New Overtime Regulations Issued by the Department of Labor

On April 20, 2004, the United States Department of Labor (DOL) announced the final regulations governing overtime eligibility for "white-collar" workers under the Fair Labor Standards Act (FLSA). These long-awaited and heavily-debated final regulations take effect August 23, 2004, 120 days after publication in the Federal Register.

While the FLSA requires most employers to pay their employees overtime pay at time and one-half their regular rate of pay after 40 hours in a workweek, the FLSA currently provides and will continue to provide exemptions from overtime pay for employees employed in bona fide executive, administrative, professional, outside sales and/or computer occupations. However, the tests governing these exemptions have been modified by the new regulations.

The most important revisions to the FLSA regulations are highlighted below and will be discussed in greater detail at seminars we have scheduled in: Philadelphia, Pennsylvania; Harrisburg, Pennsylvania; New York City, New York; and Roseland, New Jersey. See page 3 of the accompanying Update.

By way of background, generally speaking, in order for an employee to be exempt under the FLSA, two (2) general requirements must be satisfied:

1. The employee is paid a minimum salary on a weekly basis (which is not subject to impermissible deductions); and
2. The employee performs (an adequate amount of ) exempt tasks (as discussed in more detail below.)

Currently, there are different tests with regard to #2 based on what the employee earns per week under #1. Currently, any employee paid a weekly salary between $179 and $249 is subject to a longer, more onerous test in terms of the necessary duties, while those making $250 or more a week are subject to a shorter test in terms of the necessary duties. In the new regulations, the DOL has adopted unified tests for all exemptions that track the prior short tests in most respects and will be more of a standard duties test.

The new regulations raise the minimum weekly salary for exemption to $455 per week (or $380 per week, if employed in American Samoa by employers other than the Federal government). Under the new regulations, employees who are paid a salary less than $455 per week cannot be exempt from overtime. (Like the current regulations, the new regulations do not impose any minimum compensation for outside sales, teachers and employees practicing law or medicine.)

Existing rules provide that the overtime exemption may be lost if salaries are subject to the kinds of deductions which are inconsistent with salaried-based pay. For example, absences of less than a full work week for disciplinary suspensions or absences of less than a full day due to illness or other personal reasons not covered by the FMLA.

The new regulations generally continue existing rules on permissible and impermissible deductions. However, there are a couple of important changes/clarifications. For example only, an employer will be able to suspend employees without pay in full day (as opposed to full work week) increments if such suspensions are made in good faith for infractions of workplace conduct rules and in accordance with a written policy applicable to all employees. The written policy referred to in the regulation most probably means the policy the employee violated (as opposed to requiring a specific policy on suspensions).

The regulations provide that, if impermissible deductions are made from an exempt employee's salary, the employer may lose the exemption for the period of time in which the improper deductions are made not only for the employee subject to the improper deductions but also for employees in the same job classification working for the same managers responsible for the improper deduction. That's the bad news. The good news is that the new regulations also include a broader safe harbor for employers who inadvertently make a prohibited deduction.

Specifically, if an employer has a clearly communicated policy prohibiting improper deductions, includes a complaint mechanism, reimburses employees for any improper deductions (no exact time frame for reimbursement is stated), and makes a good faith commitment to comply in the future, then the employer will not lose the exemption, unless the employer willfully violates the policy by continuing to make improper deductions after receiving complaints.

The current regulations provide that, to qualify as an exempt executive, an employee would have to meet the salary test and:

• Have his/her primary duty to manage an enterprise or a customarily recognized subdivision; and
• Regularly direct the work of two (2) or more full time employees or equivalents.

Under the current regulations, "primary duty" generally has meant that the employee spends 50 percent or more of their time in such management.

The final regulations include the higher salary test and provide a less restrictive "primary duty" test. Under the revised test, the phrase refers to the "principal, main, major, or most important duty the employee performs" rather than a set percentage of time spent on typically exempt duties. The new regulations state that the analysis is based on the character of the employee's job as a whole.

The new regulations also require that an exempt executive have the authority to hire or fire other employees, or at least have his/her suggestions and recommendations as to hiring, firing, advancement, promotion or any other change of status be given "particular consideration". (This is similar to the criteria in the current long test).

Additionally, employees who own at least 20% of a business and are actively engaged in the management of the business now automatically will be considered exempt executives.

Finally, the new regulations eliminate the "sole charge executive exemption," which many retail employers took advantage of to exempt store managers and their assistant managers. The DOL has included a new "concurrent duties" exemption instead, which should still allow most managers and some assistant managers to remain exempt from overtime under the executive exemption, even if they perform a substantial amount of nonexempt work, so long as they do so while also engaging in exempt functions.

The administrative exemption has always been one of the most difficult to apply. The exemption has not been changed significantly, although a few changes and clarifications may prove helpful. The current regulations provide that, to qualify as an exempt administrative employee, an employee would have to meet the salary test and:

• Have as his/her primary duty, office or non-manual work directly related to the management policies or general operations of the employer or the employer's customers ; and
• Customarily and regularly exercise discretion and independent judgment. 

To meet the criteria of the new regulation, the employee's primary duty must include the exercise of discretion and independent judgment with respect to "matters of significance". The exercise of independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources. The new regulations make clear that an employee will not lose his/her exempt status simply because he or she uses manuals, guidelines or other established procedures that can be understood or interpreted only by those with advanced or specialized knowledge or skills.

Although the amount of time that an employee spends performing exempt work can be a useful guide in determining whether exempt work is the primary duty of that employee (generally, employees who spend more than 50% of their time performing exempt work will satisfy the primary duty requirement), the amount of time spent is not determinative under the new regulations. The key is meeting the new "primary duty" definition which is less restrictive and defined as "the principal, main, major or most important duty that the employee performs."

The final regulations also include more current examples of positions which will usually qualify for the administrative exemption, such insurance claims adjusters, financial services and human resource managers.

To qualify for the learned professional exemption, an employee's primary duty must be the performance of work requiring advanced knowledge which is customarily acquired by a prolonged course of specialized intellectual instruction. The new regulations make clear that the word "customarily" means that the exemption is also available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction.

However, the learned professional exemption still does not apply to occupations in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction.

The new regulations also include more current examples of jobs that usually will be exempt under the Learned Professional exemption, such as accountants (not bookkeepers or clerks), athletic trainers and registered nurses.

The test of a creative professional will remain basically the same but the DOL has included work of "originality" and recognized fields of creative and/or artistic endeavor.

The current exemption for employees in computer occupations will not change significantly. The exemption will continue to apply not only to salaried employees who meet the minimum $455 a week salary threshold, but also to hourly employees (paid at an hourly rate of not less than $27.63 per hour), so long as the other criteria of the exemption in terms of job functions are met.

The current rule regarding outside sales employees is that such employees are exempt only if they spend 20% or less of their time performing duties unrelated to outside sales. In contrast, the new regulations require only that the employee's "primary duty" must be making outsides sales. The new regulations (like the current regulations) provide no exemption for an inside sales employee, unless the inside sales employee meets one of the other existing exemptions.

The new regulations create a highly compensated presumed exemption. Specifically, employees with a "total compensation" of at least $100,000 per year (up from $65,000 in the proposed regulations) will be exempt from the FLSA overtime provisions (state law may not allow the exemption, however) if they perform "office or non-manual work" and customarily and regularly perform one or more exempt duties.

The regulations also make clear that, in most circumstances, an employer may provide additional compensation besides the minimum guaranteed salary to an exempt employee without losing the exemption.

The FLSA and the regulations provide the minimum standards, but all state and local laws and relevant collective bargaining agreements ("CBA's") must be reviewed as employers must comply with any local and/or state laws/ordinances and existing CBA's which are more strict.

For example, in many states, in order for an employee to be exempt, his or her exempt work must meet certain percentages and/or the non-exempt work must be below certain percentages. While it is likely that many of these state laws will be changed to conform to the new federal rules which no longer apply percentages per se, until such percentages are abolished under the applicable state law, they create some risks for employers under the state law.

All positions must be reviewed to determine if any employee's exempt or non-exempt status is changed by the new regulations. Specifically, do employees generally deemed exempt under the executive exemption actually hire, fire, discipline, etc. or recommend such actions? Also, do employees generally deemed exempt under the administrative exemption exercise adequate judgment and discretion with regard to matters of significance?

Keep in mind that the documentation which is created to determine whether an employee is exempt or non-exempt under the new regulations most probably is discoverable. In most circumstances, the documentation would be discoverable, even if prepared at the request of your counsel. (What would not be discoverable would be his or her privileged advice). So, when assessing positions, focus solely on what is necessary to comply with the regulations prospectively without including any admissions about potential violations under the soon-to-be old regulations.

Draft and distribute to all employees a policy prohibiting improper deductions from the salaries of exempt employees, and include a procedure by which employees can raise concerns about improper deductions.

Develop procedures to deal with improper deductions so that, where required, the reimbursement can be made in a timely fashion.

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.