Significant Changes to FLSA "White Collar" Exemptions Effective August 23, 2004


On August 23, 2004, the U. S. Department of Labor (DOL) made sweeping changes to the regulations governing the "white collar" overtime exemptions under the federal Fair Labor Standards Act (FLSA). On December 16, 2016, a regulation was to have taken effect regarding criteria for overtime exemptions. These did not take effect, as a lawsuit prevented the implementation. This article will first discuss the 2004 changes and then will address the 2016 rule.

Establishment of the Fair Labor Standards Act

The foundation of these exemptions was established in 1938; the last significant changes to the regulations were implemented in 1949 and have remained largely unchanged (except for increasing the minimum salary levels in 1975). As a result, the DOL (bolstered by decades of public criticism) crafted the revised regulations in an effort to ensure that the FLSA more accurately reflects the American workplace today.

Key Changes to the FLSA in 2004

Although the rules include significant changes, employers who also are covered by state wage and hour laws may not be impacted as much (or not at all, as is currently likely in California) if their state laws or regulations are more employee-favorable than the FLSA. Employers should nevertheless have a solid understanding of the key changes to the federal "white collar" exemptions, including:

  • Minimum salary levels increased to $455 gross per week ($23,660 annually).
  • Revised "job duties" tests replacing the current "long" and "short" tests with a single "standard duties" test for each exemption. Elimination of the "long test" means doing away with the requirement that an exempt employee can spend no more than 20 percent of his/her time (or 40 percent in retail or service establishments) performing non-exempt work. Going forward under the revised regulations, the exempt employees' primary duty (generally, 50% or more of their time) must be spent on exempt work.
    • Executive test will require that employees have the actual authority to hire, fire or make decisions regarding any other change of employees' status, or that their recommendations in this area be given "particular weight" (See, 29 CFR §541. 105). In other words, an exempt employee will be required to do more than customarily and regularly supervise two or more employees and have other indicia of managerial control.
    • Administrative test retains the requirement that employees exercise discretion and independent judgment on matters of significance, and adds a section on "Use of manuals" as it relates to the exercise of independent discretion and judgment. (See, 29 CFR §541. 704). The final rule does not include the proposed revision requiring only that employees must hold a "position of responsibility".
    • Professional test does not (as originally proposed) allow an employee to qualify as exempt based on equivalent training in the military, technical schools or community colleges. The rules do provide, however, that employees who have substantially the same knowledge and who perform substantially the same work as degreed employees may be exempt if they obtain such knowledge through a combination of work experience and intellectual instruction. (See, 29 CFR §541. 301)
  • Streamlined exemption for highly-compensated employees who earn at least $100,000 gross per year (including base salary, commissions and non-discretionary bonuses). Such employees automatically will be exempt if they also perform office or non-manual work and "customarily and regularly" perform one or more of the exempt duties contained in one of the "white collar" exemptions.
  • The "safe harbor" provision to minimize the impact of improper deductions from an exempt employee's salary. A "safe harbor" is a relatively brief period of time in which employers have the opportunity to correct any improper deductions it may have made from the salary of an exempt employee. This safe harbor is available to an employer only if it first (a) has a clearly communicated policy prohibiting improper pay deductions, (b) reimbursed employees for any such deductions, and (c) made a good faith commitment to future FLSA compliance.
  • The permissible salary deduction for full day absences for suspensions based on infractions of "workplace conduct rules"; i. e. , policies concerning sexual harassment, drug and alcohol use, etc. The current regulations only allow full day deductions for unpaid suspensions for violating major safety rules, and full week deductions for unpaid suspensions for violations of other conduct rules.

State Law Considerations

Employers who are covered by both the federal and state overtime laws need to follow whatever law or regulation is most favorable to employees. The chart below outlines some of the key differences between the FLSA regulations and the current wage and hour laws in Alaska, California, Oregon, and Washington.

Employers should compare the provisions of their state laws with the revised federal regulations to determine which provisions are more employee-favorable. For example, the FLSA minimum salary requirement of $455 is more employee beneficial than the current state minimum salary in all of these states except California.

Therefore, employees in those states who earn less than the minimum federal salary need to have their salary increased to preserve their exempt status under federal law.

Conversely, the regulations in most states that describe exempt duties remain more favorable to employees, except for part of the revised federal executive exemption requiring such executives to have hire/fire authority or that their recommendations be given particular weight.

  FLSA AK CA OR WA
Salary Level $455 per wk ($23,660/yr) Follow new FLSA minimum $540 per wk ($28,080/yr); follow CA minimum Follow new FLSA minimum Follow new FLSA minimum
Duties Single revised test for each exemption Follow AK regs at 8 AAC 15. 910(a)(1)(7), and also comply with new FLSA hiring/firing reqmt for executive exemption Follow CA regs in the IWC Wage Orders; see www. dir. ca. gov/iwc under "Wage Orders 1-2001 through 17-2001 Follow OR regs at OAR 839-020-0005, and also comply with new FLSA hiring/firing reqmt for executive exemption Follow WA regs at WAC 296-128-500 -– 530, and also comply with new FLSA hiring/firing reqmt for executive exemption
Highly- compensated employees Employees paid $100,000/yr exempt if meet streamlined duties test No similar exemption; don't use unless AK adopts similar exemption No similar exemption; don't use unless CA adopts similar exemption No similar exemption; don't use unless OR adopts similar exemption No similar exemption; don't use unless WA adopts similar exemption
"Safe Harbor" Broader federal "window of correction" for employer if improper deductions made Implement Safe Harbor personnel policy to obtain federal protection, although not guaranteed "safe harbor" under AK law. AK adheres to FLSA in absence of applicable state regs Implement Safe Harbor personnel policy to obtain federal protection, although not guaranteed "safe harbor" under CA law. Follow CA requirements on permissible salary deductions Implement Safe Harbor personnel policy to obtain federal protection, although not guaranteed "safe harbor" under OR law. Follow OAR 839-020-0004(30) regulations on permissible salary deductions Implement Safe Harbor personnel policy to obtain federal protection, although not guaranteed "safe harbor" under WA law. Follow WAC 296-128-532 regulations on permissible salary deductions
Permissible salary deductions Now allows full-day deductions for unpaid suspension based on violation of any conduct rules, and for violations of major safety rules, and full or part-day deductions for unpaid FMLA No similar provision; AK adheres to FLSA in absence of applicable state regs No similar provision; don't use unless CA adopts similar deduction No similar provision; don't use unless OR adopts similar deduction. Full day salary deduction allowed only for absence for personal reason other than illness; full and part day deductions allowed for unpaid FMLA No similar provision; don't use unless WA adopts similar deduction. Full day deductions for unpaid suspension allowed only for violations of major safety rules; full and part day deductions allowed for unpaid FMLA

Even though employers covered by state law cannot take advantage of some (or any of the changes, as is likely in California) of the FLSA regulations, employers should nevertheless audit their wage and hour practices to determine what changes may be necessary to comply with both laws. This is particularly true given the fact that although California may not make changes to current state requirements, it is unclear whether Alaska, Oregon, and/or Washington will revise their respective rules to fall in line with the federal regulations.

The 2016 Final Rule for Overtime

In 2014, President Obama directed the Department of Labor to revise and update the salary and compensation levels for Executive, Administrative and Professional Workers. They did so and developed a final rule 81 Fed. Reg. 32, 391, which was to take effect on December 1, 2016 raising the standard salary level from $455 to $913 per week.

The State of Nevada filed suit against the United States Department of Labor (DOL) to stop the rule from going into effect. (State of Nevada, et al. v. United States Department of Labor, et al ., No. 4:16-CV-00731). The U.S. District Judge in the Eastern District of Texas granted Nevada's summary judgment motion on August 31, 2017 finding the DOL to have exceeded its authority.

The court found that the DOL has authority to set a minimum wage under Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985). Further, the court said that under Atascadero State Hosp. v. Scanlon, 473 U.S. 234, 242 (1985), it was Congress' intention that the FLSA apply to the states. However, the court held that the DOL exceed its authority because its authority is limited to determining the essential qualities of employees who should be exempt from overtime pay.

The court stated that raising the standard salary level to $913 per week would mean that many employees who met the other defined criteria would now be non-exempt merely because of the salary level. The court said that DOL does not have the authority to use a salary-level only test, salary must be just one of the criteria items.

It is unknown at this time whether the DOL will appeal this decision, but what they have done is sent out a new Request for Information. This RFI seeks public comment on Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees. It is expected that the DOL will then craft a new regulation based on this information and the direction it received from the court.

It bears watching the progress of the DOL's attempt at changing the definitions of exempt employees. If the DOL is successful, then many states will need to adjust their definitions of an exempt employee. Further, many employers will need to review the job duties and salary levels of their employees to bring them in line with the federal regulation.