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.
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