United States: The 2004 Fairpay Regulations: Is Your Workplace In Compliance?

We have reached the end of the first quarter since the U.S. Department of Labor’s (DOL) new overtime regulations (the FairPay regulations) went into effect. The DOL developed the FairPay regulations in an effort to clarify and modernize what had become an increasingly confusing and outdated system for determining eligibility for overtime under the Fair Labor Standards Act (FLSA). Under the new regulations, the DOL increased the minimum salary threshold, streamlined a number of the tests for determining exempt status, clarified ambiguous terms and answered long-debated questions regarding certain professions.

Employers have had three months to assess the impact of the FairPay regulations on existing policies and job classifications in their workplace and make all necessary modifications. Although the process of reassessing long-standing job classifications can be daunting for some employers, employers in general have been pleased with the new rules. In congressional hearings conducted last week, the U.S. Small Business Administration reported that the modifications to the overtime regulations have produced significant cost savings for small businesses. Larger businesses also report cost savings attributable to the reclassification of personnel and to reduced costs of administering the more streamlined job classification rules. Moreover, as recently as this past Saturday, a last-ditch effort to limit enforcement of the new overtime regulations was defeated when the limitation provision was dropped from the final $388 billion spending bill pushed through Congress at the close of this year’s session. As a result, any potential legislative obstacles to the enforceability of these regulations have been eliminated.

As we mark the three-month anniversary of the FairPay regulations, a quick refresher, particularly for employers who have not yet completed their job classification reassessments, may be helpful. The principal provisions of the FairPay regulations are as follows.

The new regulations increase the minimum salary level for exempt status to $455 per week, or $23,660 per year. The old regulations provided for substantially lower minimum weekly salaries (in some cases as low as $155). Now, except in limited circumstances, any employee earning less than $455 per week must receive overtime pay for any hours worked over 40 in a workweek.

The new regulations allow employers to make certain deductions from an employee’s salary without jeopardizing the employee’s exempt status. For example, employers may make deductions for unpaid disciplinary suspensions of one or more full days for infractions of workplace conduct rules, imposed in good faith pursuant to a written policy applicable to all employees. In addition, the new regulations create a "safe harbor," protecting an employee’s exempt status in the event an employer makes improper deductions. Under this new safe harbor provision, if an employer: (1) has a clearly communicated policy prohibiting improper deductions and includes a complaint mechanism; (2) reimburses employees for any improper deductions; and (3) makes a good faith commitment to comply in the future, the employer will not lose the employees’ exemptions unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.

In addition to making these changes to the salary basis test, the new regulations streamline the tests for determining whether certain employees are exempt from the FLSA’s overtime requirements. The old regulations provided both short-form and long-form tests for each of the three principal white collar exemptions (i.e., executive, professional and administrative). The new regulations, however, combine elements of both tests, and each exemption now utilizes one test that focuses on an employee’s primary responsibilities. The new tests for the principal exemptions are as follows.

Under the new regulations, to qualify for the executive exemption an employee must meet the minimum salary level and: (1) have a primary duty of managing the enterprise or department; (2) customarily and regularly direct the work of two or more employees; and (3) have the authority to hire or fire other employees (or the employee’s opinion is given particular weight). This new test eliminates the old requirement that executives devote a particular percentage of their time to exempt work. Now, an executive may simultaneously perform exempt and non-exempt work without losing his or her exempt status. In addition, although the executive must still "direct" the work of two or more employees, the new test focuses more on the nature and scope of the executive’s function within the organization than on the direct supervision of personnel. Lastly, the new regulations clarify that employees who own at least a 20 percent equity interest in the enterprise in which they are employed may qualify as an exempt executive without meeting the salary basis test so long as they are involved in the management of the enterprise.

Under the new regulations, to qualify for the administrative exemption an employee must meet the minimum salary level and: (1) have a primary duty of performing office or non-manual work directly related to the management or business operations of the employer or its customers; and (2) a primary duty that includes the exercise of discretion and independent judgment on matters of significance.

As with the executive exemption, this new test eliminates the old requirement that an administrative employee devote a particular percentage of his or her time to exempt work. In addition, the regulations clarify what it means to "exercise discretion and independent judgment on matters of significance" by including a list of factors, such as: whether the employee provides consultation or expert advice to management; whether the employee is involved in planning long- or short-term business objectives; and whether the employee investigates and resolves matters of significance on behalf of management. The new regulations also provide a non-exclusive list of "functional areas" that generally are directly related to management or general business operations (e.g., accounting, purchasing, marketing, human resources and computer network, internet and database administration).

The new regulations made relatively immaterial changes to the test for the professional exemption. As under the old test, to qualify as an exempt professional an employee must meet the minimum salary level and have a primary duty of performing work that requires knowledge of an advanced type, including the consistent exercise of discretion and judgment, in a field of experience or learning customarily acquired by a prolonged course of specialized intellectual instruction.

The FairPay regulations have created a new exemption for highly compensated employees. To qualify for this exemption an employee must: (1) earn total annual compensation of $100,000; (2) have a primary duty of non-manual or office work; and (3) "customarily and regularly" perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.

Under the new regulations, to qualify for the computer employee exemption an employee must meet the minimum weekly salary level of $455, or be paid at least $27.63 an hour. The employee must also have a primary duty that consists of: (1) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (2) the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (3) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) a combination of the aforementioned duties, the performance of which requires the same level of skill.

This new test is a significant change from past practice in that the DOL has consolidated its existing provisions relating to computer employees into one test. In addition, the exemption is no longer limited to workers in the software field. Instead, otherwise qualified "workers in the computer field" are eligible for this exemption. Moreover, computer employees no longer need to be "highly skilled" to qualify for this exemption, and the requirement that the employee consistently exercises discretion and judgment has been eliminated.

This exemption has no minimum salary level. Under the revised regulations, to qualify for this exemption an employee must have: (1) a primary duty of making sales or obtaining orders or contracts for service or for the use of facilities; and (2) be "customarily and regularly" engaged in such activity away from the employer’s place(s) of business. The "place of business" essentially includes any fixed site, including the employee’s home office. The term "regularly" means activity that is less than constant, but more than occasional.

The FairPay regulations provide for a number of other exemptions for specific professions or categories of employees, including communications employees, commission sales employees, domestic employees, public safety personnel and more.

To ensure compliance with the new regulations, prudent employers should review their current classification of all employees and make any necessary adjustments. Employers should also review and update as necessary any personnel policies that address the subject of overtime eligibility. In particular, employers should make sure they have a written "safe harbor" policy that clearly communicates the elements necessary to qualify for a safe harbor under the new regulations.

The DOL’s website contains detailed helpful information on the new FairPay regulations, including a number of helpful Fact Sheets and Online Training Seminars. Links to relevant pages can be found here. Please note the website’s disclaimer that the material discussed in the Fact Sheets and Seminars do not constitute formal interpretations of DOL policy for enforcement purposes. Accordingly, employers should not rely entirely on the DOL’s website materials to resolve questions concerning compliance issues. Such issues should be reviewed with legal counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.