1 EMPLOYMENT & LABOR LAW FLASH FOCUS THE FEDERAL DEPARTMENT OF LABOR ISSUES NEW REGULATIONS GOVERNING EXEMPT EMPLOYEES The federal Department of Labor (DOL) recently issued new regulations governing the so-called white collar exemptions under the Fair Labor Standards Act (FLSA). The new regulations, which take effect on August 23, 2004, change both the applicable salary and job duties requirements for exempt status. These new regulations mean employers should take the following steps prior to August 23, 2004: 1. Review the job duties of all employees for purposes of determining if they meet the requirements for exempt status and make any necessary changes; 2. Review the pay and the company s pay policies for all employees classified as exempt and make any necessary changes; and 3. Implement and distribute to employees a written policy prohibiting improper pay deductions and including a complaint mechanism for employees. Brief Summary of the Major Changes The most significant changes to the FLSA regulations are as follows: 1. Required Weekly Salary Amount. The new regulations establish a required minimum weekly salary of $455 for all exempt executive, administrative and professional employees (administrative and professional employees may also be paid on a fee basis). This means that any employee whose guaranteed annual salary is less than $23,660 will not qualify for a white collar exemption. 2. One-Day Disciplinary Suspensions. The new regulations add a provision allowing employers to deduct against an exempt employee s salary for a full-day disciplinary suspension imposed in good faith pursuant to a written policy applicable to all employees, for example, for violation of the employer s sexual harassment policy. 3. Highly Compensated Employees. The new regulations create an exemption for any employee with total annual compensation of at least $100,000 if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee as defined by the regulations. 4. Extra Payments to Exempt Employees. The new regulations allow an employer to pay exempt employees additional compensation without losing the exemption if the employee is guaranteed at least the minimum weekly salary of $455. Some of What Stays the Same Under both the current and new FLSA regulations, an exempt employee is exempt from the FLSA s overtime, minimum wage and timekeeping requirements. In contrast, all non-exempt employees must receive not less than minimum wage for every hour worked (the federal minimum wage is currently $5.15 per hour) and overtime at the rate of one and one-half times the employee s regular rate for all hours worked over 40 in a workweek. Additionally, non-exempt employees must keep a weekly time record
2 showing time in and out each day (twice a day if the employee has an unpaid lunch period), total daily and weekly hours, and total daily and weekly overtime hours. Payment of a salary to an employee under both the current and new regulations does not make the employee exempt. Rather, employees meet the white collar exemptions only if they satisfy two tests for the particular exemption: (1) payment on a salary basis, including receipt of the required weekly minimum salary that is not subject to reduction except in limited, specified circumstances (professional and administrative employees may be paid on a fee basis instead of a salary and outside sales workers may be paid on a commission basis instead of a salary); and (2) the applicable job duties test. 1. Payment on a Salary Basis The new regulations set forth rules governing how employers must pay exempt employees to meet the payment on a salary basis requirement: Minimum Required Weekly Salary or Fee As noted above, the new required minimum weekly salary for exempt employees is $455. Employers also may pay equivalent salary amounts for longer periods, e.g., $910 biweekly, $ semimonthly, and $1, monthly. Alternatively, employers are allowed to pay administrative and professional exempt employees on a fee basis that equals a minimum of $455 per week. The salary/fee requirements do not apply to outside sales employees. Deductions Against Salary As noted above, the new regulations add a provision allowing employers to deduct against an exempt employee s salary for a full-day disciplinary suspension imposed in good faith pursuant to a written policy applicable to all employees. The new regulations continue to require that exempt employees be paid their full weekly salary in any week in which they perform any work regardless of the quantity or quality of the work performed with limited exceptions, such as when the employee is absent a full day for personal reasons or for any absences under the federal Family and Medical Leave Act. Improper Deductions from Salary Under the new regulations, the penalty for making improper deductions against the salary of exempt employees will depend on the facts of the deduction. A clearly communicated policy prohibiting improper deductions will be a key factor. The required clearly communicated policy should (1) prohibit improper pay deductions specified in the regulations, (2) include a complaint mechanism, (3) specify that the employer will reimburse employees for any improper deductions, and (4) set forth the employer s good faith commitment to comply in the future. With this type of policy, upon an improper deduction the employer will not lose the exemption unless the employer willfully violates the policy by continuing to make improper deductions after receiving an employee complaint. The policy should be given to new hires and be distributed to employees by including it in an employee handbook or publishing it via the employer s Intranet. Minimum Salary Guarantee Plus Extras The new regulations allow an employer to pay exempt employees additional compensation without losing the exemption if the employee is guaranteed a minimum weekly salary of at least $455. This is a significant change from the current regulations, which were unclear on this issue.
3 For example, exempt employees who receive a guaranteed weekly sum of at least $455 paid on a salary basis (i.e., no improper deductions) may also receive additional compensation based on hours worked beyond the normal workweek. This additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half, commissions or any other basis), and may include paid time off. 2. Required Job Duties The new regulations include only one standard job duties test for each exempt category. Some of the key provisions of the job duties tests include the following: Executive Employees Under the new regulations, exempt executives must meet three requirements, the third being new: (1) Primary duty must be management of the enterprise in which employed or of a customarily recognized department or subdivision of the same; (2) Customarily and regularly direct the work of the equivalent of two or more other full-time employees; and (3) Authority to hire or fire other employees or whose suggestions and recommendations as to hiring, firing, advancement, promotion or any other change in status of other employees are given particular weight. In addition, any employee who is a 20-percent equity owner in the enterprise where employed and who is actively engaged in management also is exempt. Administrative Employees Under the new regulations, exempt administrative employees must meet two requirements: (1) 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 (2) Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. These requirements remain virtually the same as the current regulations with the addition that the exercise of discretion and independent judgment must be in respect to matters of significance. Some examples of matters of significance include (1) the authority to formulate, affect, interpret, or implement management policies or operating practices; (2) carrying out major assignments in conducting the operations of the business; and (3) performing work that affects business operations to a substantial degree, even if the employee s assignments are related to operation of a particular segment of the business. The new regulations also continue to include the current requirement that exempt administrative employees be staff, not production, employees.
4 Professional Employees Under the new regulations, exempt professionals continue to be broken into three groups. For exempt learned professionals, the new regulations continue to require the following: (1) Primary duty is the performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; and (2) Consistently exercise discretion and independent judgment. The new regulations continue to identify an appropriate academic degree as the best evidence of the first requirement but note that the exemption is also available to employees who have substantially the same knowledge level and perform substantially the same work as degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. Creative Professionals The required job duties of exempt creative professionals continue to include the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Computer Employees The new regulations include two alternative payment methods for exempt computer employees : (1) a weekly salary of not less than $455, or (2) an hourly rate of not less than $ The new regulations identify computer systems analysts, computer programmers, software engineers and other similarly skilled workers in the computer field as eligible for the computer professional exemption, but note that job titles are not determinative. The required primary duties for exempt computer professionals continue to include computer application, design, development, documentation, testing, creation or other computer duties requiring the same level of skill. Outside Sales Employees Under the new regulations, exempt outside sales employees must have the following as their primary duty: (1) Making sales (transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property. It includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition), or (2) Obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (3) Customarily and regularly be engaged away from the employer s place or places of business in performing such primary duty. The new regulations do not include the prior requirement that outside sales employees spend no more than 20 percent of their work time on non-sales activities. The minimum salary requirements do not apply to outside sales employees.
5 The Highly Compensated Employee As noted above, a significant difference between the current and new regulations is the new exemption for the highly compensated individual. Under this provision, any employee with total annual compensation of at least $100,000 will be exempt if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee as specified in the regulations. The total annual compensation must include a base weekly salary or fee of at least $455 and may include commissions, non-discretionary bonuses and other non-discretionary compensation earned during the applicable 52-week period designated by the employer. It cannot include payments for medical or life insurance, contributions to retirement plans or the cost of other fringe benefits. Employees Specifically Excluded From Exemption The new regulations identify a number of workers as specifically excluded from possible exemption coverage. They include, for example, ambulance personnel, emergency medical technicians, paramedics and a number of law enforcement officers. Effect on Othe r Laws The new regulations provide minimum standards that may be exceeded and do not preempt any other federal, state or municipal laws, regulations or ordinances establishing better benefits for employees. Thus, employers must continue to comply with both federal and state laws governing classification of employees and, when the laws conflict, apply the law that provides employees the better wage benefit. Employers with questions regarding the new regulations are encouraged to contact any of Fredrikson & Byron s employment counsel identified below. Robert C. Boisvert Ingrid N. Nyberg Wade S. Davis Anne M. Radolinski Timothy B.Kohls Richard A. Ross Mary M. Krakow Fredrikson & Byron, P.A. This alert is a copyrighted work of Fredrikson & Byron, P.A. No portion of it may be reproduced or distributed without the express written permission of Fredrikson & Byron, P.A. For further information, please contact Erica Vickers at