The New FLSA White-Collar RegulationsâAnalysis of Changes
T he controversial new U.S. Department of Labor regulations on exemptions from overtime requirements took effect on August 23, 2004, despite fervent and ongoing efforts in Congress to derail their implementation. Although the new rules differ substantially from both the former regulations and the originally proposed amendments, many employers may have delayed making appropriate changes to their payroll practices due to the uncertainty caused by congressional wrangling as to whether the new regulations would ever take effect. However, because the DOL chose not to provide employers with a lengthy transition period in which to come into compliance with the new rules, employers need to be familiar with, and must ensure compliance with, the new regulations immediately.
The most common Fair Labor Standards Act (FLSA) exemptions—those applicable to executive, administrative, professional, outside sales, and computer professional employees—are commonly referred to as the “white-collar” exemptions. The white-collar exemptions contain three components: the “salary level” test; the “salary basis” test; and the “duties” tests, all of which are substantially changed by the new regulations. The most significant changes include: 1) the salary level test has been changed to increase the minimum compensation level for exempt employees and to provide a more lenient standard for certain “highly compensated” employees; 2) the salary basis test has been revised to allow salary deductions for full-day disciplinary suspensions, to expand the “window of correction” provision and to provide a “safe harbor” for employers who, among other things, have a “clearly communicated policy” prohibiting improper salary deductions; and 3) the duties tests have been combined to eliminate the separate “long” and “short” tests and to require exempt executives to have meaningful input into hiring, firing, promotion, or similar employment decisions.
Salary Level Test
Exemption Old Old New
test test test
Weekly Executive $155 $250 $455
Administrative 155 250 455
Professional 170 250 455
Computer 27.63/hr. n/a 455 or 27.63/hr. Outside Sales n/a n/a n/a
The new regulations increase the minimum salary level to one standard, $455 per week. Accordingly, employees earning less than $455 per week will not be exempt, irrespective of their job duties and responsibilities.
However, there are still several exceptions to the salary level requirement. For example, the minimum salary requirements do not apply to lawyers, physicians, or teachers. Likewise, “academic administrative” employees may be paid a salary at a rate “at least equal to the entrance salary for teachers in the educational establishment by which the employee is employed.” Moreover, there is no minimum salary requirement for the outside sales exemption. Finally, computer professionals may be paid an hourly rate of at least $27.63 as an alternative.
• “Highly Compensated Employees”
The new regulations create an exemption for “highly compensated” employees. An employee with total annual compensation of at least $100,000 is “deemed exempt,” provided that employee receives at least $455 per week on a salary or fee basis, “customarily and regularly” performs any one or more exempt duties, and performs office or nonmanual work. The rule allows for a “make-up” payment to be paid within one month after the end of the year.
Example: A sales manager supervises other sales employees as well as engaging in sales activities herself. She is paid a salary of $5000 per month, and also receives commissions for her sales and those of her staff, which are paid at the end of the month in which the sale is made. At the end of the year, she has earned $96 K in total compensation. Although it is possible that she would meet the executive exemption, the employer need not worry about meeting all the requirements of that test if the employee makes $100,000 per year. The employer pays her $4,000 in additional compensation for the prior year by the end of January. She meets the highly compensated employee exemption.
Salary Basis Test
An exempt employee still must be paid a fixed and predetermined salary, which is not subject to reduction based on the quantity or quality of work (subject to certain exceptions). The new regulations retain this “no docking” requirement, but clarify certain exceptions and create a new exception for disciplinary suspensions of less than one week. The new rules also clarify that an exempt employee’s salary may be computed on an hourly, daily, or shift basis, provided the employee is guaranteed at least the minimum salary level and a “reasonable relationship” exists between the guaranteed amount and the amount actually earned (e.g., the weekly guarantee is “roughly equivalent” to the employee’s usual earnings). As with the old rules, the new regulations do not require that an employer pay an exempt employee during a week in which he or she performs no work for the employer.
• Deductions for Disciplinary Suspensions
The new regulations allow an employer to impose “unpaid disciplinary suspensions of a full day or more” if they are imposed in good faith for infractions of “workplace conduct rules”—such as sexual harassment, workplace violence, or drug or alcohol policies—provided the suspensions are imposed pursuant to awritten policy applicable to all employees. The written policy must be sufficient to put employees on notice that they could be subject to an unpaid disciplinary suspension for violation of the rules. “Workplace conduct rules” do not include rules relating to performance or attendance issues.
• Partial-day Deductions
Partial-day deductions from exempt employees’ salaries are still not permitted, except for: 1) unpaid FMLA leave; 2) infractions of “safety rules of major significance”; 3) in the first and last weeks of employment; and 4) for public employers, pursuant to a policy established pursuant to “principles of public accountability,” provided certain requirements are met.
• Other Deductions
Deductions for absences for personal reasons are still permissible only for full-day absences. Likewise, deductions for absences for sickness or disability are permissible only for full-day absences and only if in accordance with a bona fide sickness or disability leave plan, policy, or practice. Further, an employer may still offset salary with jury duty or witness fees and temporary military pay. An employer may also offset salary with penalties imposed in good faith for infractions of safety rules of major significance (as defined by the regulations), which the new regulations clarify may be in any amount.
In addition, although not included in the regulations, the DOL expresses in the preamble to the regulations that, consistent with existing case law, employers may take deductions from accrued leave accounts; require exempt employees to record and track hours; and require exempt employees to work a specified schedule.
• Additional Compensation
An employer may provide additional compensation beyond a minimum amount that is paid as a guaranteed salary. The new regulations clarify that additional compensation may be paid on any basis, including commissions, a flat sum, bonus payment, a straight-time hourly rate, a premium hourly rate, half-time pay, or paid time off.
• Effect of Improper Deductions from Salary
Under the old regulations, an employer could lose exempt status as to entire classes of workers if improper deductions were made from the salaries of a few employees in those classes. As a result, scores of costly class or “collective” action lawsuits have been brought against employers based on relatively isolated violations of the “no docking” rule.
The new regulations, by expanding the so-called “window of correction,” provide that an exemption will be lost only if the employer has an “actual practice of making improper deductions.” The new regulations list certain factors to consider when determining whether an employer has an actual practice of making improper deductions, including the number of improper deductions, the time period of such deductions, the number and geographic location of employees whose salaries were improperly reduced, the number and geographic location of managers responsible for such deductions, and whether the employer had a clearly communicated policy prohibiting improper deductions. If an “actual practice” is found, the exemption is lost only during the time period of the deductions for employees in the same job classification working for the same managers responsible for the improper deductions. Isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employees for the improper deductions.
• Safe Harbor
Under the new regulations, an employer will not lose the exemption for any employees if the employer: 1) has a clearly communicated policy prohibiting improper deductions and the policy includes a complaint mechanism; 2) reimburses employees for any improper deductions; and 3) makes a good faith commitment to comply in the future—unless the employer willfully violates the policy by continuing to take improper deductions after receiving employee complaints. The regulations specify that the best evidence of a “clearly communicated policy” is a written policy that was distributed to employees prior to the improper pay deductions, for example, by providing a copy at the time of hire or publishing the policy in an employee handbook or on the employer’s intranet site.
The primary change to the “duties” tests is the elimination of the “long” and “short” tests in favor of simpler “standard” tests for the executive, administrative, or professional exemptions.
The most significant change to the executive exemption is now exempt executives must have the authority to hire and fire, or the employee’s recommendations as to hiring, firing, advancement, promotion, or “any other change of status” must be given “particular weight.” Although “change of status” is not defined, the DOL has expressed that it is to be given the same meaning as the term “tangible employment action” for purposes of Title VII liability (e.g., “significant change in employment status, such as hiring, firing, failing to promote, reassignment with significantly different responsibilities, or a decision causing a significant change in benefits”).
An executive’s primary duty must still be the management of the enterprise in which the employee is employed or of a recognized department or subdivision thereof. The new regulations, placing less emphasis on the percentage of time spent actually performing managerial duties, now define “primary duty” as the “principal, main, major or most important duty that the employee performs.” Determining an employee’s primary duty calls for a “holistic approach,” with “the major emphasis on the character of the employee’s job as a whole.”
The new regulations, clarifying the old “working foreman” rule, stress that an employee’s managerial duties can be performed concurrently with nonexempt tasks, provided that the employee is the one who makes the decision regarding when to perform nonexempt duties and remains responsible for the success or failure of the business operations under the employee’s management while performing nonexempt duties.
The new regulations eliminate the “sole charge executive” exception. However, the new regulations retain the “business owner” exception for owners of at least a 20-percent interest in the enterprise in which he or she is employed, but now limit the exception to owners who are “actively engaged in its management.”
Under the first prong of the new administrative duties test, an employee’s primary duty must be the performance of office or nonmanual work directly related to “management or general business operations.” The only changes to this prong are the clarification of the meaning of “primary duty” (as discussed above) and the elimination of the reference to management “policies.”
To the dismay of many employers, the new regulations do not eliminate the so-called “administration/production” dichotomy, under which work that is directed to the core activities of the business (e.g., production of goods or selling of products in a retail or service establishment) cannot be directly related to “management or general business operations.” Rather, the work must be ancillary to those core activities (e.g., administrative or staff functions related to assisting with running or servicing the business). The new regulations provide numerous examples of the types of work that generally meet this requirement, including tax compliance, finance, budgeting, accounting, auditing, advertising, marketing, procurement, human resources, public relations, network, Internet and database administration, and similar activities.
The second prong of the new administrative duties test states that an exempt administrative employee’s primary duty must include the exercise of discretion and independent judgment with respect to “matters of significance.” The new regulations provide a detailed list of factors to be considered when determining whether an employee meets this requirement.
The new regulations provide a number of updated examples of positions that “generally” satisfy the duty requirements for the administrative exemption, including insurance claims adjusters; human resources managers (but not personnel clerks); certain nonsales employees in the financial services industry (but not those whose primary duty is selling financial products); team leaders of “major projects” for the employer; executive assistants to a business owner or senior executive; and purchasing agents with authority to bind the company on significant purchases.
In addition, the new regulations clarify the academic administrative exemption, which applies to employees whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment. This exemption is limited to employees engaged in work relating to the academic, as opposed to general business, functions of a school, such as academic counselors, principals, vice-principals, college department heads, and superintendents.
• Learned Professional
The most significant substantive change to the learned professional duties test is the elimination of the requirement that an exempt professional “consistently exercise discretion and judgment.” Otherwise, the learned professional exemption remains relatively unchanged, except for the inclusion of updated examples of positions that “generally meet” the duties requirements, including registered or certified medical technologists; registered nurses (but not licensed practical nurses); dental hygienists; physician assistants; accountants (but not accounting clerks or bookkeepers); chefs with four-year culinary arts degrees; certified athletic trainers; and licensed funeral directors and embalmers with specialized college degrees. Paralegals generally do not qualify as learned professionals unless they possess advanced specialized degrees in other professional fields and apply advanced knowledge in that field in performance of their duties.
• Creative Professional
The new regulations expand the creative professional exemption to include work requiring “originality” in a recognized field of artistic or creative endeavor. The rule does not apply to work that can be produced by a person with general manual ability and training. In addition, the new regulations clarify the section regarding journalists.
There are no substantive changes to the exemption for teaching professionals, except for the minor deletion of the terms “school system” and “institution.”
• Computer Professional
The new regulation applies the new weekly salary level to this exemption as an alternative to the old hourly rate.
The general duties test for the computer professional exemption remains substantively unchanged. The new regulations delete the provision stating employees engaged in the “operation of computers” are excluded from the exemption. However, the new regulations clarify that employees must still be primarily engaged in systems analysis or programming or other “similarly skilled” occupations to meet this exemption. Therefore, the fact that an employee such as a drafter or engineer may be highly dependent upon computers or computer programs to perform his or her work does not make that employee exempt.
• Outside Sales
The most substantial change to the outside sales exemption is the removal of the restriction that exempt outside sales employees may not perform work unrelated to outside sales for more than 20 percent of the hours worked in a workweek by nonexempt employees of the employer. Instead, the new rule adopts the “primary duty” test currently used under the executive, administrative and professional exemptions. However, the new regulations clarify that “outside sales” do not include sales made by mail, telephone, or the Internet unless such contact is used merely as an adjunct to personal sales calls.
• Combination Exemption
The new regulations provide that employees who perform a combination of exempt duties may qualify for exemption. The new rules retain the allowance for “tacking,” or combining, exempt work which may fall under different exemptions and delete the requirement that, in combination exemptions, the employee must meet the stricter of the requirements on salary and nonexempt work.
Employers that have not already adjusted their payroll practices in accordance with the new regulations may be risking liability for practices that may have been compliant with the old rules. Moreover, they may be missing out on opportunities created by the new regulations to avoid liability for improper salary deductions. Actions that employers may want to consider include:
• Identifying all previously exempt employees earning less than $455 per week. Unless they fall within an exception to the salary level requirement, consider raising their pay to at least the new $455 per week threshold or reclassify them as nonexempt.
• Auditing the job duties for each previously or potentially exempt employee to determine if his or her duties satisfy the new duties requirements described above (e.g., Does the executive have the authority to hire or fire or are his or her recommendations given particular weight? Do previously nonexempt employees fall within the examples provided in the new administrative and professional provisions?). For employees currently classified as exempt who do not meet the requirements for exempt status under the new regulations, reclassify the employees or adjust their duties so they qualify for exempt status. For employees currently classified as nonexempt who meet the requirements for exempt status under the new regulations, consider reclassifying the employees as exempt.
• Revising existing disciplinary policies to permit full-day suspensions without pay of all employees for violations of workplace conduct rules (including harassment, workplace violence, and drug and alcohol policies). Distribute the revised policy, in writing, to all employees prior to implementation.
• Adopting a written policy prohibiting improper deductions from the salary of exempt employees and providing employees with procedures to complain about improper deductions. Distribute the revised policy to all employees prior to implementation. Implement protocols to ensure prompt reimbursement of any improper deductions from salaries of exempt employees.
• Identifying employees who receive compensation of at least $100,000 and determine if they fall within the new “highly compensated employee” exemption.
• If any employees are classified as exempt under the “sole charge” exception, evaluating whether they fall under another exemption. If not, reclassify them.
• Training all appropriate employees about the new regulations and policies.
Jay P. Lechner represents and advises management in labor and employment law matters with the law firm of Zinober & McCrea, P.A. He received his J.D., with honors, from the University of Florida College of Law in 2001.
This column is submitted on behalf of the Labor and Employment Law Section, Susan L. Dolin, chair, and Frank E. Brown, editor.