Client Alert

Contact: Steven B. Harz, Esq., Chairman
Labor & Employment Law Group
(201) 342-6000

DEPARTMENT OF LABOR ISSUES SWEEPING NEW OVERTIME PAY RULES UNDER THE FAIR LABOR STANDARDS ACT (FLSA)

Dear Clients and Friends:

On August 23, 2004, new so-called “FairPay” regulations issued by the United States Department of Labor (USDOL) are scheduled to take effect. The new regulations substantially modify the “White Collar” exemptions from the overtime provisions of the Fair Labor Standards Act. The following is a broad overview of the changes. Although it is not all-inclusive, it should provide a general understanding of the new rules. Please contact us with any questions you may have relating to the rules.

Generally, the new regulations make changes to the three tests that must be satisfied for executive, administrative and professional employees to be exempt from receiving overtime pay. There are also new rules relating to outside sales employees and computer employees. To be exempt from overtime pay executive, administrative and professional employees must pass the: (1) salary level test; (2) salary basis test; and (3) duties test.

Salary Level Test

The most important change to note is the modification to the salary level test. The USDOL has increased the minimum required salary to $455 weekly ($23,660 annually) from the present level of $155 per week ($8,060 annually). As a result, workers who earn less than $455 weekly ($23,660 annually) will now be guaranteed overtime pay protection. This holds true regardless of the worker's duties.

Salaried Basis Test

The new regulations do not substantially alter the prior salary basis test and will continue to require that an employee be paid on a salary basis. Moreover, the salary must remain consistent and can not vary depending upon factors such as the employee's quantity or quality of work during that specific work week. In other words, an employee must be guaranteed a specific predetermined amount of pay per pay period. The exceptions to this provision are limited.

Like the old rules, the new rules authorize only few circumstances in which an employer can cut an exempt employee's pay without violating the salary basis test. The primary change under the new regulations is with respect to deductions for disciplinary reasons. Under the present rules an employee's pay is not permitted to be reduced for any amount of time which is less than a week. The exception to this general rule is in situations where a major safety rule is violated.

Under the new regulations, however, an employer's power to make disciplinary deductions without violating the salary basis test and without affecting exemption status is broadened. The new rules make it possible for an employee to be suspended for one or more full days for a violation of a workplace conduct rule. This is generally true so long as the employer imposes the disciplinary suspension in good faith.

In addition, the new regulations contain a “safe harbor” provision to address instances when improper deductions are in fact made. Under this provision, an employer may not lose exempt status for an employee simply by making an improper, isolated or inadvertent deduction. The factors to consider in assessing whether an employer should be protected under this “safe harbor” provision are whether there is: (1) a policy prohibiting improper deductions; (2) whether this policy is clearly communicated to employees; (3) employees are reimbursed for any improper deductions and mistakes; and (4) whether the employer is committed to abide by the rules in the future. Accordingly, this protection decreases the risk of losing exempt status as a result of an improper deduction. In order to take advantage of this protection, employers are advised to create a written policy and distribute it to all employees. However, this exception is applicable only to an employer who has made a good faith effort to abide by the rules. Likewise, if an employer engages in a practice of making improper deductions or continuously violates the policy then the employee will not be permitted to retain exempt status.

Duties Test

The USDOL has modified and refined the duties test in order for an employee to qualify for exemption as an executive, administrative or professional employee. The DOL has eliminated the “short” and “long” tests that currently exist. Instead, the new regulations contain a single duties test for each category of employees.

To be classified as an executive employee, the new regulations require the employee to: (1) be compensated a minimum of $455 weekly (as stated above); (2) have the primary duty of managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; (3) customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and (4) 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 USDOL has created a special provision for business owners. Under this special rule, an executive employee may qualify for exemption if the employee owns at least a 20-percent interest in the enterprise. This holds true regardless of the type of business organization. To qualify for this exemption, however, the executive employee also must be actively involved in managing the business.

The new regulations do not drastically change the current rule with respect to classification of administrative employees. To qualify for exemption as an administrative employee, the worker must: (1) be compensated a minimum of $455 weekly (as stated above); (2) have the primary duty of performing office or non-manual work which is directly related to the management or general business operations of the employer or the employer's customers; and (3) exercise discretion and independent judgment with respect to important matters.

With respect to professional employees, an employee may be exempt either as a learned professional or as a creative professional. In order to qualify as a learned professional, the employee must satisfy the following four requirements: (1) be compensated a minimum of $455 weekly (as stated above); (2) have the primary duty of performing work that requires advanced knowledge, which is defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; (3) the aforementioned advanced knowledge must be in the field of science or learning; and (4) the advanced knowledge must be customarily acquired by a course of specialized intellectual instruction. To qualify for exemption as a creative professional, the employee must: (1) be compensated a minimum of $455 weekly (as stated above); and (2) have the primary duty of performing work that requires invention, imagination, originality or talent in an established field of artistic or creative endeavor.

Highly Compensated Employee Test

A major change from the current rule is that an employee's exemption status can change if the employee satisfies a new highly compensated employee test. This test applies to highly compensated employees performing office or non-manual work and who: (1) earn at least $100,000 per year (which must include at least $455 per week which is paid on a salary or fee basis); and (2) customarily and regularly perform at least one of an exempt executive, administrative or professional employee's exempt duties. It is important to note that the $100,000 threshold is not limited to an employer's base salary. Rather, it may also include commissions, nondiscretionary bonuses, and other compensation that is nondiscretionary. If these requirements are met then the worker is generally exempt.

Computer Employees

Another major change to the current rules involves computer employees. Under the current rules, computer employees can only be exempt under the professional or executive classifications. To qualify for the computer employee exemption an employee must: (1) be compensated a minimum of $455 weekly or $27.63 hourly; (2) be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; and (3) have the primary duty of performing any of the following functions:
(a) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
(b) The 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;
(c) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
(d) A combination of the aforementioned duties, the performance of which requires the same level of skills.
It is important to note that this category does not pertain to employees who are involved in manufacturing or repairing computer hardware or other related equipment. Also excluded are employees that depend upon or use computers but who are not primarily engaged in any of the aforementioned computer-related occupations.

Outside Sales Employees

Lastly, an employee may qualify for exemption as an outside sales employee. This requires that an employee: (1) have the primary duty of 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 (2) be customarily and regularly engaged away from the employer's place of business.

The primary difference between the present rules and the new rules with regard to outside sales employees is the elimination of the twenty percent restriction on an employee performing non-exempt duties. In addition, the salary requirement for the other white collar classifications does not apply here.

If you have any questions with regard to the application of the new regulations, or if you need any further assistance with regard to any labor and employment matter, please do not hesitate to contact Steven B. Harz, Esq., Labor Group Chair, at (201) 342-6000 or via email at sharz@hertenburstein.com.