FLSA Exemption Regulations: Understanding the Issues

SPECIAL REPORT FLSA Exemption Regulations: Understanding the Issues Robin Thomas, J.D. Managing Editor, HR Matters Personnel Policy Service, Inc. 159 St. Matthews Avenue Suite 5 Louisville, KY 40207 Ph: 1-800-437-3735 Fax: 1-800-755-7011

2 CONTENTS Page Section I: Overview and Conclusions...3 DOL Final Regulations Attempt to Simplify Overtime Exemptions...3 Historical Background to the Exemptions...4 The Changes in Brief...5 Five Steps to Get Into Compliance...6 Changes are Constructive, But Short of What Employers Wanted...7 For More Information...7 Section II: FLSA Exemptions Outlined and Explained...8 A. Executive Exemption...8 B. Administrative Exemption...10 C. Professional Exemption...12 D. Primary Duty...14 E. Computer-Related Exemption...15 F. Outside Sales...16 G. Trainees Not Exempt...17 H. Highly Compensated Employees...17 I. Fee Basis...18 J. Salary Basis...18 K. Partial Day Absences Private Sector Employees...20 L. Partial Day Absences Public Sector Employees...21 M. Improper Deductions...22 N. Limited Safe Harbor for Improper Deductions...22 O. Extra Compensation...23 Copyright 2004 is the original copyrighted work of Personnel Policy Service, Inc., Louisville, Kentucky, and is protected under the trademark and copyright laws of the United States. No copying, reproduction, or republication is permitted without the written permission of Personnel Policy Service, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that Personnel Policy Service, Inc., and its employees are not engaged in rendering legal services or legal advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Adapted from a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.

3 Section I: Overview and Conclusions DOL Final Regulations Attempt to Simplify Overtime Exemptions The DOL s final regulations redefining the FLSA s white collar exemptions took effect on August 23, 2004. Significant changes from its March 2003 proposed rule were made, but questions still remain. Find out how the new regulations affect your overtime obligations and how to make sure your organization is in compliance. After spending over a year to review more than 75,000 comments, the Department of Labor (DOL) issued its final regulations to revise the out-of-date rules employers must follow to classify exempt employees. (Exempt employees are those who, because of the nature of their job duties and the fact they generally are paid on a salary basis, are not subject to the Fair Labor Standards Act of 1938 (FLSA) minimum wage and overtime requirements.) The so-called white collar exemptions have long been viewed as antiquated because their duties tests have not been changed since 1949 and the salary level tests have not been raised since 1975. The old regulations also included references to jobs that no longer exist. The DOL appears to have learned quite a lot about politics and public relations since it initially proposed the regulations in March 2003. At that time, the agency was caught off-guard as opponents (primarily labor unions and employee rights advocates) quickly mounted an effective campaign to undermine its proposed changes. Central to the opponents case was their contention that the changes would result in loss of overtime for millions of U.S. workers. They published studies that attempted to undermine the DOL s position that 1.3 million employees would become newly eligible for overtime and only 644,000 would lose coverage. Now, the agency has attempted to answer its critics by substantially revising the proposed regulations and incorporating suggestions from the comments of thousands of employers, workers, labor organizations, and business groups. Revisions include an even higher exemption salary level threshold; a new, higher threshold for the automatic exemption of certain highly-compensated employees; and changes to the job duty criteria for exemption. In addition, the DOL has gone on the offensive this time and is promoting the regulations with its own special FairPay Web site. The site, which is branded with the logo Overtime Security for the 21st Century Workforce, provides fact sheets about the exemption criteria as well as the full text of the regulations. (See: www.dol.gov/esa/ regs/compliance/whd/fairpay/main.htm.) While it is unlikely that critics will be completely appeased, there are early indications that the changes will stick and survive any Congressional attacks. The DOL made so many revisions to these final regulations that most of the more controversial, and

4 arguably useful, changes were eliminated. Efforts so far by opponents to rescind the new rule have failed, and the rule took effect as scheduled on August 23, 2004. So, you need to make sure your organization is in compliance. To make your job easier, the major requirements of the new regulations are outlined in this article so you can understand the issues and plan your compliance reviews. Historical Background to the Exemptions When Congress passed the FLSA in 1938, it included an exemption to the overtime pay and minimum wage requirement for certain employees employed in a bona fide executive, administrative, or professional capacity or in the capacity of outside salesman. The law did not define these terms, so the DOL was left with the job of developing regulations to explain the scope of the exemptions. The legislative history of the FLSA indicates that the exemptions were intended to apply to workers who earned salaries well above the minimum wage and who also were presumed to enjoy other compensatory privileges, such as better-than-average fringe benefits, job security, and opportunities for advancement. In addition, the work performed by exempt employees was presumed to be of such a nature that it could not be easily standardized to any time frame, or delegated to other workers after 40 hours in a week. (The FLSA overtime provisions were intended, in part, to compel employers to hire more workers, in the aftermath of the 1930 s Depression, by imposing a premium pay penalty on hours worked over 40 in a single workweek.) The old regulations (codified in 29 C.F.R. Part 541) relied on three criteria to determine which employees were exempt: (1) how much salary they were paid; (2) whether the salary was guaranteed without regard to the quality or quantity of work performed; and (3) what duties they performed. In addition, each exemption (except outside sales) had two tests to determine if employees qualify. The short test, used by most employers, applied when employees were paid a salary of at least $250 per week and their primary duties consisted of exempt work. The long test was used when employees were paid between $155 and $249 per week ($170 to $249 in the case of professional employees). The long test also specified more extensive job duty requirements, including a limitation on the percentage of nonexempt work exempt employees could perform. Because of the low salary limit, few employers used the long test in recent years. The exemption regulations were initially implemented in 1938 and have been revised fewer than ten times in the last 65 years. In fact, as noted above, the duties test was last changed in 1949, while the salary level tests have not been raised since 1975. The regulations included references to jobs that no longer exist, such as keypunch operators and strawbosses, and set salary levels that are absurdly low by today s standards. The old salary minimum for the short test equated to $6.25 an hour or $13,000 a year. Even more incredibly, the long test minimum of $155 was actually below the minimum wage, at $3.88 an hour or $8,060 a year.

5 And, as the DOL pointed out in the preamble to the final rule: The existing duties tests are so confusing, complex, and outdated that often employment lawyers, and even Wage and Hour Division investigators, have difficulty determining whether employees qualify for the exemption. Unquestionably, the necessary political consensus for modernization of the regulations has not kept pace with workplace and economic reality. The Changes in Brief With the exception of the new exemption for certain highly-compensated employees (see below), the DOL s final regulations did not create any new categories of exempt employees. Rather, they primarily adjust and modify the old exemptions to incorporate FLSA opinion letters, court decisions, and workplace changes since the law was enacted over 65 years ago. Thus, the DOL left intact the basic requirements for the exemptions -- exempt employees still are those employees who are paid a regular salary, regardless of the number of hours they work or of the quantity or quality of their work, and who meet certain job duty criteria. What has been updated is how these terms should be interpreted and applied. Here is a summary of the major changes: 1. The minimum salary level for the executive, administrative, professional, and computer-related exemptions increased to $455 a week (equal to $23,660 a year). 2. A new exemption has been created for highly-compensated employees who make at least $100,000 a year and perform some exempt duties. 3. The long and short tests have been eliminated so that each exemption has just one salary test. 4. Job duties and educational requirements are clarified somewhat for the executive, administrative, and professional exemptions, but vague terms like discretion and independent judgment remain for the administrative and professional classifications. 5. Deductions are now allowed for certain full-day disciplinary suspensions. 6. An actual practice of making improper deductions from exempt employee pay may now result in the loss of the exemption for all employees who work in the same job classification and who are under the manager responsible for the deductions. 7. However, a new safe harbor is now available to allow you to preserve your exemptions if you inadvertently make improper deductions or the deductions are isolated, or if you have (among other

6 things) a clearly communicated policy prohibiting improper deductions. In Section II (page 8), FLSA Exemptions Explained, you will find more details about these changes, as well as summaries for each exemption s criteria. Five Steps to Get Into Compliance The regulations were published in the April 23, 2004, Federal Register (the official daily government publication for rules, proposed rules, and notices from federal agencies and organizations) and took effect on August 23, 2004. The new regulations can be a bit intimidating because of their length (about 15 pages of actual changes and another 140 pages of commentary). However, most wage and hour experts agree that they do not significantly change the exemptions. Instead, they attempt to clarify existing requirements and incorporate recent case law, regulatory interpretations, and modern workforce realities. As a practical matter, many employers probably have not had the time or resources to complete a review of every exempt job classification before the new rule took effect. Instead, you should consider focusing on any problem areas you are aware of, such as current or suspected misclassifications, and on new exempt positions. Here are five steps you can take immediately to facilitate your compliance efforts: 1. Look at your exempt salary levels. This is an obvious one anyone who makes less than $455 a week (or $910 biweekly, $985.83 semimonthly, or $1,971.66 monthly) should be flagged and reclassified as nonexempt. In the unlikely event that you actually pay any nonexempt employees $100,000 or more a year, don t rush to change their status. These workers will not meet the highly-compensated employee exemption unless they are performing some exempt duties, in which case, they likely would already be classified as exempt. 2. Review the exemptions of nonsupervisory administrative and professional employees. Legal experts suggest that these nonsupervisory workers should be a priority because they are the most likely to be misclassified, both under the old and new regulations. 3. If you know of other potential problem areas, now is the time to fix them. If you think you have exemption problems that should have been addressed previously under the old regulations, the implementation of the new regulations gives you a unique opportunity or cover to get into compliance without calling any undue attention to past problems. (You are not fully insulated since you still can be hit

7 with legal action for past violations, but at least you will have acted to cut off any future liability.) 4. Make sure new exempt positions meet the criteria. Job descriptions should reflect the appropriate exempt criteria, as should the actual duties these new exempt employees will perform day-to-day. 5. Check state law for more restrictive requirements. Most states follow the federal guidelines regarding who qualifies as an exempt employee. However, a few have higher salary requirements and different job duties. For example, in California, executive, administrative, and professional employees must be paid at least $2,340 a month, versus only $1,971.66 under the new federal regulations. Where state and federal law differ, you must comply with the one with the most restrictive provisions. Changes are Constructive, But Short of What Employers Wanted Without question, the revisions to the exempt regulations are long overdue and likely will survive even in today s political environment. The salary increases and the elimination of the outmoded long test should be acceptable in principle to most everyone. There is still a small chance that opponents of the regulations will derail the rules. So far, opponents in the Senate have attempted to limit the changes to the exemptions by passing a rule that would overturn any portion of the new regulations that causes an existing nonexempt employee to become exempt. That amendment has not yet been passed by the House of Representatives, and likely will not be. As a practical matter, these changes do not appear to provide the clear cut standards many employers were hoping for. For example, you still have to show that administrative and professional employees have sufficient discretion and independent judgment to qualify for the exemption, and the new DOL factors and examples do not sufficiently clarify this vague requirement. So, the jury remains out as to whether you will see any meaningful relief from the problems employers have been having in classifying exempt employees properly. Plaintiff s bar lawyers have been active and thrive on filing wage and hour class action suits, so don t be surprised if challenges to the exemption regulations continue. Still, now is the time to review your exempt status classifications and get your house in order. For More Information Fact sheets about the exemption criteria and full text of the regulations, Department of Labor (DOL), www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm HOURS OF WORK, Chapter 207, Personnel Policy Manual, Personnel Policy Service, Inc., 159 St. Matthews Ave., Louisville, KY 40207 Ph: 800-437-3735, Fax: 800-755-7011 http:///ss/ppm/flsa.htm.

8 Section II: FLSA Exemptions Explained The basic requirements for the exemptions are essentially the same under the new and old regulations. In most cases, exempt employees still are those who are paid a regular salary, regardless of the number of hours they work or of the quantity or quality of their work, and who meet certain job duty criteria. What has been updated is how these terms should be interpreted and applied. In addition, a new exemption for highly-compensated employees has been added. Below are the highlights of the new regulations, which took effect on August 23, 2004. A. Executive Exemption [29 C.F.R. 541.100] Under the new regulations, workers are employed in an executive capacity if they are compensated on a salary basis at a rate of at least $455 per week (equal to $23,660 annually), exclusive of board, lodging, or other facilities. This new amount is a significant increase over the old exempt salary requirement, which ranged between $155 and $250 per week, depending on whether you used the old short or long test for the exemption. (The new regulations eliminate these two tests in favor of one test for each exemption.) In addition, the workers job duties must meet all three of the following criteria: 1. Their primary duty consists of the management of the enterprise in which they are employed, or of a customarily recognized department or subdivision of it. [29 C.F.R. 541.102-103] Examples of the management of the enterprise include: interviewing, selecting, and training employees; setting and adjusting employee pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employee productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints; disciplining employees; planning the work; determining the type of materials, supplies, machinery, equipment, or tools to be used or merchandise to be bought, stocked, and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.

9 A customarily recognized department or subdivision must have a permanent status and a continuing function, as distinguished from a mere collection of employees assigned sporadically to a specific job. 2. They customarily and regularly direct the work of two or more full-time employees or their equivalent. [29 C.F.R. 541.104] For example, one full-time employee plus two half-time employees equals two full-time employees. Similarly, four half-time employees equal two full-time employees. Note that an employee who assists the manager of a particular department and supervises two or more employees only in the manager s absence does not meet the exemption. 3. They have the authority to hire or fire other employees, or their suggestions and recommendations are given particular weight concerning the hiring, firing, advancement, promotion, or any other change of status of other employees. [29 C.F.R. 541.105] Factors to consider to determine if suggestions and recommendations are given particular weight include whether it is part of the employee s job duties to make the suggestions and recommendations, the frequency with which they are made or requested, and the frequency with which they are relied on. To qualify, the executive s suggestions and recommendations must pertain to employees whom the executive customarily and regularly directs, not to occasional suggestions regarding the status of a coworker. However, the executive s suggestions and recommendations will still be considered to have the necessary weight, even if a higherlevel manager can overturn the decision or if the executive does not have authority to make the ultimate decision. The new regulations also contain an exemption for executive employees who are also 20% equity business owners actively involved in the management of the business. The new executive exemption is similar to the old regulations, with one key exception. The new rule requires that all executive employees either have the authority to hire and fire or be regularly involved in these types of decisions. Under the old regulations, only executives who were subject to the long test (because they were paid the extremely low salary of between $155 and $249 a week) had to have that authority. Useful Court Cases Decided Under the Old Regulations Many cases that were decided under the old regulations will continue to provide helpful guidance on how the executive exemption likely will still be applied, particularly in determining whether an employee s job duties qualify for the exemption. For example, in Baldwin v. Trailer Inns, Inc., 266 F.3d 1104 (9th Cir. 2001), the Ninth Circuit found that managers at a trailer park were exempt executive employees even though they spent

10 much of their time on nonexempt, manual duties. According to the court, the employees performed significant managerial duties that made them qualify for the executive exemption, including making the relatively important day-to-day decisions of the facility, overseeing employees, and handling problems as they arose. And, in Murray v. Stuckey s Inc., 50 F.3d 564 (8th Cir.), cert. denied, 516 U.S. 863 (1995), the Eighth Circuit determined that convenience store managers were exempt as executive employees, even though their authority was limited by company policies. They managed two or more employees and were responsible for handling emergencies, hiring employees, scheduling work hours, training and disciplining workers, and ordering inventory. In contrast, in Ale v. Tennessee Valley Authority, 269 F.3d 680 (6th Cir. 2001), the Sixth Circuit agreed that shift supervisors were not exempt executives because their primary responsibility was performing clerical duties, such as calling people to come to work and doing the payroll. They spent some time supervising employees, but they had no real control over the people they supervised. They did not set or adjust hours of work, determine which employees staffed which posts, or even train employees. B. Administrative Exemption [29 C.F.R. 541.200] Under the new regulations, workers are employed in an administrative capacity if they are compensated on either a salary or fee basis at a rate of at least $455 per week (exclusive of board, lodging, or other facilities), and their work meets both of the following requirements: 1. Their primary duty consists of the performance of office or nonmanual work directly related to the management or general business operations of their employers or of their employers customers. [29 C.F.R. 541.201] To meet the work directly related to the management or general business operations standard, an employee must perform work directly related to assisting with the running or servicing of the business. Examples include work in functional areas such as human resources; tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; employee benefits; labor relations; public relations; government relations; computer network, internet, and database administration; legal and regulatory compliance; and similar activities. The regulations note that some of these activities may be performed by employees who also would qualify for another exemption. Employees acting as advisers or consultants to their employer s clients or customers also may be exempt if they perform work in the above areas for the clients or customers.

11 2. Their primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. [29 C.F.R. 541.202] This standard requires the comparison and evaluation of possible courses of conduct and acting, or making a decision, after the various possibilities have been considered. Matters of significance refer to the level of importance or consequence of the work performed. Factors to consider include: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree (even if assignments are related to operation of a particular segment of the business); whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; whether the employee has authority to negotiate and bind the employer on significant matters; whether the employee provides consultation or expert advice to management; whether the employee is involved in long- or short-term business objectives; whether the employee investigates and resolves matters of significance on behalf of management; and whether the employee represents the employer in handling complaints, dispute arbitration, or grievance resolution. Note that the regulations state that employees can be considered to be exercising the necessary discretion and independent judgment even if their decisions or recommendations are reviewed at a higher level. Thus, decisions may consist of recommendations for action rather than the actual taking of action. However, the employee must be doing more than simply applying well-established techniques, procedures, or specific standards described in manuals or other sources. The new regulations contain several examples of jobs that may qualify for this exemption, depending on their specific duties, including human resources managers, certain insurance claims adjusters, certain financial service employees, executive or administrative assistants to business owners or senior executives, and purchasing agents with authority to bind the employer on significant purchases. The new regulations also contain an exemption for employees who perform administrative functions directly related to academic instruction or training in an educational establishment.

12 Interestingly, the new regulations use the same basic standards for the administrative exemption as the old ones, although they eliminated the reference in the old regulations to work directly related to management policies as a primary duty. In addition, the new regulations do a better job in organizing the factors and examples used in the old rule to make them more understandable. Further, the new regulations add a few new factors and examples culled from recent court decisions and administrative opinions. Useful Court Cases Decided Under the Old Regulations In Piscione v. Ernst & Young, 171 F.3d 527 (7th Cir. 1999), the Seventh Circuit determined that an employee met the administrative exemption because he spent more than 50% of his time on administrative duties such as client management and employer policy development and implementation. In Reich v. John Alden Insurance Co., 126 F.3d 1 (1st Cir. 1997), the First Circuit found that marketing employees were covered by the administrative exemption to the FLSA. They performed nonmanual work promoting the sale of insurance policies, and, although they did not design or produce those policies, the success of the business depended in large part on their efforts. In addition, they had discretion regarding which independent agents to approach and how to do so. In contrast, in Ale v. Tennessee Valley Authority, 269 F.3d 680 (6th Cir. 2001), the Sixth Circuit agreed that a training officer who was responsible for training and testing employees on procedures and protocols for operating nuclear plants did not meet the administrative exemption. His primary duty did not include the exercise of discretion and independent judgment because he did not write any of the lesson plans. Instead, he taught from existing, very specific plans and only updated them to include more recent Administrative Orders. Similarly, in Jarrett v. ERC Properties, Inc., 211 F.3d 1078 (8th Cir. 2000), the Eighth Circuit found that the site manager of a federally subsidized housing project was not an exempt administrative employee. Her office duties were typical of nonexempt clerks, secretaries, and bookkeepers in any ordinary business, and the rest of her duties consisted of manual labor such as cleaning and maintaining grounds and common areas. C. Professional Exemption [29 C.F.R. 541.300] Workers are employed in a professional capacity if they are compensated on either a salary or fee basis at a rate of at least $455 per week (exclusive of board, lodging, or other facilities), and their primary duty meets either the learned professional or the creative professional criteria. 1. Learned professional. [29 C.F.R. 541.301-304] The work requires knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.

13 The work must be predominantly intellectual in character, and includes work requiring the consistent exercise of discretion and judgment, as distinguished from the performance of routine mental, manual, mechanical, or physical work. According to the new regulations, advanced knowledge cannot be attained at the high school level. A field of science or learning includes law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various sciences, pharmacy, and other similar occupations. A prolonged course of intellectual instruction requires specialized academic training that is a standard prerequisite for entrance into a profession, such as an appropriate academic degree. However, a formal degree is not required, and the exemption is available to employees who attain advanced knowledge through a combination of work experience and intellectual instruction. Examples of exempt professionals include registered or certified medical technologists, registered nurses (not licensed practical nurses), dental hygienists and physician assistants who have completed four academic years of preprofessional and professional study, certified public accountants, chefs who have attained a four-year specialized academic degree, certified athletic trainers who have completed four years of specialized study, and licensed funeral directors and embalmers. In contrast, most paralegals and legal assistants generally do not qualify because those jobs do not required a specialized academic course of study. Any employee actively employed by an educational establishment and whose primary duty includes teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge also is an exempt professional. Examples include regular academic teachers, teachers of kindergarten or nursery school pupils, teachers of gifted or disabled children, teachers of skilled and semi-skilled trades and occupations, teachers engaged in automobile driving instruction, aircraft flight instructors, home economics teachers, and vocal or instrumental music instructors. Teachers who have teaching certificates typically will qualify for the exemption; however, a certificate is not required. Physicians and lawyers are considered exempt if they have a valid license or certificate permitting the practice of law or medicine. Physicians include medical doctors (general practitioners and specialists), doctors of osteopathy, podiatrists, dentists, and optometrists. Medical interns and residents who have the appropriate academic degrees for the general practice of medicine also are covered under this exemption. As in the old regulations, physicians and lawyers do not have to be paid on a salary or fee basis in order to meet this exemption if they hold a valid license or certificate and they are actually engaged in professional practice. In addition, teachers also are exempted from the salary or fee basis requirement if they are actively employed in an educational establishment, regardless of whether they have a certificate.

14 Useful Court Cases Decided Under the Old Regulations In Piscione v. Ernst & Young, 171 F.3d 527 (7th Cir. 1999), the Seventh Circuit determined that an employee, who had a bachelor s degree in mathematics, was studying to be an actuary, and kept up with his employer s education requirements, had the requisite advanced knowledge and met the professional exemption. His primary job duties, including client contact and data and problem analysis required the use of this advanced knowledge. 2. Creative professional. [29 C.F.R. 541.302] The work requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. Eligible fields include music, writing, acting, and the graphic arts. The requirement of invention, imagination, originality, or talent is intended to distinguish the creative professions from work that primarily depends on intelligence, diligence, and accuracy. It generally will be met by actors, musicians, composers, conductors, and soloists; painters who are only given the subject matter of their painting; cartoonists who are told only the title or underlying concept of a cartoon and who rely on their own ability to express the concept; essayists, novelists, short-story writers, and screenplay writers who choose their own subjects and hand in a finished piece of work to their employers; and persons holding the more responsible writing positions in advertising agencies. In contrast, people who are employed as copyists, animators of motion picture cartoons, or retouchers of photographs likely would not meet the creative exemption. Journalists also may meet the duties requirements, but not if they only collect, organize, and record information that is routine or already public or if they do not contribute a unique interpretation or analysis to a news product. Thus, reporters who only rewrite press releases or write standard recounts of public information are not exempt. Examples of journalists who likely qualify as exempt include those whose primary duty is (1) performing on the air in radio, television, or other electronic media; (2) conducting investigative interviews; (3) analyzing or interpreting public events; (4) writing editorials, opinion columns, or other commentary; or (5) acting as a narrator or commentator. The revised professional exemption also is quite similar to the old test. The new regulations provide more examples of potentially exempt professionals, and the term creative professional replaces the old regulations reference to artistic professions.

15 D. Primary Duty [29 C.F.R. 541.700] The executive, administrative, and professional exemptions all specify that the employee s primary duty must meet the exemptions requirements. Primary duty is defined to mean the principal, main, major, or most important duty the employee performs. Factors to consider include: the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee s relative freedom from direct supervision; and the relationship between the employee s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. According to the new regulations, the amount of time spent performing exempt work can be a useful guide in determining whether exempt work is the primary duty of an employee. Typically, employees who spend more than 50% of their time performing exempt work will satisfy the primary duty requirement. A case decided under the old regulations supports this definition. In Piscione v. Ernst & Young, 171 F.3d 527 (7th Cir. 1999), the Seventh Circuit noted that the primary duty is the one on which the employee spends the most time or is clearly most important to the employer. In this case, the employee met the administrative exemption because he spent more than 50% of his time on administrative duties such as client management and improving methodologies affecting the employer s policies However, the new regulations make clear that time alone is not the sole test, and employees who spend less than 50% of their time on exempt duties still may meet the primary duty standard if the other factors support the exemption. So, for example an assistant manager in a retail establishment who spends more than 50% of her time in nonexempt work, such as running the cash register, will still be considered exempt if she also spends significant time performing exempt executive work such as supervising and directing other employees, ordering merchandise, and managing the budget. For example, in a case decided under the old regulations, Baldwin v. Trailer Inns, Inc., 266 F.3d 1104 (9th Cir. 2001), the Ninth Circuit found that managers at a trailer park were exempt executive employees even though they spent more than 50% of their time on nonexempt, manual duties. The court determined that their managerial, exempt duties where much more important than their nonexempt duties. This definition is similar to the old regulation s treatment of primary duty.

16 E. Computer-Related Exemption [29 C.F.R. 541.400] To be eligible for the computer-related exemption, workers must be employed in computer systems analysis, programming, software engineering, or other related jobs requiring similarly skilled work in the computer field. In addition, they must be compensated either on an hourly basis at a rate of at least $27.63 an hour (the same hourly rate as under the old regulations) or on a salary or fee basis of at least $455 per week (exclusive of board, lodging, or other facilities). Further, their primary duties must consist of one or more of the following: 1. The application of systems analysis techniques and procedures (including consulting with users) to determine hardware, software, or system functional specifications; 2. The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs (including prototypes) based on and related to user or system design specifications; 3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or 4. A combination of the duties listed above, the performance of which requires the same level of skills. These new regulations specifically state that the computer exemption does not apply to employees engaged in the manufacture or repair of computer hardware and related equipment. In addition, this exemption does not apply to employees whose work is highly dependent on, or facilitated by, the use of computers and computer software programs (for example, engineers, drafters, and others skilled in computer-aided design software) and who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations, as discussed above. The new regulations are substantially similar to the old regulations, with one major change. Under the old regulations, the computer-related exemption is part of the professional exemption and so requires that computer-related employees consistently exercise discretion and judgment. The new regulations both removed this requirement and split the computer-related exemption into a separate category. F. Outside Sales [29 C.F.R. 541.500] Workers are considered employed in an exempt outside sales capacity if they meet both of the following criteria set out in the new regulations: 1. Their primary duty is either (a) making sales as defined by the FLSA or (b) obtaining orders or contracts for services, or for the use of facilities, for which a consideration will be paid by the client or customer.

17 Sales as defined by the FLSA include the transfer of title to tangible property and, in certain cases, the transfer of tangible and valuable evidences of intangible property. In addition, it includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition. Obtaining orders for the use of facilities includes the selling of time on radio or television, the solicitation of advertising for newspapers and other periodicals, and the solicitation of freight for railroads and other transport systems. 2. They are customarily and regularly engaged away from the employer s place or places of business in performing their duties. Outside sales employees are those who make sales at the customers places of businesses, or if selling door-to-door, at the customers homes. Outside sales does not include sales made by mail, telephone, or Internet unless such contact is used merely as a supplement to personal calls. Note that, as in the old regulations, there is no salary requirement for outside sales employees. The new regulations streamline the old outside sales regulations and eliminate the requirement that these employees cannot spend more than 20% of their work time in nonexempt activities. G. Trainees Not Exempt [29 C.F.R. 541.705] As under the old regulations, employees are not considered exempt who are training for employment in an executive, administrative, professional, outside sales, or computer related profession and who are not actually performing the exempt duties for those occupations. H. Highly-Compensated Employees [29 C.F.R. 541.601] The new regulations have added a special exemption for highly-compensated employees. Workers are considered exempt if they meet all of the following three criteria: 1. They earn total annual compensation of $100,000 or more, which must include at least $455 paid per week on a salary or fee basis. Total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period. It does not include payments for medical insurance, payments for life insurance, contributions to retirement plans, or the cost of other fringe benefits.

18 2. They customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative, or professional employee. 3. Their primary duty includes performing office or nonmanual work. In other words, highly-compensated production workers, carpenters, plumbers, construction workers, ironworkers, etc., will not qualify simply because they earn more than $100,000 a year. The high dollar threshold and exempt duty requirement mean that most employers will not find this new exemption all that useful. I. Fee Basis [29 C.F.R. 541.605] As noted above, administrative and professional employees may be paid on a fee basis rather than on a salary basis, as long as the fee is equivalent to $455 a week. Payment on a fee basis is defined as payment of an agreed sum for a single job regardless of the time required for its completion. The new regulations explain that it applies to the kind of job which is unique rather than for a series of jobs which are repeated an indefinite number of times and for which payment on an identical basis is made over and over again. To determine whether the fee payment meets the salary minimum, the amount paid to the employee will be tested by determining the time worked on the job and whether the fee payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours. Thus, the regulations provide the following example: an artist paid $250 for a picture that took 20 hours to complete meets the exemption since earnings at this rate would yield the artist $500 if he worked 40 hours. These requirements are substantially similar to those under the old regulations. Useful Court Cases Decided Under the Old Regulations In Fazekas v. Cleveland Clinic Found. Health Care Ventures, Inc., 204 F.3d 673 (6th Cir. 2000), the Sixth Circuit found that registered nurses making home health care visits and paid per visit depending on the work performed were paid on a fee basis and met the professional exemption. Each visit was found to be unique and affected by each patient s medical condition, family status, education, home environment, and physician input. In contrast, in Elwell v. University Hospitals Home Care Services, 276 F.3d 832 (6th Cir. 2002), the Sixth Circuit determined that a home health nurse paid a combination of fees and hourly compensation was not an exempt professional under the FLSA. The employee s pay was based in part on the number of hours she worked, contrary to the fee basis requirement.

19 J. Salary Basis Test [29 C.F.R. 541.602] The new regulations preserve most of the old definition of payment on a salary basis. Thus, an exempt executive, administrative, professional, or computer-related employee is considered to be paid on a salary basis if he regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. This amount cannot be subject to reduction because of variations in the quality or quantity of work performed. In addition, an exempt employee must receive the full salary for any week he performs any work without regard to the number of days or hours worked, although a few exceptions can apply (discussed below). Deductions may not be made for absences caused by the employer or by the operating requirements of the business. If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. Alternatively, an exempt employee does not have to be paid for any workweek in which he performs no work. Deductions may be made for salaried exempt employees under the new regulations in the following seven situations: 1. For absences from work of one or more full days for personal reasons (other than sickness or disability, discussed below). So, for example, if the employee is absent for two full days to handle personal affairs, those two days may be deducted from the employee s salary without affecting the exemption. 2. For absences from work of one or more full days because of sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost because of illness. This is true even if the exempt employee has not yet qualified for the plan or has exhausted the plan s sick leave allowance. An example of a bona fide plan, policy, or practice includes a policy that allows employees to accrue paid sick leave. 3. To offset amounts employees receive as jury or witness fees, or for military pay. Note that you cannot make deductions for partial week absences caused by jury duty, attendance as a witness, or temporary military leave. You may only offset any monetary payments received as jury or witness fees or military pay for that particular week. 4. For penalties imposed in good faith for infractions of safety rules of major significance. These rules include those relating to the prevention of serious danger to the worksite or other employees, such as no smoking rules in explosives plants, oil refineries, and coal mines. 5. For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. This disciplinary deduction provision was added in the new regulations. To qualify for the deduction, you must have a written policy that is applied to all employees. For example, you can suspend an exempt

20 employee without pay for three days for violating a company-wide, written policy prohibiting sexual harassment. Note, too, that DOL comments accompanying the final rule point out that the term workplace conduct covers just inappropriate conduct, including harassment, violence, drug or alcohol violations, or violations of state or federal laws, and not performance or attendance issues. Comments to the rule also shed light on the requirement that the policy be in writing. The policy does not have to include an exhaustive list of specific violations that could result in a suspension or even a definitive declaration of when a suspension would be imposed. Rather, the written policy only has to be sufficient to put employees on notice that they could be subject to an unpaid disciplinary suspension. 6. During the initial or terminal week of employment. You are not required to pay the full salary in the initial or terminal week of employment if the employee only works a portion of the week. You only have to pay a proportionate part of the salary. 7. For weeks, days, or portions of days in which an exempt employee takes unpaid leave under the Family and Medical Leave Act (FMLA). Under the FMLA, covered employers specifically are given the right to make deductions from exempt employees salaries for leaves required by the FMLA. So, if an exempt employee takes unpaid FMLA leave, you need only pay a proportionate part of the full salary for time actually worked. As an example, if an exempt employee takes four hours of FMLA unpaid leave, you can deduct that partial day amount from the employee s salary without affecting the exempt status. Similarly, you will not alter the employee s exempt status an by requiring the use of accrued vacation for partial day absences for any hours taken as intermittent or reduced FMLA leave. K. Partial Day Absences Private Sector Employees One hot-button topic the DOL failed to address is the conflict over the use of paid leave for partial day absences. The regulations still prohibit employers from docking the pay of exempt employees for absences of less than a day, although a few exceptions apply for infractions of safety rules of major significance, disciplinary suspensions, the initial and terminal weeks of employment, and FMLA leave (see above). However, a question arises when employers require exempt employees to use hours of paid vacation or sick time when they leave early to take care of personal business. The DOL, in its informal opinion letters, traditionally has permitted vacation or sick leave offsets as long as the employee does not experience a reduction in compensation. So, according to the DOL, once an employee is out of paid-time off, you may not make any partial-day deductions. And, in the comments to the new regulations, the agency specifically restates its position acknowledging that employers may make these deductions from exempt employee leave accounts without jeopardizing the employee s exempt status.

21 Several courts have adopted the DOL s position. For example, in Webster v. Pub. Sch. Emples. of Wash., Inc., 247 F.3d 910 (9th Cir. 2001), the Ninth Circuit determined that an employer can make deductions for partial day absences from an exempt employee s leave bank. According to the court, leave time is not considered salary, even when the leave can be paid out as cash at termination. Similarly, in Graziano v. Soc. of N.Y. Hospital, 4 WH Cases 2d 286 (S.D. N.Y. 1997), the court deferred to the DOL s position that hospital employees were paid on a salary basis even though they were required to substitute paid leave or compensatory time for partial-day absences. However, a few courts have disagreed. They have determined that this practice, even without an actual loss of pay, treats the exempt employee like an hourly, nonexempt employee and, therefore, triggers loss of the exempt status. For example, in Klein v. Rush-Presbyterian-St. Luke s Med. Ctr., 990 F.2d 279 (7th Cir. 1993), the Seventh Circuit determined that a private employer improperly categorized employees as professional. The employer had established a compensatory time bank based on overtime hours from which employees had to draw when working less than eight hours per day. The court ruled against the employer even though the employees never were actually docked if their banks had a negative balance. As a result of this disagreement between the courts and the DOL, employers still will be caught in the middle on this issue. Accordingly, if you are a private employer and require exempt employees to use paid leave for absences of less than a day, you should consult legal counsel. As a practical matter, though, even if you are in a jurisdiction that allows this practice, you may find that exempt employees resent being required to use paid leave for partial day absences, particularly if they regularly work more than 40 hours per week. In this situation, they are not entitled to additional pay when they put in long hours, but are required to use vacation or sick leave if they need a few hours off. (Note that special rules apply for exempt public employees and allow them to be considered exempt even if their pay is reduced for partial day absences, as discussed below.) L. Partial Day Absences Public Sector Employees [29 C.F.R. 541.710] Unlike employees in the private sector, exempt public employees are considered to be paid on a salary basis if their pay system meets certain requirements, even if their pay is reduced for partial-day absences. The exemption applies if the pay system was established by statute, ordinance, or regulation, or by a policy or practice established according to principles of public accountability. In addition, the pay system must both: (1) allow for accrual of paid leave; and (2) require the reduction in pay or placement on leave without pay for absences of less than one day for personal reasons, illness, or injury, if the paid leave is not used to cover an absence because:

22 (a) the employee did not ask or was denied permission to use the accrued leave; (b) all of the employee s accrued leave has been used; or (c) the employee chooses to use leave without pay. In addition, public employers may make pay deductions due to budget-related furloughs (a temporary layoff) without permanently jeopardizing the employee s exempt status. However, during the workweek that the furlough day is taken and the employee s pay is reduced as a result, the employee must be treated as an hourly, nonexempt employee. These provisions under the new regulations are substantially the same as the requirements of the old regulations. Thus, in Demos v. City of Indianapolis, 302 F.3d 698 (7th Cir. 2002), a case decided under the old regulations, the Seventh Circuit determined that city employees fell under the FLSA s public employee exception when they were docked for days that they did not work at least eight hours and did not have accrued leave to cover the time. The city s undisputed evidence showed that the employees compensation was consistent with public accountability principles and therefore met the public employee s salary basis test under the FLSA. In particular, Indiana law requires that the working hours of each employee be fully accounted for and that employees not be paid for time that is not worked. In addition, the city s Code of Ethics prohibited the city from paying employees for not working during a regularly scheduled workday. M. Improper Deductions [29 C.F.R. 541.603] The final DOL regulations also include a new section addressing improper deductions. If you are considered to have an actual practice of making improper deductions from exempt employee pay, you may lose the exemption for all employees who work in the same job classification and who are under the manager responsible for the deductions. Factors the DOL will consider to determine if you have an actual practice include: the number of improper deductions made, particularly as compared to the number of employee infractions warranting discipline; the time period during which the improper deductions were made; the number and geographic location of employees whose salaries were improperly reduced; the number and geographic location of managers responsible for making the improper deductions; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. If the employer is found to have an actual practice of improper deductions, the exemption will be lost during the time period in which the deductions were made for employees in the same job classification working for the same manger responsible for the deductions. So, for example, if a manager at one facility routinely docks the pay of exempt engineers

23 at that facility for partial day absences, then all engineers in that facility whose pay could have been improperly docked by that manager would lose their exemption. However, engineers at other facilities working for different managers would remain exempt. N. Limited Safe Harbor for Improper Deductions [29 C.F.R. 541.603(c) and (d)] Fortunately, the new regulations also provide two safe harbors that allow you to preserve your exemptions if you inadvertently make mistakes. The first applies if you inadvertently make improper deductions or if the deductions are isolated. In these situations, if you reimburse employees for the improper deductions, you will not lose the exemptions for those employees. (This new section effectively replaces the old regulation s window of correction, which also allows employers to correct inadvertent deductions without losing the exemption.) A second, new safe harbor is available even in situations where the deductions do not appear to be inadvertent or improper. This safe harbor applies, however, only if you (1) have a clearly communicated policy that prohibits improper deductions and includes a complaint mechanism, (2) reimburse affected employees, and (3) make a good faith effort to comply in the future. In addition, the safe harbor will not apply if you willfully violate your policy against improper deductions by continuing to make the improper deductions after receiving employee complaints. To qualify as a clearly communicated policy, the policy should be in writing and should be distributed to employees prior to the improper pay deductions. Such a policy communication can occur, for example, at the time of hire, in an employee handbook, or on the employer s Intranet. So, for example (according to the preamble to the new regulations), if an employer has a clearly communicated policy prohibiting improper deductions and a manager engages in an actual practice of making such deductions, the exemption would not be lost as long as the employer reimburses employees for the improper deductions and makes a good faith commitment to comply in the future. O. Extra Compensation [29 C.F.R. 541.604] Finally, the new regulations clarify when an employer may pay an exempt employee additional compensation without jeopardizing the exemption or violating the salary basis requirement. Specifically, if the exempt employee is guaranteed the minimum weekly payment of $455, he also may be paid a commission on sales or a percentage of profits or sales, or even additional compensation based on hours worked beyond the normal workweek. This additional compensation can be paid on any basis, including a flat sum, bonus payment, straight-time hourly amount, time and one-half, or any other basis, including paid time-off.

24 In addition, the new regulations allow an exempt employee s earnings to be computed on an hourly, daily, or shift basis, if the employment arrangement also includes a guarantee of at least the $455 minimum weekly required salary regardless of the number of hours, days, or shifts worked. However, to pay this way, a reasonable relationship must exist between the guaranteed amount and the amount actually earned. Reasonable relationship means that the weekly guarantee is roughly equivalent to the employee s usual earnings at the assigned hourly, daily, or shift rate for the employee s normally scheduled workweek. To Purchase This Report Additional copies of may be purchased online for $27 each. Go to: http:///ecom/flsa.