In 2003, the United States Department of Labor (USDOL) published a proposal to modernize its 50-year-old regulations defining exemptions from the Fair Labor Standards Act (FLSA) for "white-collar" employees. While the FLSA covers minimum wage, youth employment and other issues, the critical distinction for employees under federal wage and hour laws is whether an employee is "exempt" — and not entitled to overtime — or "non-exempt" — and entitled to overtime at "time and a half" for work in excess of 40 hours in a 7-day work week.
As part of its plan to overhaul overtime regulations the USDOL raised the salary threshold from $155 a week to $425 a week. Employees earning below this amount would automatically qualify for overtime. Employees with salaries above this threshold still need to satisfy an updated "duties test" to qualify for overtime exemptions. The other major parts of the proposed changes called for revising the job duties required to qualify for the exemptions to better correspond to 21st-century workplace realities than the 1949 regulations.
The regulations had been out of step with the modern workforce for some time (with unrealistically low salary thresholds and references to outdated job classifications such as Legmen, Straw Bosses and Key Punch Operators), but perhaps the driving force behind these changes was that the USDOL was battle weary from litigation over the many soft spots in overtime and related regulations. For several months these proposed regulations were circulated for public comment. In response, the USDOL was bombarded with questions, criticisms and challenges. As a result, the USDOL substantially revised the initial proposed changes and in April 2004 they rolled out the Fair Pay Act.
The final rules went into effect August 23, 2004 and are summarized below.
The Final Regulations
Minimum Salary Level Increased: Under the old rules, an employee earning only $155 a week could qualify as a "white collar" employee not entitled to overtime pay. The new rules raise this minimum salary to $455 per week, the largest increase since the Fair Labor Standards Act was passed by Congress in 1938. To qualify as exempt, an employee must meet this minimum salary level and the "duties test".
Duties Test Rely on "Primary Duty": For decades federal law has had "long" and "short" tests to determine whether a particular employee is exempt or non-exempt. The new rules eliminate the "short test", while retaining their reliance on an employee's primary duty. The rules also eliminate the long-inactive "long test" rule restricting exempt employees from devoting more than 20% of their time during a workweek to non-exempt duties. A new test, called the "standard test" has now been created, which borrows elements of the prior tests, while adding new elements as well. The duties applicable to each are as follows:
- Executive Exemption: The executive duties test has three requirements: managing the enterprise or a department or subdivision of it; directing the work of two or more employees; and, having authority to hire or fire (or when recommendations for such are given particular weight).
- Administrative Exemption: The administrative duties test requires the employee to have as his or her primary duty the performance office of or non-manual work directly related to management or general business operations; and, which includes the exercise of discretion and independent judgment in matters of significance.
- Professional Exemption: The final rules recognize as exempt both "learned professionals" and "creative professionals". A learned professional's duties must be predominantly intellectual, involving the constant exercise of discretion and judgment. The learned professional's knowledge is acquired through a prolonged course of specialized instruction. The creative professional must have a primary duty performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
Employees Treated More Equitably: The USDOL's final rules allow salary deductions from exempt employees for full-day absences taken for disciplinary reasons, such as sexual harassment or workplace violence. Previously, only hourly workers' wages were subject to such deductions. The proposal retains the "salary basis" rule prohibiting deductions from exempt salary for partial-day absences.
New Exemptions
The new rules carve out several new exemptions that should help to clarify the status of certain employees. The first applies to those who own at least 20% of the business in which they are employed. If a 20% owner is actively engaged in the management of the business, then he or she will be considered exempt.
The second new exemption applies to "highly compensated" employees. Any employee who is paid, on a salary basis, at least $100,000 per year, excluding discretionary bonuses, and who has a primary duty performing office or non-manual work that falls within the scope of executive, administrative or professional, will be considered exempt.
It is also worth noting that the "sole charge" exemption contained in an earlier version of the regulations did not survive.
Status in Congress
Some members of Congress who were quite vocal in their opposition to the new regulations threatened to file legislation to block their enactment. In the end, however, Congress adjourned for their summer recess without any such bills being filed.
What Should Employers Do?
There are four basic steps an employer should take to comply with the new rules.
- Review salary levels under the new weekly minimum for exempt employees ($23,660 per year) and prepare to reclassify to non-exempt as appropriate.
- Evaluate the job duties of exempt employees earning above the new minimum in light of the revised duties test.
- Review your pay practices especially with regard to how you pay salaried employees and whether you deduct from their wages. Note that there are strict rules on deductions from salary AND the rules under federal and state laws are different. Improper salary deductions can still put overtime exemptions in jeopardy.
- Implement and communicate a policy to stay within the "safe harbor" of the rule that forbids docking exempt employees' pay. The policy should prohibit improper salary deductions, provide a clear channel for employee complaints, and explain exceptions to the no-docking rule.
It's Also a Good Time to Review Existing Pay Practices in Areas Unaffected by the Fair Pay Act
- Make sure non-exempt employees are paid for all hours worked.
- Remember to include shift differentials, commissions, on-call payments and non-discretionary bonuses in determining employees' "regular rate" of pay for computing overtime.
- Implement and enforce a clear policy that employees record and that the employer pay for all working time.
- Make sure the people you classify as independent contractors really meet the requirements.
Conclusion
These rules stumbled during the last year and challenges were threatened as recently as a few weeks ago, but they went into effect on schedule on August 23, 2004. While Congress and the USDOL gave themselves time to finalize and adjust to these changes, employers had less than four (4) months' notice from the roll out of the substantially revised final rules to their effective date. There is no grace period for compliance. Employers are advised to review their exemptions and get into compliance as soon as possible.
This article is intended to serve as a summary of the issues outlined herein. While it may include some general guidance, it is not intended as, nor is it a substitute for, legal advice. Your receipt of Good Company or any of its individual articles does not create an attorney-client relationship between you and Sheehan Phinney Bass + Green or the Sheehan Phinney Capitol Group. The opinions expressed in Good Company are those of the authors of the specific articles.
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