1 THE RESOURCE A Legal Newsletter for Employers & Human Resource Professionals By: L. Diane Tindall & Mary S. McCrory Attorneys-at-Law Issue XXI Summer 2004 Topic: They re Here (Are You Ready?): The New FLSA Regulations On August 23, 2004, absent action by Congress to block them, the U.S. Department of Labor s new Regulations updating the Fair Labor Standards Act white collar overtime exemptions will go into effect. Although everyone agrees that the old Regulations were seriously outdated (they were last revised in 1975), the new Regulations have been the subject of great debate. Employers should expect significant media coverage on overtime exemptions in coming months, and employees will be more likely to question their exempt status. This volume of The Resource will provide an overview of the changes made to the white collar exemptions in the new Regulations, and will outline steps that employers should take now to prepare for August 23. CURRENT AND PAST ISSUES OF THE RESOURCE ARE AVAILABLE IN PDF FORMAT THROUGH OUR FIRM S WEBSITE, AT THE "NEWS AND ARTICLES" LINK. This newsletter is meant to provide basic, general legal information only, and should not be relied upon in lieu of advice from an attorney. Please consult your company s counsel for specific advice concerning your company s legal obligations. The New FLSA Regulations The new Regulations increase the threshold salary levels for exempt white collar workers, provide a new exemption for highly-compensated employees, set out permitted deductions from exempt employees salaries, provide a safe harbor for improper deductions and streamline the duties tests for executive, administrative and professional exempt employees, eliminating the old short and long tests. a. The New Salary Threshold Under the old Regulations, there were two salary thresholds for white collar workers. If an employee earned $250 or more per week, his/her job duties would be analyzed under the short tests to see if he/she qualified for the exemption; if he/she made less than $250 but at least $155 per week, his/her duties would be examined using the long duties tests. The new Regulations do away with the two test levels and create a single duties test for each of executive, administrative and professional employees and a new single salary threshold of $455 per week ($23,660 per year).
2 b. The New Exemption for Highly Compensated Employees There is a new, streamlined test for highly compensated employees, defined as those whose total annual compensation equals $100,000 or more. Total annual compensation may include salary, commissions, non-discretionary bonuses and any other non-discretionary compensation earned within a fifty-two week period. (Board, lodging and payments for medical insurance, life insurance, retirement contributions and other fringe benefits may not be included in the calculation.) To qualify for this exemption, the employee must receive at least $455 per week ($23,660 per year) on a salary or fee basis, must perform office or non-manual work and must customarily and regularly perform one or more of the job duties that are required for an executive, administrative or professional exemption. c. Permitted Deductions that will not Defeat the Salary Basis Test The new Regulations also spell out more clearly what deductions can and cannot be made to an exempt employee s salary. The general rule is the same under the new Regulations: you must pay exempt employees the same salary for every week (or per other pay period) in which the employee performs any work, without deduction because of variations in the quality or quantity of work. Deductions made for absences occasioned by the employer or by the operating requirements of the business are expressly prohibited. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available. Employers can make deductions for exempt employees under the following circumstances: 1. The employee is absent from work for one or more full days for personal reasons; 2. The employee is absent from work for one or more full days due to sickness or disability if the deductions are made under a bona fide plan, policy or practice of providing wage replacement benefits for these types of absences (including wage replacement benefits provided under state disability or workers compensation law); 3. The employee has received payment for jury duty, for appearing as a witness or for military service, but the deduction can only offset against the employee s salary the amount received by the employee; 4. The employer imposes a penalty in good faith for the employee s infraction of a safety rule of major significance ; 5. The employer imposes one or more full days of unpaid disciplinary suspension in good faith for infractions of workplace conduct rules, so long as there is a written policy regarding such suspensions applicable to all employees; 6. The employee works a partial week in the first or last week of employment; or 7. The employee is absent from work taking unpaid leave pursuant to the Family and Medical leave Act.
3 In general, deductions may be made for full days of absence only; partial day deductions for an exempt employee s absence from work are not permitted under the new Regulations. d. The Safe Harbor for Improper Deductions Under the old Regulations, if the employer made an improper deduction from an exempt employee s salary, all employees in that same job classification would lose their exempt status and would be entitled to overtime pay, even if the other employees pay was never docked. Under the new Regulations the overtime exemption will be lost only if the employer has an actual practice of making improper deductions. Factors listed in determining whether an employer has an actual practice of making improper deductions include: the number of improper deductions; the time period during which the improper deductions were made; the number and location of the employees whose salary was reduced; the number and location of the managers who made the improper deductions; and whether or not the employer has a clearly communicated policy permitting or prohibiting improper deductions. Further, the exemption will only be lost (a) during the time period in which the improper deductions were made, (b) for employees in the same job classification (c) who were working for the same manager who was responsible for the improper pay deduction. The new Regulations also clarify that an employer can avail itself of a safe harbor for improper deductions if: (x) the employer has a clearly communicated policy that prohibits improper deductions and the policy includes a complaint mechanism; (y) the employer reimburses employees for improper deductions; and (z) the employer makes a good faith commitment to comply with the Regulations regarding improper deductions in the future. Notwithstanding these measures, an employer may lose the safe harbor if it willfully violates the policy by continuing to make the improper deductions after receiving employee complaints. e. The New Streamlined Duties Tests 1. Executives Under the new test, an employee will be an executive exempt from the overtime provisions of the FLSA if he/she meets the salary threshold and salary basis tests and: a. His/her primary duty is the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; b. He/she customarily and regularly directs the work of two or more other employees; and c. He/she has the authority to hire or fire other employees or his/her suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.
4 2. Administrative Employees Under the new test, an employee will be an administrative employee exempt from the overtime provisions of the FLSA if he/she meets the salary threshold and salary basis tests and: a. His/her primary duty is 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 b. His/her primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. 3. Professionals Under the new test, an employee will be a professional exempt from the overtime provisions of the FLSA if he/she meets the salary threshold and salary basis tests and: a. His/her primary duty is the performance of work requiring knowledge of an advanced type (defined as work that is predominantly intellectual in character and that includes work requiring the consistent exercise of discretion and judgment) in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or b. His/her primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. f. The Outside Sales Exemption The outside sales exemption has been clarified in the new Regulations, eliminating the confusing 20% test, which forced employers to compare the work and time of outside sales persons to that of the employer's nonexempt employees. The new Regulations do not add an exemption for inside sales employees. g. The Computer Employee Exemption The new Regulations set out the exemption for highly skilled computer employees in a new separate section. However, the requirements for this exemption in the new Regulations are essentially the same as in the old Regulations.
5 Steps Employers Should Take Now in Response to the New Regulations a. Be Sure Exempt Employees Meet the New Salary Threshold If you have employees who in the past have been considered exempt and who make less than $455 per week (or $23,660 per year), those employees will be entitled to receive overtime beginning on August 23, For these employees to continue to be exempt, you must increase their salaries to meet the minimum threshold under the new Regulations. The U.S. Department of Labor estimated that approximately 2.6 million workers earn a salary of between $155 per week (the old threshold for the long tests) and the new threshold amount of $455 per week. b. Determine if any Employees are Highly Compensated If you have any employees who have been considered nonexempt in the past and who make close to or more than $100,000 per year, you will want to examine their compensation to determine whether or not they can fall within the new highly compensated employee exemption to overtime. The new Regulations specifically permit employers to make a year-end catch up payment to employees to be sure that their compensation exceeds the threshold for this exemption. Employees who work for an employer for less than a year may still qualify for the exemption if their salaries meet the threshold on a pro rata basis. c. Update All Job Descriptions One of the reasons for employers to maintain job descriptions for all of their positions is to document and ensure that every exempt employee s duties fall within the applicable duties test for exemption. Such job descriptions become a liability rather than an asset if they do not accurately reflect the actual job currently being performed by the employee or if the description demonstrates that the employee s primary duties are nonexempt. With the advent of the new Regulations, now is an excellent time for employers to review and update their job descriptions and to compare exempt employees primary duties with the new simplified duties tests. d. Check the New Regulations to see if Any Job Titles are Specifically Addressed Over 800 actual jobs are referenced in the new Regulations or the Preamble. These examples can provide an invaluable guide to determining whether an employee is exempt or not. Examples given of administrative employees who are or who are likely to be exempt include insurance adjusters, employees in the financial services industry, employees who lead a team of other employees assigned to complete major projects for the employer, executive or administrative assistants to a business owner or senior executive of a large business, human resource managers and purchasing agents with authority to bind the company on significant purchases. The new Regulations give as examples of employees who will generally be exempt under the professional/learned professionals exemption, registered or certified technologists, registered nurses, dental hygienists, physician assistants, accountants, executive or sous chefs, certified athletic trainers and licensed funeral directors and embalmers.
6 f. Reclassify Employees and Correctly Pay Overtime If you must reclassify any employees due to changes in the Regulations, make the changes effective as of August 23. If, in reviewing the new Regulations, you realize that an employee had been incorrectly classified as exempt under the old Regulations, consider calculating and paying him/her for past due overtime pay. Otherwise, misclassified employees can seek recovery of two years back overtime pay (and three years back overtime in cases of willful FLSA violations). g. Implement a Policy on Improper Deductions to Qualify for the Safe Harbor Provision To qualify for the new safe harbor relative to improper deductions from exempt employees pay, employers must implement a clearly communicated policy that prohibits improper deductions and includes a complaint mechanism. According to the new Regulations, the best evidence of a clearly communicated policy is a written policy that was distributed to employees before the improper deduction took place. The new Regulations further suggest that a copy of the policy be distributed to employees upon hire, and that it be published in the employer s employee handbook and/or on the company s Intranet. A sample policy is attached to this Newsletter. All rights reserved. This Newsletter may not be reproduced in whole or in part without the written permission of Wyrick Robbins Yates & Ponton LLP. Wyrick Robbins Yates & Ponton LLP 4101 Lake Boone Trail, Suite 300, Raleigh, NC (919)
7 SAMPLE SAFE HARBOR PAY DEDUCTION POLICY Pay Deduction Policy Application: This Policy applies to pay deductions made from the compensation of employees of the Company who are exempt from the overtime provisions of the Fair Labor Standards Act. This policy does not apply to deductions required by law; deductions made for employee s benefit or with employee s consent; deductions for payments of the costs of employee benefits, such as for payment of health insurance premiums; or deductions for the reimbursement or offset of costs or expenses incurred by employee. Purpose: The purpose of this Policy is to clearly communicate to exempt employees what types of deductions may be properly made from their pay; to provide a complaint mechanism for employees who believe an improper deduction has been made; to mandate a policy of prompt reimbursement for any improper deduction; and to reflect the Company s commitment to comply with the Fair Labor Standards Act with respect to such deductions now and in the future. Proper Deductions: Deductions from the pay of exempt employees may be properly made: (1) When an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability; (2) For absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability (including wage replacement benefits under state disability or workers compensation laws); (3) To offset any amounts received by an employee as jury fees, witness fees or military pay for a particular week against the salary due for that particular week;. (4) For penalties imposed in good faith for infractions of safety rules of major significance; (5) For unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules; (6) So that a proportionate part of an employee s full salary is paid for the time actually worked in the first and last week of employment; or (7) For weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. ALL OTHER DEDUCTIONS ARE PROHIBITED.
8 Complaint Mechanism: Any exempt employee who believes that an improper deduction has been taken from his/her salary should report the deduction in writing to the Manager of Human Resources. Alternatively, or if the employee is not satisfied that his/her complaint is being addressed promptly and properly, he/she should provide a copy of the complaint to the Company s Chief Operating Officer. The Company will investigate the deduction, and, if it is found to have been improper, will reimburse the employee for the improper deduction on the Company s next regular pay day. Distribution: This Policy shall be distributed to every exempt employee upon hire or upon reclassification from non-exempt to exempt status, and will be made a part of the Company s Employee Handbook and published on the Company s Intranet site. All rights reserved. Wyrick Robbins Yates & Ponton LLP 4101 Lake Boone Trail, Suite 300, Raleigh, NC (919)
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