To qualify for most of the exemptions, employees must earn at least $455 per week and satisfy the duties test that accompanies each exemption. Income levels have not been adjusted since 1975. The increase from $155 per week to $455 per week is the largest since Congress passed the FLSA in 1938. There are limited exceptions to the salary requirement for computer employees and outside sales employees. Some of the other more significant changes embodied in the new regulations include:
Elimination of the "Long Test" & "Short Test"
The new overtime regulations eliminate the use of separate long and short tests based on an employee's weekly wages. By eliminating the long test, the new regulations eliminate the requirement that exempt employees spend 20% or less of their time in a given workweek on non-exempt activities. The cap on non-exempt work has been removed from all exemptions.
Executive Exemption
To qualify for the executive employee exemption, an employee must:
- Have a primary duty involving management of an enterprise or a customarily recognized department or subdivision of the enterprise;
- Customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- Have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
The requirement that the employee have authority, or at least some input into, promotion decisions is the most significant change to the executive exemption. Generally, for this portion of the test to be satisfied, the employee must give recommendations pertaining to employees whom the executive customarily and regularly directs. Occasional suggestions are not enough to meet this portion of the duties test.
Administrative Exemption
The final version of the new administration exemption differs somewhat from the version of the exemption contained in the proposed regulations. To qualify for the administrative exemption, an employee must meet minimum salary requirements and:
- Have a primary duty involving performance of office or non-manual work directly related to the management or general business operations of the employer of the employer's customers; and
- A primary duty that includes the exercise of discretion and independent judgment with respect to matters of significance.
The regulation also attempts to clarify "matters of significance," noting that the phrase refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly or because the employee operates very expensive equipment.
Professional Exemption
Under the new regulations, the professional exemption is divided into two categories: learned professionals and creative professionals. The learned professional exemption encompasses jobs with a primary duty of the performance of work requiring advanced knowledge, defined as work predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment. The advanced knowledge must also be in a field of science or learning and is customarily acquired by a prolonged course of specialized intellectual instruction.
The "specialized intellectual instruction" requirement in the learned professional duties test restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the occupation. An academic degree is the best evidence that an employee satisfies this requirement. However, the exemption is also available to employees in such professions who attained their advanced knowledge through a combination of work experience and intellectual instruction. The exemption is not available for occupations that are usually performed with general knowledge acquired by an academic degree in any field or knowledge acquired through an apprenticeship or for occupations in which most employees acquire their skill by experience. Doctors, lawyers, engineers, scientists, pharmacists, dental hygienists, accountants, architects, teachers, theologians, physician assistants, executive or sous chefs and athletic trainers are among the occupations that will generally meet the requirements of the learned professional exemption.
To qualify for the creative professional exemption, an employee must meet minimum salary requirements and must have primary duty performing work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. This exemption includes fields such as music, writing, acting and graphic arts. Journalists may qualify for this exemption if their primary duty is work requiring invention, imagination, originality or talent. This includes investigative interviews, writing editorials, opinion columns or other commentary, analyzing or interpreting public events and performing on the air in radio, television or other electronic media.
Highly Compensated Employees
The new regulations also create a special exemption for highly compensated employees. Highly compensated employees are those with salaries of $100,000 or more per year. This amount was increased from the $65,000 yearly salary suggested by the proposed regulations. In addition to the minimum salary requirement, highly compensated employees must also perform at least one of the job duties of an exempt executive, administrative or professional as identified in the duties tests for those exemptions.
Computer Employees
Before the promulgation of the updated regulations, rules relating to computer employees were scattered throughout the FLSA regulations. The new regulations collect all the regulations pertaining to computer employees in one section. As noted above, computer employees must meet the salary minimum but may do so with either a $455 per week salary or $27.63 per hour. Additionally, the employee's primary duties must fall into one of four categories: application of systems analysis techniques and procedures, design, development, analysis, creation, testing or modification of computer systems or programs, design documentation, testing, creation or modification of computer systems related to machine operating systems, or a combination of those duties.
Outside Sales Employees
Outside sales employees are not subject the minimum salary requirement needed to qualify for the other four exemption. To qualify for the outside sales exemption, an employee must:
- Have a primary duty involving making sales (as defined in the FLSA), or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and
- Customarily and regularly engaged away from the employer's place or places of business.
Improper Deductions & Safe Harbor
Employers who make improper deductions from an otherwise exempt employee's salary will lose the exemption if facts demonstrate the employer did not intend to pay employees on a salary basis. The regulations list a number of factors to consider for purposes of determining whether an employer has an actual practice of making improper deductions. If facts demonstrate the employer has an actual practice of making improper deductions, then the employer loses the overtime exemption for all employees in the same job classification working under individuals responsible for the improper deductions during the time period in which improper deductions were made. However, when improper deductions are either isolated or inadvertent, the employer will not lose the exemption as long as it reimburses the employees for the improper deductions.
The new safe harbor provision prevents an employer from losing an overtime exemption for improper pay deduction – regardless of the reason for the improper deductions – where the employer:
- Has a "clearly communicated policy" that prohibits improper pay deductions and includes a complaint mechanism;
- Reimburses employees for any improper deductions; and
- Makes a good faith effort to comply in the future.
While DOL has stated a written policy is the best evidence of an employer's good faith efforts to comply with the regulations, a written policy is not required. However, the employer must communicate the policy to employees prior to the impermissible deduction. Thus, the "clearly communicated" standard could be met by providing a copy of the policy to all newly hired employees, publishing the policy in a company handbook or on an Intranet or, for small businesses, through an oral statement to employees. DOL plans to publish a model safe harbor policy that would comply with the regulations.
"Blue Collar" Workers & Veteran Status
In response to concerns voiced after promulgation of the proposed regulations, DOL has clarified the impact of the new regulations on both "blue collar" workers and veterans. Blue collar workers are defined as those who perform work involving repetitive operations with their hands, physical skill and energy. DOL has stated individuals in these positions will not be exempt no matter how highly they are compensated. Mechanics, craftsmen, plumbers, electricians, maintenance workers, production workers and construction workers are among the examples of blue collar positions provided in the new regulations.
Also, following vocal opposition from the AFL-CIO and a number of veteran's rights groups, DOL has explained military training is generally not sufficient to meet the requirements of the professional exemption. This is because the learned professional exemption applies only to employees in occupations that have attained recognized professional status. Thus, veterans working in traditionally blue collar positions will not find themselves subject to the white collar exemption because of their military training and/or experience.
Specific Jobs
The updated overtime regulations provide several examples of positions that will continue to qualify for overtime and those that are likely to be exempt following implementation of the updates. Each of these provisions once again emphasizes a main theme of the new regulations – exemptions are based not on job titles, but on job duties. Thus, while the specific jobs listed are likely to fall into the categories suggested by DOL, case–by–case analysis will still be necessary. Examples include:
- First Responders – First responders, including police, fire fighters, paramedics, correctional officers, park rangers and other similar workers, will generally not be exempt from overtime payments because their primary duty is not management and a specialized degree is not usually required.
- Insurance Adjusters – Subject to the case-by-case caveat, these individuals are likely to be administratively exempt if their duties include activities such as interviewing insured, witnesses and physicians, inspecting property damage, making recommendations regarding coverage of claims, negotiating settlements and making recommendations regarding litigation.
- Financial Service Industry Workers – Again, subject to case-by-base analysis, these individuals are also likely to be administratively exempt if their duties include collecting and analyzing information regarding a customer's income, assets, investments or debts, advising the customer regarding advantages and disadvantages of different financial products, marketing, servicing or promoting the employer's financial products or other similar duties.
- Human Resources Managers – These individuals are likely administratively exempt if job duties include formulation, interpretation or implementation of employment policies or if the employee works as a management consultant who studies business operations and proposes changes in the organization.
- Nurses – Registered nurses, licensed by an appropriate state board, will most likely qualify for the learned professional exemption if they are paid on a salary basis. However, licensed practical nurses and similar health care providers would not be exempt under this section because possession of a specialized degree is not a standard prerequisite for the occupation.
- Technologists & Technicians – These individuals will generally not qualify for the learned professional exemption because the occupations are not of recognized professional status. Examples include veterinary technicians, ultrasound technicians and engineering technicians.
What Does This Mean for You?
DOL estimates that 1.3 million exempt workers will gain overtime protection under the new rules. So now is the time to analyze exempt and non-exempt positions and determine how your employees should be classified under the new regulations. Once the final regulations are published in the Federal Register – perhaps as soon as April 23, 2004 – employers will have 120 days to comply. We recommend starting early.
For more information on the new overtime regulations and how they affect you, contact Alexis Pheiffer in Madison (608) 283-2446, Michael Aldana in Milwaukee (414) 277-5151, Scott Watson in Chicago, David Barton in Phoenix (602) 230-5526 or David Arizmendi in Florida (239) 262-5959.