On April 20, 2004, in an attempt to better accommodate the realities of the modern workplace, the United States Department of Labor ( DOL ) published regulations changing the standards governing whether employees are exempt from the overtime and minimum wage requirements of the Fair Labor Standards Act ( FLSA ). The new regulations go into effect on August 23, 2004 and will affect the overtime eligibility of workers. Overview of Changes to Regulations. Among other changes, the new regulations: Adopt a single standard duties test for each exemption category - discarding the long and short tests used in prior regulations; Eliminate the 20% limitation on amount of time exempt employees devote to non-exempt tasks, which will result in professional employees performing concurrent managerial and non-exempt tasks (for example: restaurant and store managers who, in addition to managerial tasks, also spend time working at checkout counters) retaining exempt status; Revise and clarify elements considered when determining whether an employee s primary job duties fall within any of the exemptions; Increase the minimum weekly salary required for executive, administrative, and professional employees exempt from overtime pay from $155 to $455, thus workers earning less than $455 per week are guaranteed overtime compensation; Exempt highly paid employees who earn more than $100,000 per year; Add a new, permissible deduction: an employer may now deduct unpaid disciplinary suspensions (of one or more full days for infractions of workplace conduct rules applicable to all employees) from an exempt employee s pay; Add a new safe harbor provision, which provides that isolated or inadvertent, improper deductions may not jeopardize exempt status; and State explicitly that many public safety employees (such as: police officers, firefighters, paramedics, and emergency medical technicians), manual laborers, and blue-collar workers are entitled to overtime pay. Job Duties Analysis. The new regulations identify an employee s primary duty as the principal or most important duty of the employee. The test to determine an employee s primary duty remains substantially unchanged. The employee s job must be considered as a whole, considering factors such as: relative importance of exempt duties as compared to nonexempt duties, amount of time spent performing exempt work, freedom from direct supervision, and relationship between the employee s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. Under the new regulations, the amount of time spent performing exempt work is not determinative. The new regulations eliminate the 20% limitation on amount
of time exempt employees devote to nonexempt tasks, and concurrent performance of exempt and nonexempt duties does not automatically preclude an employee s classification as exempt. Nonexempt tasks directly and closely related to the performance of exempt work remain classified as exempt work. Which Employees Qualify as Exempt Under the New Regulations? All employees are subject to minimum wage, overtime, and equal pay rules unless they are exempt. The following categories of workers may be exempt, if the workers meet the DOL requirements for exemption: (1) executive employees, (2) administrative employees, (3) professional employees, (4) outside salespersons, (5) computer employees, and (6) highly compensated employees. Executive Employees An executive employee may be exempt from minimum wage and overtime rules. To be exempt, an executive employee s primary duty must be (1) management of the business or (2) management of a recognized department or subdivision of the business. An executive employee must customarily and regularly direct the work of two or more full-time employees or their equivalent. An executive employee must have the authority to hire or fire other employees, or his recommendations regarding employment actions concerning other employees must receive particular weight. An executive employee must customarily and regularly exercise discretionary power. An executive employee must have discretion to decide whether to perform non-exempt work and must always remain responsible for the business operations under his management while performing non-exempt work. Additionally, an executive employee s salary cannot be less than $455 per week. The new regulations retain the safe harbor for business owners. An employee actively engaged in the management of an organization and owning at least a 20% interest in the enterprise qualifies for the executive exemption. The salary requirements do not apply to an employee qualifying under the business owner safe harbor provision. Administrative Employees To be exempt from minimum wage and overtime rules, an administrative employee s primary duty must be the performance of office or non-manual work relating to management policies or general business operations of the employer or its customers. Alternatively, an administrative employee may perform administrative functions directly related to academic instruction or training in an educational establishment. An exempt administrative employee must customarily and regularly exercise discretion and independent judgment with respect to matters of significance. An administrative employee s salary or fee must be at least $455 per week, unless employed in an academic setting. An academic administrative employee must be paid a rate at least equal to the entrance salary for teachers employed by the academic institution. Examples of employees who may qualify for the administrative exemption include: claims adjusters, financial services industry employees, purchasing agents, human resources employees,
inspectors, and examiners/graders. Employees who apply well-established techniques, procedures, or specific standards within closely prescribed limits are excluded from the administrative exemption. Those employees excluded from the administrative exemption include: employees performing clerical or secretarial work, employees recording or tabulating data, and employees performing other mechanical, repetitive, recurrent, or routine work. Professional Employees There are three types of professional employees who may be exempt from minimum wage and overtime regulations: learned professionals, creative professionals, and teachers. To be exempt from minimum wage and overtime rules, a professional employee s primary duty must be to perform work that is predominately intellectual. Learned professionals must: (1) perform work requiring advanced knowledge that is predominately intellectual in character and includes work requiring consistent exercise of discretion and judgment, (2) perform work requiring scientific or specialized study, or (3) perform work requiring advanced knowledge customarily acquired by prolonged course of specialized intellectual instruction. Creative professionals must perform original and creative work in a recognized artistic endeavor; their work must grow primarily from their own invention, imagination, or talent. Teachers must: (1) teach, tutor, instruct, or lecture and (2) be engaged in this activity as a teacher. A teacher s certificate is not required to qualify for the exemption. An exempt professional employee must consistently exercise discretion and judgment. Most professional employees must earn a salary or fee of at least $455 per week. However, this salary requirement does not apply to licensed legal or medical practitioners, holders of academic medical degrees who are engaged in internship or resident programs, and teachers employed by schools or other educational institutions. Examples of employees who may qualify for the professional exemption include: chefs, musicians, writers, actors, graphic artists, lawyers, doctors, pharmacists, athletic trainers, accountants, actuaries, engineers, architects, teachers, theologians, and scientists. Outside Salespersons To be exempt from minimum wage and overtime rules, an outside salesperson s primary duty must be (1) making sales 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. Exempt outside salespersons must customarily and regularly spend time conducting their work away from the employer s place of business. Salary requirements do not apply to outside salespersons. Computer Employees Highly skilled computer analysts, programmers, software engineers, and others in computerrelated occupations may be exempt from minimum wage and overtime regulations, providing the employee s primary duties include: (1) the application of systems analysis techniques and procedures, including consulting with users in determining hardware, software, and system functional specifications, (2) the design, development, documentation, analysis, testing, creation, 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 these duties. Exempt computer employees must have a certain level of education and on-thejob training in the field, although no particular degree, license, or certification is required. Computer employees must earn a salary or fee of at least $455 per week or, if compensated hourly, they must earn at least $27.63 per hour. Employees who operate, manufacture, repair, or maintain computers, hardware, software, or related equipment do not fall within this exemption. Highly Compensated Employees A highly compensated employee performing office or non-manual work may be exempt from minimum wage and overtime regulations. In order to qualify under this exemption, the employee must customarily and regularly perform at least one of the exempt duties of an executive, administrative, or professional employee identified in the standard tests for exemption. Highly compensated employees must earn a salary or fee of at least $455 per week, and their annual compensation must total $100,000 or more. Which Employees Do Not Qualify as Exempt Under the New Regulations? Exemptions do not apply to blue collar workers or other manual laborers, no matter how highly paid, who perform work involving: repetitive operations with their hands, physical skill, and energy. Additionally, public safety employees (such as: police officers, firefighters, paramedics, and emergency medical technicians) are not exempt under the new regulations. Exemptions do not apply to employees training for employment, but not actually performing the duties, as an executive, administrative, professional, outside sales, or computer employee capacity. Employer Compliance with the New Regulations. In preparation for the regulations effective date of August 23, 2004, employers should review their policies and practices to ensure they are in compliance. Employers should pay particular attention to the following situations. Employees earning less than $455 per week. If these employees meet any of the duties tests and meet the exemption standards, employers may want to consider increasing compensation to preserve exempt status. If these employees do not meet any of the duties tests or do not meet the exemption standards, employers may want to consider providing overtime compensation or adhering to a 40 hour workweek. Job duties of employees. Employers may want to revise or modify employees job descriptions based on the new regulations. State and local hour and wage laws. Local hour and wage laws still apply, and the new regulations do not relieve employers of obligations under local laws.
The new regulations can be found at 69 Fed. Reg. 22, 122 (April 23, 2004) and will be codified at 29 C.F.R. Part 541. For additional information, visit the DOL website at http://www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm. David R. Hammond Brett C. Painter Amanda Bass Upson This publication is not intended as, and does not represent, legal advice and should not be relied upon to take the place of such advice. Since factual situations will vary, please feel free to contact a member of the firm for specific interpretation and advice, if you have a question regarding the impact of the information contained herein.