The Fair Labor Standards Act (FLSA) is the federal law that requires employers to pay most employees in the United States at least the federal minimum wage (currently $5.15 per hour) for all hours worked, as well as overtime pay at time and one-half an employee's regular pay rate for all hours worked in excess of 40 hours during a workweek. However, FLSA also exempts employees who are executive, administrative, professional and outside sales employees from receiving overtime pay.
On March 31, 2003, the U.S. Department of Labor (DOL) proposed regulatory changes to FLSA overtime laws. DOL reviewed more than 75,000 public comments on its draft regulations before finally publishing its long-awaited rule April 23. The rule is intended to simplify and update current overtime requirements. The final rule significantly revises the 54-year-old "white-collar" exemptions for executive, administrative and professional employees and clarifies the existing regulations for outside salespeople and computer employees (such as computer system analysts, computer programmers and software engineers). The final rule does not address factory workers, other "blue-collar" workers or those covered by collective-bargaining agreements who always have been entitled to overtime pay and will continue to be. In addition, the revised rule does not cover a number of other issues employers face under FLSA, such as when compensable work begins and ends. The final rule is scheduled to go into effect Aug. 23.
An overview
The highlights of the changes to the overtime rules include an increase in the minimum salary level necessary to qualify for executive, administrative and professional exemptions from overtime pay. According to the current rule, an employee earning $155 a week can qualify as a "white-collar" employee and not be entitled to overtime pay. The new rule raises the minimum salary to $455 per week. As a result, employees who have exempt duties but are being paid less than $455 per week now will be eligible for overtime pay.
The new rule eliminates the "long test" to determine an employee's exempt status. The long test restricts exempt employees from devoting more than 20 percent of their time to nonexempt duties and requires employers to perform expensive, time-consuming analyses to determine whether employees are exempt from overtime requirements.
But the rule retains what commonly is referred to as the "short test" to determine whether an employee's primary duty qualifies for executive, administrative or professional exemptions. An employee's "primary duty" is defined as the principal, main, major or most important duty an employee performs. Determining an employee's primary duty under the new rule is based on the facts in a particular case with emphasis on the character of the employee's job.
Lastly, the new overtime rule allows employers to make deductions from exempt employees' salaried pay for full-day absences taken for personal reasons other than sickness or disability. Employers also are entitled to deduct penalties imposed in good faith for infractions of safety rules of major significance. This was not permitted under the old rule and, in fact, making such deductions would result in the overtime exemption being lost for the employee who suffered the deduction. Being paid on a "salary basis" means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. If an employer deducts from an employee's predetermined salary, the employee is not paid on a salary basis and will be entitled to overtime pay for each week in which he or she worked more than 40 hours.
Therefore, such an employee could collect past overtime that would have otherwise been due. Under the old rule, only hourly workers' wages were subject to such deductions. The new rule retains the prohibition of deductions from exempt salaried employees for partial-day absences.
Executive
For an employee to qualify for the executive exemption under the new rule, three requirements must be met in addition to the salary requirement: the employee's primary duty must be managing an enterprise or managing a customarily recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of two or more full-time employees or their equivalent; and the employee must 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 third requirement is new and may limit the number of employees who can qualify as exempt. Therefore, you will need to assess whether currently exempt executive employees meet the criteria by assessing each employee's job duties, roles and responsibilities.
The new overtime regulations define "management" and include a litany of examples, such as having the authority to interview, select and train employees. The phrase "a customarily recognized department or subdivision" is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function. "Customarily and regularly" means greater than occasional but less than constant and includes work done every workweek.
The new regulations go on to explain the phrase "two or more full-time employees or their equivalent" to include, for example, one full-time and two part-time employees. The supervision can be distributed among two, three or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent.
Under the executive exemption, business owners, who the regulations define as employees who own at least a 20 percent equity interest in an enterprise and are actively engaged in its management, also are exempt. Employees who perform office or nonmanual work and are paid an annual compensation of $100,000 or more also qualify under the executive exemption if they customarily and regularly perform at least one of the duties of an exempt employee.
Administrative
The administrative exemption for the new rule is the same as that of the old rule. However, the new rule adds significant clarification and better guidance. To qualify for the administrative exemption, the minimum salary requirement must be met; an employee's primary duty must be the performance of office or nonmanual work directly related to management or general business operations; and an employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.
An employee's primary duty directly is related to management or general business operations if the employee's work directly is related to assisting with the operation or servicing of the business. Examples of such work include quality control, purchasing and procurement. According to the new rule, the exercise of discretion and independent judgment involves comparing and evaluating courses of conduct and making a decision after the various possibilities have been considered. The implication is that a decision made by such an employee is free from immediate direction or supervision.
The new regulations also note the term "matters of significance" refers to the level of importance or consequence of the work performed. As an example, the new rule notes that a matter is not significant simply because an employer will experience financial losses if an employee fails to properly perform a job.
As with the executive exemption, employees who perform office or nonmanual work and are paid annual compensations of $100,000 or more also qualify under the administrative exemption if they customarily and regularly perform at least one of the duties of an exempt employee.
Outside sales
To qualify for the outside salesperson exemption according to the new overtime rule, an employee's primary duty must be making sales or obtaining orders or contracts and the employee must be customarily and regularly engaged away from the employer's place or places of business.
The key in having an employee qualify for the outside sales exemption is to ensure sales occur at customers' places of business or homes. Outside sales do not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls.
Proper deductions
Unlike the old rule, the new rule allows for deductions to exempt employees' salaries in the following situations: when an employee is absent from work for one or more full days for personal reasons other than sickness or disability; for absences of one or more full days as a result of sickness or disability if the deduction is made according to a plan, policy or practice of providing compensation for salary lost because of illness, such as workers' compensation laws or short-term disability insurance plans; to offset amounts employees receive as jury or witness fees or military pay; for penalties imposed in good faith for infractions of safety rules of major significance, including those relating to the prevention of serious danger in the workplace or to other employees; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions (these deductions must be imposed pursuant to a written policy). Also, an employer is not required to pay the full salary in the initial or terminal week of employment or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.
According to the new rules, an employer will be forced to pay overtime to otherwise exempt employees if he has an "actual practice" of making improper deductions. If an "actual practice" is found, the exemption is lost for the entire time period in which the deductions were taken. The exemption is lost not only for the employee who suffered the deduction but also for employees in the same job classification working for the same managers responsible for the improper deductions. The new rule provides that isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
If an employer has a complaint mechanism and clearly communicated policy prohibiting improper deductions, reimburses employees for any improper deductions and makes a good-faith commitment to comply in the future, the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints.
What's next?
DOL is expected to swiftly enforce the new regulations, and you should review and implement necessary workplace changes before Aug. 23 to ensure compliance. Employers who repeatedly or willfully violate the new regulations may face fines from DOL up to $1,100 per violation, as well as civil lawsuits from the employees claiming past due overtime pay. Too many employers wrongly assume a high salary equates to exemption from overtime pay. Therefore, look carefully at job descriptions of highly paid people to determine who is exempt. Also, keep in mind the new regulations allow unpaid suspensions of less than one week for exempt employees who violate serious workplace rules.
Philip J. Siegel is an attorney with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.
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