The Department of Labor recently released new regulations concerning the exempt status of certain executive, administrative, professional and other “white-collar” employees under the Fair Labor Standards Act. The new regulations revise the salary levels and the “duties” and “salary basis” tests that employees must meet in order to be considered “exempt” employees and, thus, not entitled to overtime pay. Effective August 23, 2004, these regulations make the most profound changes to the interpretation of the FLSA in 50 years.

Salary Test For All Exempt Positions

Minimum Salary Level Increased. Under the new salary test, exempt employees must be paid a salary of at least $455/week as opposed to the old level of $155/week. The only exception is that the salary requirement does not apply to outside sales employees, teachers, or employees practicing law or medicine. Computer employees are exempt if they are paid $455/ week or if they are paid on an hourly basis at a rate not less than $27.63/hour.

New Deductions Permitted. With some limited exceptions, all of the “white-collar” exemptions still require that an exempt employee be paid on a “salary basis” (i.e., regularly receiving a predetermined amount of compensation each pay period). The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. Subject to certain permissible deductions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. The new regulations, however, permit an employer to impose on exempt employees “unpaid disciplinary suspensions of one or more full days” for “infractions of workplace conduct rules” as long as the rules are outlined in a written policy applying to all employees.

New “Safe Harbor” Provision for Improper Deductions. Under the new regulations, an employer that has an “actual practice” of making improper deductions from exempt employees’ salaries will lose the exemptions but may lose it only for “the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions.” The new regulations include a “safe harbor” provision under which an employer can avoid losing the exemption for the employee completely if it: (1) has a clearly communicated policy prohibiting improper deductions which includes a complaint mechanism; (2) reimburses the employee for any improper deductions; and (3) makes a good faith commitment to comply in the future.

Executive Exemption: “Hire/Fire” Authority Requirement Added

The duties requirements for the executive exemption have been streamlined into the following single “standard” test:

1. one whose primary duty is management of the enterprise or a customarily recognized department or subdivision of that enterprise;

2. one who customarily and regularly directs the work of two or more employees; and

3. one with the authority to hire or fire employees or to make recommendations as to hiring, firing, or other changes of employee status that are given “particular weight.”

Determining whether a worker’s recommendations are given “particular weight” involves deciding whether making such recommendations are part of the employee’s job duties and the frequency with which such recommendations are made, requested and relied upon. An employee’s recommendations may still be deemed to have “particular weight” even though the employee does not have authority to make the ultimate decision.

Administrative Exemption: New Positions Identified

Substantively, the DOL’s new rules left intact the duties test for the administrative exemption but they do identify new positions which the DOL generally considers to fall within this exemption. Consistent with the old short test, the duties tests for this exemption are as follows:

1. primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and

2. primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

The new rules provide several factors for employers to consider when reviewing a “primary duty” under the administrative exemption:

• the relative importance of the exempt duties as compared with other types of duties;

• the amount of time spent performing exempt work;

• the employee’s relative freedom from direct supervision; and

• the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.

An employee who spends more than 50% of her time performing exempt work generally meets the primary duty test, although less than 50% may be enough under the right circumstances. Similarly, “matters of significance” refers to the “level of importance or consequence of the work performed.” The new positions identified as generally falling within the exemption include: insurance claims adjusters, financial service industry employees, team leaders, executive assistants, purchasing agents, and human resources managers.

Professional Exemption: New Positions Identified

Substantively, the DOL’s new rules also left intact the duties test for the learned professional exemption. Consistent with the old short test, the duties tests for this exemption are as follows:

1. the employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

2. the advanced knowledge must be in a field of science or learning; and

3. the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

For the “creative” professional exemption, the employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The new regulations discuss the exempt status of specific professional occupations, including registered or certified medical technologists, registered nurses, dental hygienists, physician assistants, accountants, executive and sous chefs, athletic trainers, and funeral directors or embalmers.

Computer Employee Exemption: Consolidation into One Exemption

The DOL’s new rules condense computer employee provisions into a single, more “user-friendly” subpart. To qualify under this exemption, in addition to satisfying the salary test discussed above, an individual must:

1. be employed as a computer systems analyst, computer programmer, software engineer, or in another “similarly skilled” field, and

2. the individual’s primary duty must consist of one of the following:

   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 specification;

   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 skills.

Under the new regulations, such employees no longer need a certain level of skill and education to qualify for the exemption, and the requirement that they exercise discretion and judgment has also been eliminated. However, computer employees engaged in the manufacture or repair of computer hardware and related equipment are not exempt.

“Highly Compensated Employee” Exemption: Established

The new “highly compensated worker” regulation allows employers to classify employees as exempt from the minimum wage and overtime requirements if that employee:

1. earns at least $100,000 a year;

2. performs a primary duty of office or non-manual work; and

3. customarily and regularly performs at least one of the exempt responsibilities of an exempt executive, administrative, or professional employee.

For example, an employee may qualify as an exempt highly compensated executive if the employee customarily and regularly directs the work of two or more other employees, even though the employee does not meet all of the other requirements in the standard executive exemption test.

The special rule’s annual salary threshold of $100,000 or more may include commissions, nondiscretionary bonuses and other nondiscretionary compensation but not credit for board or lodging, or fringe benefit payments like contributions to retirement funds. The wages may be earned in any 52-week period, and a “catch-up” payment may be paid within the first month after the close of that 52-week period which may be counted toward the prior year’s wages.

Outside Sales Exemption: “20 Percent” Limitation Eliminated

The DOL’s new regulations eliminate the requirement from the old duties test that outside salespeople spend no more than 20% of their time engaged in non-sales activities. Under the new rules, an employee is eligible for this exemption if his primary duty is customarily and regularly working away from his employer’s place of business making sales or obtaining orders or contracts for services or the use of facilities for which a consideration will be paid by the client or customer.

Conclusion

Employers should consider how their compensation practices, job descriptions, personnel policies, and employee handbooks will need to be updated to comply with the new regulations. It is also an excellent opportunity for employers to conduct job audits based on these new regulations to evaluate whether the employer’s classification of exempt status for each job is accurate. And, the new regulations provide a legitimate justification for an employer to make changes to its payroll practices without advertising to its employees any possible wage and hour claims.

Reprinted from Finley’s Ohio Municipal Service, with the permission of the publisher and copyright owner, West Group.