The United States Department of Labor's long-anticipated, much debated revised regulations under the Fair Labor Standards Act ("FLSA") finally have been issued, and will take effect on August 23, 2004.
The most notable change in the new regulations is a guarantee of overtime eligibility to all employees earning less than $23,660 per year, or $455 per week. Employees earning less than this amount will be "nonexempt" (i.e., subject to the overtime requirement), regardless of their duties.
In addition to revising the threshold compensation amounts applicable to the overtime exemptions, the Department of Labor also revised and clarified the executive, administrative, and professional duties tests used to determine exempt status.[1] The new regulations also include similar tests for computer employees and outside sales people. The familiar long test / short test dichotomy for determining exempt status has been eliminated. Under the new regulations employers may apply the following standard tests to employees whose salaries fall between $23,660 and $99,999 per year:
Executive Employees Standard Test | |
Salary | $455 per week |
Duties | Primary duty of the management of the enterprise or a recognized department or subdivision. Customarily and regularly directs the work of two or more other employees. Has authority to hire or fire other employees (or recommendations as to hiring, firing, promotion or other change of status of other employees are given particular weight). |
Administrative Employees Standard Test | |
Salary | $455 per week |
Duties | Primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. Holds a “position of responsibility” with the employer, defined as either (1) performing work of substantial importance or (2) performing work requiring a high level of skill or training. |
Learned Professional Employees Standard Test | |
Salary | $455 per week |
Duties | Primary duty of performing office or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which also may be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience. |
Creative Professional Employee Standard Test | |
Salary | $455 per week |
Duties | Primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. |
Outside Sales Employees Standard Test | |
Salary | None required. |
Duties | Primary duty of making sales; or of obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. Customarily and regularly engaged away from the employer’s place or places of business. |
Computer Employees | ||
Section 13(a)(17) Test | Standard Test | |
Salary | $27.63 an hour | $455 per week or $27.63 an hour |
Duties | Primary duty of (A) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional applications; or (B) design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or (C) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (D) a combination of duties described in (A), (B) and (C), the performance of which requires the same level of skills. Employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field. | Primary duty of (A) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional applications; or (B) design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or (C) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (D) a combination of duties described in (A), (B) and (C), the performance of which requires the same level of skills. Employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field. |
For those employees earning $100,000 per year or more, a new, abbreviated exemption test applies, which should result in nearly every employee falling within this salary range being exempt from the FLSA’s overtime requirements. Although an employer may use any fifty-two week period as the applicable year, but if that year is not identified in advance, the calendar year will apply. In addition, if an employee does not work a full year for the employer, the employer may still meet the test on a pro-rata basis for the amount of time worked. The applicable test is:
Highly Compensated Employees ($100,000/year) Standard Test | |
Salary | $455 per week. (The remainder of the employee’s annual compensation may consist of nondiscretionary bonuses and commissions, and other nondiscretionary compensation earned during a 52-week period. Compensation does not include board or lodging or other facilities, or payments for medical insurance or other fringe benefits.) |
Duties | Customarily and regularly performs any one or more of the exempt duties or responsibilities of an Executive, Administrative, or Professional employee. Primary duty of making sales; or of obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. |
Each of the proposed “duties test” set forth above has been revised as significantly as the salary test. Under the prior regulations, "primary duty" generally meant the most time consuming duty. Under the new regulations, it means the most important duty, regardless of time spent. Those employees who spend over 50% of their time in executive (i.e., management), administrative, professional, and outside sales pursuits will be presumed to meet the relevant duties test. In addition, however, even an employee who performs substantial amounts of routine, non-exempt work may still qualify for the exemption, so long as the primary duty qualifies for the exemption. By way of example, an executive employee such as a manager in a retail establishment may spend more than 50% of his or her time in performing nonexempt work such as running the cash register, but still be responsible for the supervision of employees, managing the budget and other executive functions. In such cases, the employee will properly be classified as exempt.
The regulations also make significant changes to the “salary basis” test applied to exempt employees, which changes allow an employer to make certain deductions from pay without losing the exemption. As before, an employer may make deductions from pay when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability. Similarly, an employer may make deductions for full-day absences in accordance with a bona fide sickness or disability plan (e.g., before the employee has qualified for eligibility or after the employee has exhausted all available leave). In addition, an employer now may make deductions for unpaid disciplinary suspensions of any length (in full days) for any infraction of workplace conduct rules, not just safety rules of major significance. Bear in mind, however, that the suspension must be imposed pursuant to a written policy applicable to all employees. Finally, the employer is not required to pay the full salary during unpaid FMLA leave or in the initial or terminal week(s) of employment, but may pay a proportionate part for time actually worked.
Even if an employer makes an improper deduction from an exempt employee’s pay, the protections of exempt status will not be lost unless it can be shown that the employer has an “actual practice” of making improper deductions. Several factors are to be considered in making this determination, but in any event a wrongful deduction actually must have occurred. (Prior to the revision in the regulations, even having a policy pursuant to which an employee might suffer a deduction from pay was sufficient to lose exempt status.) Significantly, in the event an “actual practice” is found to exist, all employees in the same job classification who work for the same manager will lose exempt status.
Improper deductions that are isolated or inadvertent will not result in loss of the exemption, if the employer reimburses the employee(s) for such deductions. In addition, an employer can retain the exemption even in the face of any improper deductions if it does the following: 1) adopts and communicates to employees a policy prohibiting improper wage deductions and establishing a complaint mechanism; 2) reimburses employees for improper deductions; and 3) and does not violate its own policy by continuing to make improper deductions after receiving complaints.
PA&C Policy Advisor:
In light of the amendment’s to the FLSA regulations, employers should review their existing policies and practices to determine what changes may be appropriate. Specifically, employers are advised to:
- Review payroll records for current “exempt” employees to ensure minimum salary thresholds are met to retain exempt status.
- Review the new duties tests to ensure employees are appropriately categorized. As before, a title or salary is insufficient to establish exempt status. The employees’ duties must satisfy the applicable test.
- Prior to making any changes in pay status classification, notify employees in writing; if employees are reclassified from “exempt” to “non-exempt” status, compensate employees for any overtime worked on or after August 23, 2004.
- and provide to employees a written policy defining and prohibiting impermissible deductions from exempt employees’ pay, and provide for a complaint procedure and reimbursement of the employee in the event the policy is violated.
- Train managers on those deductions that are permissible under the FLSA for both exempt and non-exempt employees, and the proper response in the event of a complaint.
The views expressed in this article are those of the author and may not reflect the views of Potter Anderson & Corroon LLP or its clients. Nothing in this website or the publications included in this website is intended to create an attorney-client relationship. This publication should not be deemed legal advice and should not be relied on by you as legal advice related to your particular circumstances.
Wendy K. Voss is a partner with the Wilmington, Delaware firm of Potter Anderson & Corroon LLP, where she has practiced since 1992. Ms. Voss graduated, summa cum laude, from the Marshall Wythe School of Law, College of William & Mary, in 1992 and graduated from the University of Michigan, magna cum laude, in 1974. Ms. Voss is a member of the Order of the Coif and was a Member of the William and Mary Law Review.
Ms. Voss's practice is concentrated in the areas of labor and employment law, in which she exclusively represents management. She provides advice regarding personnel policies and practices to human resources personnel and other members of management, and training in personnel-related matters. In addition, Ms. Voss regularly defends employers in employment and employment-related matters before federal and state courts and administrative agencies. Ms. Voss is a member of American Bar Association ("ABA") and the Delaware State Bar Association ("DSBA"). She is a former Chair of the Labor and Employment Law Section of the DSBA (1998-1999).
[1] Please note that certain workers do not qualify for any of these exemptions, no matter how highly paid they might be. These include manual laborers or other “blue collar” workers, such as production-line and construction workers, carpenters, electricians, mechanics, and the like. It also includes police officers, detectives, and other law enforcement officers, fire fighters, correctional officers, emergency medical technicians, ambulance personnel, investigators, hazardous materials workers and similar employees, regardless of rank or pay level, and even if they may supervise the work of others.