THE FAIR LABOR STANDARDS ACT Recent Changes to the Regulations Has Help Arrived? Presented by Regina Hollins Lewis Nexsen Pruet, LLC

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1 THE FAIR LABOR STANDARDS ACT Recent Changes to the Regulations Has Help Arrived? Presented by Regina Hollins Lewis Nexsen Pruet, LLC History and Overview of the Fair Labor Standards Act ( FLSA ) The Fair Labor Standards Act was passed by Congress on 25th June, The main objective of the act was to eliminate "labor conditions detrimental to the maintenance of the minimum standards of living necessary for health, efficiency and well-being of workers". The act established maximum working hours of 40 hours per week as well as a minimum wage. Currently, the minimum wage is $5.15 per hour. The act requires payment of one and one-half times the normal rate of pay for any time worked over 40 hours. The Fair Labor Standards Act also prohibited child labor in all industries engaged in producing goods in interstate commerce. The act set the minimum age at 14 for employment outside of school hours in non-manufacturing jobs, at 16 for employment during school hours, and 18 for hazardous occupations. Certain classes of administrative, professional, and managerial workers are exempt from the regulation. The law originally contained a large number of special industry exemptions, many of which were designed to protect traditional pay practices in small, rural businesses. The bulk of these exemptions have been repealed. Currently, the most important issues relate to the so-called "white collar" exemptions applicable to professional, administrative and executive employees. The FLSA is administered by the Wage & Hour Division of the United States Department of Labor. The United States Department of Labor is a Cabinet department of the United States government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, re-employment services, and some economic statistics. Many U.S. states also have such departments. The department is headed by the United States Secretary of Labor. The Administrator of the Wage & Hour Division has no unilateral enforcement authority, but may bring a lawsuit in federal court. As a practical matter, this is relatively rare. The FLSA provides for direct federal actions by employees, and offers substantial financial incentives for private litigants and their counsel. The most contentious issues in recent years relate to technical employees, such as computer programmers, who have a significant degree of specialized knowledge without formal academic credentials. Such employees often exercise no direct

2 management or even administrative authority, and so are arguably ineligible for any of the FLSA white-collar exemptions. By legislative amendment, some employees of this sort are now exempt from the overtime provisions of the FLSA, but many unsettled issues remain. Recent Changes to Exemptions On April 23, 2004, the Department of Labor published changes to final regulations defining exemptions. The new regulations took effect on August 23, SALARY BASIS TEST White Collar Exemptions 29 CFR Part 541 Prior to the new regulations, the salary basis test was last updated in Pursuant to the salary basis test, the employer must pay a predetermined salary without reductions based on quality or quantity of work. The new regulations provide new permissible deductions and a new safe harbor to insure that the exempt status of positions is not lost when employers take certain actions. Under the salary basis test the employer must now pay overtime to employees whose salary level is less than $455 per week or $23,660 annually. This is a significant increase from the old regulations, which required that overtime be paid to employees earning $155 per week, or less than $8,060 annually. The $455 per week may be paid in equivalent amounts for periods longer than one week, e.g., bi-weekly, semi-monthly and monthly payroll cycles. Unlike the old regulations, the new regulations allow an employer to deduct an exempt employee s salary for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace rules. The old regulations permitted such deductions only if the suspension was for a full week and imposed for infractions of safety rules of major significance. The deduction is now much more broad and can be used whenever there is a disciplinary suspension regardless of the reason. It is important that employers insure that any deductions are proper under the regulations. Improper deductions from salary will result in the loss of the exemption for the time period during which improper deductions were made for employees in the same job classifications who work for the same managers responsible for the actual improper deductions. However, isolated or inadvertent improper deductions will not result in the loss of exempt status if the employer reimburses the employee. The new regulations provide that loss of the exemption for improper deductions will also not be lost if the employer: (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism; (2) reimburses employees for any improper deductions; and (3) makes a good faith commitment to comply in the 2

3 future. This safe harbor provision does not apply if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. A clearly communicated policy should be a written policy distributed to employees prior to the improper pay deductions, e.g., handbook, distributing copies of the policy, publishing the policy on the employer s intranet. HIGHLY COMPENSATED EMPLOYEES EXEMPTION Also based on salary, the highly compensated employees exemption provides that employees who earn at least $100,000 per year in total compensation, i.e., base pay, commissions, and non-discretionary bonuses AND who perform office or non-manual work; AND who satisfy one of the exempt duties executive, administrative or professional functions under the standard duties test. If these three factors are met, the employee is exempt. DUTIES TEST The revised duties test, which, prior to the new regulations, was last updated in 1949, provides a new standard by which employees earning between $23,660 and $100,000 are to be assessed to determine their status. The short and long tests of the old regulations are no longer used. Executive Duties Three factors must be show to qualify for the executive exemption. 1) The employee s primary duty must be management of the enterprise or of a customarily recognized department or subdivision; 2) The employee must customarily and regularly direct the work of two or more other employees. 3) The employee must have the authority to hire or fire other employees or must be one whose suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees are given particular weight. The first two requirements were also in the old regulations; the third requirement is new and now must also be shown. What is a primary duty? 3

4 A primary duty is the principal, main, major or most important duty that the employee performs. Factors to consider include, but are not limited to: 1) Relative importance of the exempt duties; 2) Amount of time spent performing exempt work; 3) Relative freedom from direct supervision; and 4) Relationship between the employee s salary and the wages paid to other employees for the same kind of nonexempt work. NOTE: Employees who spend more than 50% of their time performing exempt work will generally satisfy the primary duty requirement. However, the regulations do not require that exempt employees spend more than 50% of their time performing exempt functions. What is the impact of concurrent duties on an employee s exempt status? Concurrent performance of exempt and nonexempt work does not automatically disqualify an employee from exemption. Exempt executives generally decide when to perform nonexempt duties and remain responsible for the success or failure of business operations. Conversely, non-exempt employees generally are directed by a supervisor to perform the exempt work or perform the exempt work for defined time periods. New Executive Exemption 20% Owner The new executive exemption also includes employees who (1) own at least a bona fide 20% equity interest in the enterprise AND (2) are actively engaged in management of the enterprise. The salary level and salary basis requirements do not apply in this circumstance and the owner/part-owner is automatically exempt. What types of positions qualify for the executive exemption? Management employees who perform the following functions will generally be classified as exempt: > Interviewing, selecting, and training employees; > Setting and adjusting pay and work hours; > Maintaining production or sales records; > Appraising employee productivity and efficiency; > Handling employee complaints and grievances; 4

5 > Disciplining employees; > Planning and apportioning work among employees; > Monitoring or implementing legal compliance measures; > Determining the techniques to be used; the type of materials, supplies, machinery, equipment or tools to be used, or the merchandise to be bought, stocked and sold; > Providing for the safety and security of employees or property; > Planning and controlling the budget; > Monitoring or implementing legal compliance measures. What is required to show that the employee works in a customarily recognized department or subdivision? A customarily recognized department or subdivision must have a permanent status and continuing function. It does not have to be physically located within the employer s establishment and may mover from place to place. In addition, continuity of the same subordinate personnel is not essential to the existence of a recognized unit. The employee in charge of each branch establishment is in charge of a recognized subdivision. A department or subdivision does not include a number of employees assigned from time to time to a specific job. What constitutes customarily and regularly? The customarily and regularly provision requires a frequency that must be greater than occasional but which, of course, may be less than constant. It includes work normally and recurrently performed every workweek but does not include isolated or one-time tasks. Can two part-time employees qualify for the two or more employees exemption? The phrase two or more other employees means two full-time employees or the equivalent. Full-time generally means 40 hours per week. The supervision of the same employees can be distributed among two or more exempt executives, but the hours worked by an employee cannot be credited more than once. 5

6 Are there any other factors considered in determining whether or not an employee qualifies for the Executive exemption? Other factors considered in determining whether or not the Executive exemption applies include: > Does the employee make suggestions and recommendations as a part of his/her job duties? > What is the frequency with which suggestions and recommendations are made and requested? > What is the frequency with which the employee s suggestions and recommendations are relied upon? NOTE: The exemption is not lost simply because suggestions and recommendations of the employee are reviewed by a higher-level manager. In addition, the exempt executive need not have authority to make the ultimate decision. However, employees who make occasional suggestions regarding a change in status of a co-worker do not meet the standard. Administrative Duties The second type of exemption is for those employees who perform administrative duties as defined by the regulations. The new regulations do not contain any significant changes to the old regulations, but does set forth factors to be considered in determining whether one of the prongs necessary for the exemption, the exercise of discretion and independent judgment, applies. The following factors must be established in order for the administrative duties exemption to apply: 1) The employee s 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) The employee s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. What constitutes management or general business operations? Management or General Business Operations refers to the type of work performed by the employee. The work must be directly related to assisting with the running or servicing of the business. It does not include employees who work on a manufacturing production line or those whose duties are selling products in a retail or service establishment. Examples of Management or General Operations areas include tax, finance, accounting, human resources, legal and regulatory compliance, and computer network, internet and database administration. 6

7 Is there clarification on what constitutes the exercise of discretion and independent judgment? The old FLSA regulations also required the exercise of discretion and independent judgment to qualify for the administrative exemption. The new regulations set forth several factors for consideration in determining whether an employee exercises discretion and independent judgment. These factors include, but are not limited to the following: > Does the employee have the authority to formulate, affect, interpret, or implement management policies or operating procedures? > Does the employee carry out major assignments in conducting the operations of the business? > Does the employee perform substantial work that affects business operations to a substantial degree, even if the employee s assignments are related to the operation of a particular segment of the business? > Does the employee have the authority to commit the employer in matters that have a significant financial impact? > Does the employee have the authority to waive or deviate from established policies and procedures without prior approval? > Does the employee have the authority to negotiate and bind the company on significant matters? > Does the employee provide consultation or expert advice to management? > Is the employee involved in planning long-term or short-term business objectives? > Does the employee investigate and resolve matters of significances on behalf of management? > Does the employee represent the company in handling complaints, arbitrating disputes or resolving grievances? NOTE: Discretion and independent judgment does not include: > Applying well-established techniques, procedures or specific standards described in manuals or other sources; > Clerical or secretarial work; > Recording or tabulating data; 7

8 > Performing mechanical, repetitive, recurrent or routine work. Learned Professional Exemption The new regulations do not contain significant changes to the Learned Professional Exemption. As with the old regulations, the new regulations require the employee s primary duty to include: 1) The performance of work requiring advanced knowledge; 2) In a field of science or learning; 3) Customarily acquired by a prolonged course of specialized intellectual instruction. What does the advanced knowledge component require? The advanced knowledge component of the Learned Professional exemption requires that the work performed by the employee be predominantly intellectual in character. It includes work requiring the consistent exercise of discretion and judgment. The advanced knowledge is generally used to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge does NOT include work involving routine mental, manual, mechanical or physical work and cannot be a classification for an employee educated at the high school level only. What constitutes a field of science or learning? The following occupations have recognized professional status, as distinguished from the mechanical arts or skilled trades: > Law > Theology > Medicine > Pharmacy > Accounting > Teaching > Architecture > Engineering 8

9 > Actuarial Computation > Physical Sciences > Chemical Sciences > Biological Sciences What constitutes a prolonged course of specialized intellectual instruction? As discussed, the exemption also requires a prolonged course of specialized intellectual instruction. Specialized academic training must be a prerequisite for entering the profession in order to qualify for this position, as is required for each of the positions listed above. The best evidence that an employee meets this requirement is possession of the appropriate academic degree. The following backgrounds do NOT qualify for the Learned Professional exemption: > General knowledge acquired by an academic degree in any field; > Knowledge acquired through an apprenticeship; > Training in the performance of routine mental, manual, mechanical or physical processes; > Occupations in which most employees acquire skill by experience. NOTE: The exemption is also available to employees in learned professions who: > Have substantially the same knowledge level AND; > Perform substantially the same work as the degreed professionals; > Attained the advanced knowledge through a combination of work experience and intellectual instruction, e.g. lawyer who did not attend law school, chemist who does not have a chemistry degree. Computer Professional Exemption The computer professional exemption is substantially the same as it was under the old regulations. To qualify for the exemption, ALL of the following requirements must be met by the employee: 9

10 > must be paid on a salary or fee basis at a rate of not less than $455 per week; if compensated on an hourly basis, at a rate not less than $27.63 per hour; AND > must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field whose primary duties consist of: Χ Χ Χ Χ the application of systems analysis techniques and procedures, including consulting with users to determine hardware, software, or system functional specifications; OR the design documentation, testing, creation, or modification of computer programs related to machine operating systems; OR the design, documentation, testing, creation or modification of computer programs related to machine operating systems; OR a combination of these duties, the performance of which requires the same level of skill. Outside Sales Exemption As with the old regulations, the new regulations provide for an outside sales exemption. Under the new regulations, the following requirements must be met by the employee in order for the exemption to apply: > primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities (e.g. selling advertisements) for which the customer will pay; AND > must be customarily and regularly engaged away from the employer s place or places of business. NOTE: Outside sales employees are NOT required to meet the $455 per week minimum salary in order to be exempt. Other work that furthers the employee s sales efforts also shall be regarded as exempt work including for example, writing sales reports, updating or revising the employee s sales or display catalogue, planning itineraries and attending sales conferences. The outside sales exemption does NOT apply in the following situations: 10

11 > where work done is incidental to and in conjunction with the employee s own outside sales or solicitations, including incidental deliveries and collections; > where the employee performs inside sales; those sales made at a home or office. Outside sales are made at the customer s place of business or at the customer s home if the salesperson is selling door-to-door. Outside sales DOES NOT include sales made by mail, telephone or the Internet unless such contact is used merely in connection with sales made in person. Drivers Who Sell Drivers who sell qualify for the exemption IF the primary duty of the driver is making sales. Drivers who may qualify for this exemption include those who: > provide the only sales contact between the employer and customers; > call on customers and take orders for products; > deliver products from stock in the employee s vehicle or deliver the product on a later trip; > receive compensation based on the volume of products sold; > obtain or solicit orders for the employer s products from an employee of the customer who has the authority to commit the customer to purchases; > call on new prospects for customers and attempt to convince them to accept regular delivery of goods; OR > call on established customers and persuade them to accept delivery of new products even though the initial sale was made by someone else. Generally, a driver will NOT qualify for the exemption if: > her primary duty is to transport products sold by the employer through vending machines; > she regularly calls on established customers and delivers a set amount of products; OR > she primarily performs activities to promote sales for the customer (e.g., driver for Budweiser, Kraft). 11

12 Creative Professional Duties Exemption The Creative Professional Duties Exemption is also substantially the same under both the old and the new regulations. To qualify for this exemption, the employee s primary duty must include: > The performance of work requiring intervention, imagination, originality or talent; > In a recognized field of artistic or creative endeavor. Examples of positions that would qualify under this exemption are: musicians, composers, essayists, novelists, play writers, painters, photographers, and cartoonists. A creative professional must perform work that requires invention, imagination, originality or talent. Creative professional work does NOT include: > Work that primarily depends on intelligence, diligence and accuracy; > Work that a person with general manual ability and training can produce. Exempt status is determined on a case-by-case basis, depending on the extent of the invention, imagination, originality or talent exercised. Regina Hollins Lewis is a Member of the Nexsen Pruet law firm in Columbia, South Carolina where she practices in the area of employment law. 1 She may be reached at rlewis@nexsenpruet.com. 1 Portions of this outline were adapted from information published by the United States Department of Labor Wage and Hour Division subsequent to the issuance of the new regulations. 12