Other Bulletins
Summer 2004
Employment Law Bulletin
Fair labor standards act regulation modifies exemption standards
By Hamilton Doherty, Jr., Esq.
The United States Department of Labor ( DOL ) has revised white collar exemption regulations under the Fair Labor Standards Act (FLSA). The text of the amendments and a review of the extensive comments filed after the proposed regulations were issued in March, 2003 can be found at www.dol.gov/esa. This newsletter identifies major changes affecting employers and the initial steps which should be taken toward compliance.
The new regulations are effective as of August 23, 2004 . DOL is developing a special enforcement plan to enforce the new regulations.
General
FLSA is the law which establishes the federal minimum wage and the minimum requirements for overtime pay affecting virtually all employees. Employees covered under the law must receive overtime, at a rate not less than one and one-half times their regular rate of pay, for hours worked in excess of a 40-hour workweek. Employees who qualify as “white collar” employees under the regulations, along with those in a number of other groups, are exempt from the minimum wage and overtime requirements. The primary white-collar exemptions, which have not changed, are: executive, professional, administrative, computer, and outside sales employees. Changes affecting those within these five categories are discussed in detail below. All employees who qualify for the white-collar exemption must be paid on a salary basis (except computer employees described below) and must earn a salary of not less than $455/week ($23,660/annually). This minimum salary level was increased from previous minimums of $170 or $250 per week, depending upon two different tests. The minimum salary requirement does not apply to teachers, lawyers or doctors (including interns or residents). The current regulations which prohibit pro-rating the minimum salary for part-time employees are unchanged. Unless noted otherwise, the minimum salary requirement applies to the discussion below.
An employee who earns in a year at least $100,000 is deemed to be an exempt employee if her primary duty includes performing office or non-manual work and she customarily and regularly performs any one or more of the duties and responsibilities of an executive, administrative or professional employee.
Under the new regulations, a salaried employee may be suspended without pay for one or more full days (but not partial days) for violations of written workplace conduct rules applicable to all employees. Under the prior regulations, such suspensions could be only for increments of one full weekly pay period, except for major safety rule infractions.
An employer which has an actual practice of making improper deductions from salaried employees may render all of the employees in that classification as non-exempt. Under the new regulations, the loss of the exemption for a group of employees can be avoided if an employer adopts a “clearly communicated policy” that prohibits improper deductions and includes, among other things, a process for making complaints and receiving prompt reimbursement.
Under limited circumstances, the pay of an exempt employee may be computed on an hourly basis, if the employee has a guaranteed salary and if there is a “reasonable” relationship between the guaranteed amount and the actual earnings.
The Five White Collar Categories
Executive Employees. The “primary duties” of the exempt Executive Employee must be management. If an employee is otherwise exempt, the concurrent performance of exempt and non-exempt work does not cause the loss of the exemption. The new regulations add a requirement that an exempt Executive Employee must either have the authority to hire and fire employees or to make recommendations which are given weight in such decisions. An employee who owns a 20% equity interest in his or her employer is automatically an exempt executive if the employee is actively engaged in the management of the business.
Administrative Employees. The test for exempt Administrative Employees is not substantially changed, but the regulations do provide some guidance and clarifying examples. The exempt Administrative Employee must perform office or non-manual work, directly related to the management or general business operations of the employer, which includes the exercise of discretion and independent judgment on matters of significance. The regulations have a list of “management and general business functions.” The requirement that the discretion and independent judgment be exercised “with respect to matters of significance,” codifies a number of court decisions on the subject.
Professional Employees . “Learned” Professional Employees are exempt if their work predominantly requires advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. “Advanced knowledge” is described to emphasize the requirement of specialized study and degree. The exemption is not available for knowledge gained exclusively on the job. “Creative” Professional Employees are exempt if they primarily perform work “requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.”
Computer Employees . The job-duty requirements for the exempt Computer Employee are not changed in substance. An exempt Computer Employee must be paid a salary or fees of at least $455/week, or, if compensated on an hourly basis, at a rate of not less than $27.63/hour.
Outside Sales Employees. The new regulations eliminate the former “20% test,” which precluded exempt status if the Outside Sales Employee performed non-exempt work for more than 20% of the hours worked by non-exempt workers performing such work. The regulations also address promotion work and drivers who do sales – their exempt status depends on a number of fact specific matters.
Things To Do Now
- Review and make adjustments for all employees previously considered exempt who earn less than the minimum salary of $455/week. With limited exceptions, no employee earning below that minimum salary will be exempt under the new regulations.
- Develop and communicate clear policies prohibiting improper deductions from the pay of exempt employees and establishing a complaint mechanism and provision for reimbursement.
- Review the job descriptions and actual duties of employees previously classified as exempt, to confirm that they continue to qualify or that, with some changes in job duties, they could continue to qualify as exempt.
- Review the job descriptions and actual duties of employees who were previously not exempt (that is, were required to be paid overtime) to determine whether, with some combination of changes in job duties and the changes in the regulations, these employees may qualify as exempt positions.
- Review the job duties and compensation practices for highly compensated employees, to understand and apply the requirements for reaching and maintaining the minimum salary level of $100,000.
- Review workplace conduct policies to confirm they satisfy the requirements for the disciplinary suspension of exempt employees.
If you would like assistance in reviewing your job descriptions or have any questions regarding the new overtime pay law, please contact one of the members of our employment law group through its coordinator, Mary J. Kennedy, at mkennedy@bulkley.com or (413) 272-6242.
Hamilton Doherty, Jr. (hdoherty@bulkley.com) practices in the firm’s Employment Law Practice Group.
