On Monday, March 31, 2003, the Department of Labor published proposed regulations that significantly change the tests for determining which employees are exempt from time-and-a-half overtime pay under the Fair Labor Standards Act. Since 1949, the DOL has made only minor modifications to these regulations, leaving them considerably out of date, vague, and confusing. The proposed regulations – which would take effect only after a notice and comment period – seek to address some of the problems caused by the current antiquated regulations. Though only a partial fix, the proposed regulations are a welcome effort to update the FLSA and better accommodate the realities of the modern workplace. By clarifying the exemption standards, the new rules also may have the positive effect of reducing rampant FLSA litigation, as FLSA claims now are the most commonly litigated employment class actions.
Overview of Proposed Changes
The current regulations have created considerable confusion over the years regarding who is, and who is not, exempt from the FLSA's overtime pay requirements. The proposed revisions would fundamentally change and update all three tests generally required to be met for the exemption to apply: (1) the salary level test; (2) the salary basis test; and (3) the duties tests.
Salary Level Test. Under the current salary level test, to be exempt, employees have to meet either a "short test," if their salary is at least $250 per week, or a "long test," if their salaries are at least $155 (for executive and administrative employees) or $170 (for professional employees).
The proposed regulations simplify the salary level test dramatically:
- First, they replace the short and long tests with a single, united "standard test."
- Second, under that new standard, the minimum weekly salary is substantially increased to $425 for all exemptions.
- Third, the regulations create a new exemption category for employees earning $65,000 or more per year. Employees compensated at that level – and, significantly, commissions and nondiscretionary bonuses paid on at least a monthly basis can be included in meeting the $65,000 threshold – are automatically exempt if they perform any one of the exempt duties for the executive, administrative, or professional exemptions. In other words, for employees at this compensation level, the duties test is significantly simplified and exempt status is much more readily achieved.
Salary Basis Test. Under the current salary basis test, to be exempt, employees must be paid a predetermined and fixed salary, not an hourly wage subject to reductions because of variations in the quality or quantity of work performed.
- Significantly, the proposed regulations provide better flexibility for disciplinary suspensions without pay. Under current rules, an exempt employee may be suspended without pay only for infractions of safety rules of major significance or for full work weeks. The proposed regulations, however, would allow employers to suspend exempt employees without pay for sexual harassment or infractions of workplace rules for two days, four days, or 10 days, as appropriate to respond to the misconduct. Such suspensions must be imposed pursuant to a written policy applied uniformly to all employees.
- The proposed regulations also include improved safe harbors reducing the likelihood that pay glitches result in the loss of exempt status for large groups of employees. Under the proposed rule, employers would lose the exemption only if there is a pattern and practice of improper deductions, and even then only employees in the same job classification and working for the same manager responsible for the improper pay-docking decision or policy would lose the exemption (thus creating a safe harbor). Moreover, if an employer has a written policy prohibiting improper pay deductions, notifies employees of that policy, and reimburses employees for any improper deductions, then that employer would not lose the exemption for any employees unless the employer's policy prohibiting improper deductions is repeatedly and willfully violated.
Duties Tests. Like the salary tests, the new regulations simplify and improve the duties tests. The former long and short tests are integrated into a single standard test for each exempt category.
- Executive Exemption: The proposed duties test would exempt employees if they (1) have a primary duty of managing the enterprise or a recognized department or subdivision; (2) regularly direct the work of two or more employees; and (3) have the authority to hire or fire other employees or have particular weight given to suggestions as to the hiring, firing, promotion, or any other status changes. This new duties test eliminates the current long test provisions regarding the percentage of time spent on non-exempt versus exempt duties. Significantly, the proposed regulations eliminate the requirement that the employee exercise "discretion and independent judgment," which had caused considerable confusion and litigation. The proposed regulations also have a special provision for retail businesses, to prevent a manager who pitches in and does non-exempt work alongside the employees he supervises – for example, a fast food restaurant assistant manager who waits on customers during the noon rush – from losing his or her exempt status. This change could greatly aid retail businesses, which recently have been the target of a great deal of FLSA litigation.
- Administrative Exemption: The proposed regulations retain the current requirement that an exempt administrative employee have a primary duty of performing non-manual work related to the management or general business operations of the employer. But, the proposed changes replace the confusing "discretion and independent judgment" requirement with the requirement that the employee hold a "position of responsibility." The proposed rule also reduces the emphasis on what has been coined the "production versus staff dichotomy" between exempt and non-exempt employees. In other words, under the current duties tests, the regulations and the courts assess whether the work is related to the administrative operations of the business as distinguished from production. By reducing the emphasis on this "production versus staff" distinction, the proposed regulations address troubling cases that had limited the exemption if the employees did "production" work, which was defined inconsistently.
- Professional Exemption: The proposed test for the professional exemption is whether the employee's primary duty requires advanced knowledge in a field of science or learning acquired through specialized instruction. Recognizing the realities of the modern workforce, the proposed regulations no longer require that the instruction be college or graduate school, but focus instead on the employee's knowledge and how that knowledge is used in everyday work. Therefore, under the proposed regulations, an employee with applicable military duty, technical school, or work experience may qualify for the professional exemption.
- Computer Exemption: Likely because this exemption is, in FLSA terms, relatively new, having just been implemented in the early 1990s, the proposed regulations do not provide any real substantive changes to this exemption, aside from eliminating the confusing "discretion and independent judgment" requirement. Nonetheless, given the development of the Internet and sophisticated databases, this exemption is already out of date. The DOL specifically acknowledged that the computer employee exemption has been particularly confusing and invited comments on any further clarifications.
- Outside Sales Exemption: The proposed regulations eliminate the confusing 20 percent restriction on outside sales employees performing duties unrelated to their own outside sales. This change should relieve employees and employers from the burden of having to track the specific hours and duties of outside sales employees.
Industry Impact — Costs and Benefits
If adopted, employers still bear the economic burden of the proposed rules in one-time implementation costs and recurring payroll costs incurred for changing those employees presently treated as exempt from overtime under the current rules to non-exempt employees. Employers, however, will have options concerning the potential costs associated with the newly designated nonexempt employees, including: (1) adhering to a 40-hour work week; (2) changing the duties to comply with the proposed rules; (3) raising employees' salaries to exempt levels; (4) converting salaried employees' bases of pay to an hourly rate (no less than minimum wage); or (5) paying statutory overtime premiums.
Certain industries likely will bear the greatest costs of the proposed regulations, including: health services, construction, business services, and real estate. Conversely, industries that traditionally employ relatively low-paid, salaried workers, such as personal services, automotive repair, and parking, will reap most of the benefits, including the reduction in the potential legal liability from the unintentional misclassification of non-exempt workers as exempt.
Conclusion
The proposed regulations are long overdue and a necessary improvement to the existing FLSA standards. Nonetheless, the proposals do not go as far as some in the business community had hoped. For example, the proposed computer professional exemption does not include network, database, and Internet administrators, individuals responsible for troubleshooting, nor those responsible for training those employees. Nor do the proposed regulations clarify the duties of these individuals so that, with new developments in technology, employers can determine which new positions are similarly skilled and thus exempt. The DOL also declined to propose amending the regulations to permit partial-day unpaid leaves for exempt employees without reclassifying them as non-exempt. The DOL explained that, because exempt employees are not paid overtime for working more than 40 hours in a week, employers must in exchange provide a guaranteed salary that cannot be reduced when an employee works less than 40 hours a week. Still, the DOL took a step in the right direction.
Nevertheless, the future of the proposed rules remains uncertain, as does any impact on pending litigation. The proposed regulations must survive the 90-day comment and review period and become enacted. Additionally, while they may decrease future FLSA litigation, the proposed regulations may have little, if any, effect on pending FLSA lawsuits. Accordingly, in the interim, employers should consult with counsel to ensure that they are complying with the existing standards and remain up-to-date on the status of the proposed regulations.
Further Information
This Jones Day Commentaries is a publication of Jones Day and should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general informational purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at its discretion. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship.
Please feel free to call the principal authors of this publication, Steven T. Catlett (312.269.4281; stcatlett@jonesday.com) and Michael J. Gray (312.269.4096; mjgray@jonesday.com), or your regular Jones Day contact if you have any questions or would like to discuss these matters further. General e-mail messages may be sent using our Web site feedback form, which can be found at www.jonesday.com.