Wage & Hour Regulations for Overtime

In April the Wage & Hour Division of the U.S. Department of Labor issued the final rule amending the white collar exemptions (from overtime) (541 Regulations) which will become effective on August 23, 2004, assuming Congress does not kill them. The Senate already had voted to substantially modify these provisions, rolling back some of the admittedly modest expansions of the exemptions proposed.
  The firestorm of criticism directed at the Wage & Hour for these rules may explain why they were last effectively changed in 1975.

The so-called “white-collar exemptions” in the Fair Labor Standards Act (FLSA) for executive, administrative, and professional employees have never been a model of clarity. While the new rules initially proposed by the Administration over a year ago would have made a number of changes that would assist those trying to understand and apply the regulations, a well-orchestrated barrage of letters following their publication caused Wage & Hour to retreat from a number of those changes. The revised new rules are not as substantial as those originally proposed.

The regulations provide exemptions for executive, administrative, professionals, computer professionals and outside sales.
  The major changes are as follows:

1. Change the minimum salary from $250 a week to $455 a week;
2. Create a single test, eliminating the long and short tests;
3. Create a “safe harbor” presumption that an employee earning at least $100,000 per year is not entitled to overtime;
4. Specifically remove most law enforcement and fire fighting personnel from the exemptions;
5. Define “primary duty” as the main or major duty, without specifying percentages of time involved;
6. Eliminate the “sole charge” classification from executive exemption;
7. Include computer-related administrative duties as exempt duties;
8. Create new guidelines for journalists;
9. Specifically list certain occupations as meeting or not meeting exemptions;
10. Expand the definition of teachers to include nursery school teachers;
11. Allow, under certain circumstances, a 1-day unpaid suspension for violations of workplace conduct rules without destroying the exemption;
12. Define the scope for losing the exemption for improper deductions;
13. Redefine the window of correction;
14. Clarify the effect of additional compensation to exempt employees;
15. Define the salary to include guarantees of hourly, day and shift pay; and
16. Provide guidelines on the impact of the use of manuals.

Standard Tests

The new regulations provide a standard test for each one of the exemptions. The new tests are as follows:

Executive test: To be exempt as an “executive,” the employees must:

1. Be compensated on a salary basis or not less than $455 per week;
2. Have as his or her primary duty the management of the enterprise or a customary recognized department or subdivision thereof:
3. Customary and regularly direct the work of 2 more employees;
4. Have authority to hire or fire or to make recommendations as to hiring, firing, or other changes in status that are given particular weight.

Administrative test: To be exempt as an “administrator,” the employee must:

1. Be compensated on a salary or fee of not less than $455 per week;
2. Have as his or her primary duty the performance of office or non-manual work directly related to the management or general business operations of the employer's customer (s);
3. Exercise discretion and independent judgment as to matters of significance.

Professional test: To be exempt “professional,” the employee must;

1. Be compensated on a salary or fee of not less than $455 per week;
2. Have as his or her primary duty work either requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction or requiring invention, imagination, originality of talent in a recognized field or artistic or creative endeavor.

Outside sales employee test: To be exempt as an outside salesperson, the employee must:

1. Have as his or her primary duty either making sales or obtaining orders or contracts for services or for the use of facilities;
2. Customarily and regularly be engaged away from the employer's place of employment in performing such primary duties.

How do these new rules differ from the old ones?
  In the executive test, the requirement that the employee must hire or fire or have recommendations given particular weight is new, and was added from the old “long test.”
  In the outside sales employee) besides slightly changing the name to conform with modern politically correct usage) the new test drops the old requirement that at least 20% of the employee's work be sales or sales-related. The more meaningful change is that the new criteria are published as regulations, whereas the old were never more than interpretative bulletins subsidiary to less specific regulations. The significance of this change is that Wage & Hour's explanations now have the force and effect of law.

Safe Harbor (29 C.F.R. §541.501) – The new regulations create a safe harbor for employers with respect to employees earning $100,000 or more a year: these highly-compensated individuals will be presumed to be ineligible for overtime. The $100,000 amount is a significant increase from the first proposal's more sensible $65,000 a year. If the employee performs any exempt duty and makes a $100,000 a year, the employee is exempt.
  The employer is given a 1-month grace period to make up an employee's pay to reach the $100,000 mark and preserve the exemption. For example, if an inside sales person who supervises 2 employees has a poor final quarter in commissions and earnings fall below the magic number, the employer may make up the difference in the month following the end of the year and preserve the employee's exempt status.

Law Enforcement and Fire Fighters (29 C.F.R. §541.3(b)(2)) – Police officers or firefighters whose primary duty
  is to investigate crimes or fight fires cannot qualify as exempt under the new rules. Even if the employee directs the work of others in the conduct of the investigation or fighting fires, the employee will not qualify as exempt. This is a major change: in the past, first-line supervisory officers such as police sergeants and fire captains often qualified for the exemption as executives.
  This new change will make it very difficult to treat any employee actually in the investigation of crimes or fighting fires as exempt, even if that employee has supervisory responsibilities.

Redefine Primary Duty (29 C.F.R. §541.700) – Wage & Hour has adopted a definition of “primary duty” that a number of courts had adopted over Wage & Hour's objection at the time.
  “Primary duty” is now defined as the main, major or most important duty of the employee.
  The new regulations affirm that an exempt employee can perform both exempt and nonexempt duties at the same time without losing the exemption. Wage & Hour notes specifically state that an assistant manager in a restaurant who performs both exempt and non-exempt duties at the same time can still qualify for the executive exemption. Such employees, who may flip burgers, shelve merchandise, or ring sales alongside the hourly employees whom they supervise, have been at the center of a number of lawsuits in recent decades, but this regulatory change certainly clarifies their status and will make such lawsuits less attractive for plaintiff's lawyers in the future.

Eliminate Sole Charge Provision – The new regulations have dropped the “sole charge” provision.
  The concept of that provision was that every establishment has at least one manager who can properly be regarded as exempt, even (for example) if he or she supervised just 2 employees.
  Now, employees who are in charge of a small establishment must meet all of the provisions of the regulations to qualify for the exemption. However, since the definition of “primary duty” ahs been changed from a time-based definition which many small establishment managers could not meet to one emphasizing the importance of the managerial duties, such managers may still qualify for the exemption.

Include Computer Related Administrative Duties (29 C.F.R. § 541.202 (b)) – Wage & Hour has acknowledged that employees who are engaged in computer network, internet and database administration may qualify for the administrative exemption. Employers have long struggled with how to classify certain employees who have very important duties related to the computer, the internet and database management but do not meet the strict definition of computer professional, often because their duties do not meet the technical definition of computer professional.
  Now it will be safer to classify such employees as exempt administrative employees.

New Guidelines for Journalists (29 C.F.R. § 541.302 (d)) – Media companies and the courts also have struggled over whether journalists should be regarded as exempt creative professionals. Wage & Hour has provided guidelines which will make it easier to determine whether an individual is exempt or not.
  For example, on-air reporters will generally be considered exempt.

Specific Listing of Occupations as Meeting or Not Meeting an Exemption – In the new regulations, Wage & Hour specifically lists certain occupations which they declare to meet the duties of the exemption.
  Some of the occupations listed as meeting the duties test of an exemption are:

insurance claims adjustors

financial service employees (not including selling)

major project leaders

athletic trainers with 4-year degrees

chefs

funeral directors

CPA's

physicians assistants

purchasing managers

dental hygienists

buyers

human resources managers

Some occupations listed as not meeting the duties test are:

ordinary inspection work

public sector inspectors

examiners or graders

cooks

comparison shoppers

paralegals

The “in” and “out” lists are the product of decades of litigation. They do not change the law so much as resolve some ambiguities that have made these occupations fertile grounds for FLSA lawsuits.

Expand Definition of Exempt Teachers to Include Nursery Teachers and Extracurricular Activities (29 C.F.R. § 541.303 (b)) – One area of controversy related to the exemption for teachers has focused on nursery school teachers. Plaintiff's lawyers have argued that a nursery teacher's primary duty was that of care giver, and that teaching was only a secondary duty. In the new rules, Wage & Hour has specifically decreed that nursery school teachers fall within the general exemption for teachers. Plaintiff's lawyers also have argued over the years that those responsible for extracurricular activities such as coaching (as opposed to academic instruction) should not qualify for the exemption for teachers because teaching, strictly speaking, was not their primary duty.
  The new regulations recognize the importance of extracurricular activities to the well-rounded education of students, and hold that time spent on these activities qualifies the coach/instructor for the teacher exemption.

Allow for One-Day Unpaid Suspension of Exempt Employees (29 C.F.R. § 541.602 (b)(5)) – One of the inequities of the old regulations was that in order to suspend an exempt employee for misconduct, the employer had to suspend the employee for the entire workweek or not at all: a suspension of one day could cause the exemption to be invalidated, and trigger liability for up to 3 years unpaid overtime. This problem has been corrected in the new rules. An exempt employee can be suspended for a whole day (or days) based on the employer's good faith belief that the employee has violated written workplace rules. The written policy must be applicable to all employees.

Define Effect of Improper Deductions (29 C.F.R. § 541.603) – Correcting another inequity that developed under the old regulations, in the new rules Wage & Hour has limited the impact on an employer of making an improper deduction from an exempt employee's pay. Plaintiffs have long argued – often successfully – that a single improper deduction from an exempt employee's pay voids the exemption for every employee.
  Under the new rules employers making improper deductions will lose the exemption only for the time period in which the deductions were made, and only for employees in the same job classification working for the same manager. This may be the most valuable change for employers in terms of limiting dollars and cents liability.

Redefine the Window of Correction (29 C.F.R. § 541.603 (d)) – The window of correction has been defined. Under new regulations, an employer may correct an improper deduction from an exempt employee's salary (avoiding the liability described above) if it has clearly communicated rule that prohibits improper deductions and which includes a complaint mechanism, it reimburses the employees when it discovers the improper deduction, and makes a good faith commitment to comply in the future. The best evidence of a clearly communicated rule is a written rule.

Clarify the Effect of Additional Compensation to Exempt Employees (29 C.F.R. § 541.604) – Wage & Hour consistently has taken the position that as long as an employee receives a guaranteed salary, the employees could also receive additional compensation without losing the exemption.
  In spite of this official position, some courts ruled that such payments caused the exemption to be lost.
  In the new regulations, Wage & Hour reinforces its position and specifically allows hourly pay, time and half pay and compensatory time to be paid to exempt employees in addition to their guaranteed salary without jeopardizing their exemption.

Allow Guaranteed Hourly, Daily an Shift Pay to be Considered a “ Salary” (29 C.F.R. § 541.640 (b)) – An employee who is guaranteed a certain number of hours, day pay or shift pay will meet the salary component of the exemption requirement as long as there is a reasonable relationship between the guaranteed amount and the amount actually earned. For example, guaranteeing an employee 20 hours at $25.00 an hour ($500) would not bear a reasonable relationship to $1,000 (40 hours X $25 an hour).

Provide Guidance on the use of Manuals (29 C.F.R. § 541.704) – Plaintiff's lawyers have argued, sometimes successfully, that requiring administrative and professional employees to follow policy manuals divests the employees of independent discretion and judgment necessary for them to qualify as exempt. The new regulations acknowledge that some manuals are highly technical or complex and require an individual to have specialized knowledge or skill to understand them, and thus such manuals do not preclude the employees from qualifying for the exemption.

Conclusion – While the underlying tests have not been radically changed, the new regulations raise some issues of their own.
  It may be a matter of years before all of these issues are resolved. If Congress does not forbid implementation of these regulations, prudent employers would be wise to adopt the suggested written programs related to disciplinary suspension of exempt employees and the window of correction and to review their job descriptions to make sure that exempt positions remain exempt.

Provided by

Wimberly , Lawson, Steckel , Nelson & Schneider, P.C.

Suite 400 Lenox Towers

3400 Peachtree Road, N.E.

Atlanta , GA 30326-1107