At last, the Department of Labor has proposed new regulations to help employers in the struggle of properly classifying employees as "exempt" or "not exempt" from the overtime provisions of the Fair Labor Standards Act ("FLSA"). The United States Department of Labor ("DOL") has proposed the first significant changes to the regulations governing this Depression-era statute that determines, among other things, an employee's exempt status from overtime pay. The proposed changes, published on March 31, 2003 and expected to go into effect in January 2004, represent the first significant changes to the overtime regulations since the FLSA was originally enacted in 1938. Most business groups are applauding the proposed changes and are hopeful that the changes will not only ease the classification process, but also reign-in the numerous, and costly, collective action lawsuits filed on this very issue.
To be exempt from overtime, employees generally must be paid a salary plus have job duties that fit into one of the "white collar" exemptions: administrative, executive or professional. Under the DOL's proposed changes, the previous minimum threshold salary for overtime has been increased: any salaried employee who now makes less than $425 per week (or $22,100 per year) is automatically qualified for overtime, irrespective of their job duties. The prior minimum threshold was $155 per week (or $8,000 per year). According to the DOL, this change alone will entitle an additional 1.3 million low-wage workers to overtime.
The proposed regulations also greatly expand the administrative exemption. The proposed regulations state that an employee need only hold "a position of responsibility" to qualify for the administrative exemption. The employer no longer has to establish that the employee has a job in which he "customarily and regularly exercises discretion and independent judgment." Accordingly, the number of employees covered by the administrative exemption is expected to rise, since an employee can clearly hold a responsible position without necessarily exercising discretion and independent judgment. In order to fit under the administrative exemption, the employee still must be paid a salary and have as his "primary duty" the performance of office or non-manual work related to the management of the company's general business operations.
The number of those who may now qualify for the professional exemption is also expected to rise. The proposed regulations eliminate the need for a four-year college degree and state that an employee may qualify as an exempt professional employee if their acquired knowledge, plus schooling, equals the knowledge acquired in a four-year degree.
And, if an employee still does not fit into one of the above white collar exemptions despite the lessened burdens, the proposed regulations also extend a white collar exemption to "highly compensated employees" who are paid $65,000 a year or more and perform office or non-manual work, but otherwise satisfy only one or more of the requirements for meeting the administrative, executive or professional exempt duties test. For instance, an employee who supervises two or more workers, but does not participate in any decisions regarding hiring or firing, may still be exempt, even though he does not meet all of the other executive exemption requirements, so long as he makes $65,000 or more per year.
Finally, to the relief of many employers, the proposed regulations will allow employers more leeway in docking an employee's pay for disciplinary reasons. An employer would be able to suspend an exempt employee without pay in time increments of less than a full workweek without being at risk for losing that employee's exempt status. Currently, the regulations only permit deductions from an exempt employee's pay for penalties imposed for infractions of safety rules of major significance and for unpaid suspensions in time increments of one or more full workweeks.
Undoubtedly, the proposed regulations are long overdue and may ease not only the employer's struggle of properly classifying employees, but may also significantly reduce an employer's overtime expenditures. Remember, however, that these regulations are not yet in effect and are not expected to be approved in final form until January 1, 2004. We, of course, will continue to keep you advised as to the status of the proposed regulations.
Note: As this article went to press, the U.S. Senate passed an amendment blocking DOL's proposed regulations so, it is unclear if, or when, these changes will go into effect. The amendment was supported by labor and employee groups who contend the proposed regulations will deprive previously non-exempt workers of million of dollars in overtime pay. The regulations have, since their inception, been a hotly debated topic among employer and employee groups alike, with DOL receiving nearly 100,000 comments during the public comment period. We'll continue to monitor Congressional developments and provide an update in the future.