On April 23, 2004, the United States Department of Labor (“DOL”) issued its long-awaited final regulations revising the so-called “white-collar” exemptions from the overtime requirements under the Fair Labor Standards Act (the “FLSA”). See 69 Fed. Reg. 22121 (Apr. 23, 2004).

Under the FLSA, covered employees must be paid at least the federal minimum wage for all hours worked and overtime pay at one-and-a-half times the regular hourly rate of pay for all hours worked over forty (40) in a work week, unless they meet each of three exemption tests: (1) “salary basis,” which requires an exempt employee be paid a predetermined and fixed salary which is not reduced due to variations in quality or quantity of work performed; (2) “salary level,” which requires the amount of salary paid to meet minimum specified amounts; and (3) the job “duties” test, which requires an employee’s job duties primarily involve executive, administrative or professional duties as defined in the regulations. The final rule issued by the DOL significantly changes the salary level and duties tests.

The final rule is scheduled to go into effect on August 23, 2004; however there currently are efforts underway in Congress to prevent some of the new requirements from going into effect, at least with regard to workers who would no longer be eligible for overtime pay under the new regulations.

Salary Basis Is Still Required Under New Rules

The new rules still require that an employee be paid on a “salary basis” in order to be exempt from the FLSA’s overtime requirements. To meet the salary basis test, employees must regularly receive a predetermined and fixed salary for each pay period in which they perform any work. An employee’s salary cannot be reduced due to variations in quality or quantity of work performed. Nor can an employee’s salary be reduced when the employer has no work available so long as the employee is ready, willing and able to work. However, a salaried employee does not have to be paid for a week in which the employee performs no work. To the extent that an employer violates the salary basis requirements, the employee may be rendered no longer exempt from the FLSA overtime requirements.

There are limited instances in which an employer may reduce an employee’s salary and still retain the employee’s exempt status. For example, an exempt employee’s salary may be reduced for full-day absences for personal reasons; full-day absences due to sickness or disability pursuant to a bona fide plan, policy or practice providing wage replacement benefits for such absences; hours taken as unpaid leave pursuant to the federal Family and Medical Leave Act (“FMLA”); amounts offsetting jury fees, witness fees or military pay received by the employee; or in the first or last weeks of employment. In addition, the employer may make pay deductions as a penalty for “infractions of safety rules of major significance” or for unpaid disciplinary suspensions of a full day or more for violations of workplace conduct rules pursuant to a written policy so long as the policy is “applied uniformly to all workers.” Employers may also require exempt employees to record the hours they work and to work a specific schedule.

Finally, in the Preamble to the final rule, the DOL clarified that employers generally may make deductions from employees’ accrued leave accounts (as opposed to their salary) for partial-day absences.

Improper deductions from salary may result in the loss of exemption not only for the individual employee but also for other employees in the same job classification. However, improper deductions that are inadvertent or isolated generally will not result in the loss of exempt status for an employee, so long as the employer reimburses the employee.

New Salary Levels May Require Overtime Pay for More Employees

The new rules increase the minimum weekly salary required for certain “white-collar” executive, administrative and professional workers to be exempt from the FLSA’s overtime requirements. For example, the new rules require overtime for employees earning a salary of less than $455 a week or $23,660 annually – up from the current minimum salary of $155 a week or $8,060 annually. This represents the largest increase to minimum salary levels since the FLSA was enacted sixty-five years ago. There are exceptions to the salary level and salary basis requirements for certain categories of workers, such as doctors, lawyers, teachers, outside sales employees and certain computer-related workers who are paid at least $27.63 per hour.

The regulations also replace what were known as the “long” and “short” duties tests with a standard duties test applicable to all employees earning between $23,660 and $100,000 annually to determine whether they are exempt from the FLSA overtime requirements. The new rules exempt employees with salaries of $100,000 or more in nondiscretionary compensation so long as they are paid at least $455 per week on a salary or fee basis, perform office or non-manual work, and “customarily and regularly” perform any one or more of the exempt duties identified in the standard tests for executive, administrative or professional exemptions.

Changes to the Duties Tests

In addition to meeting the minimum salary level requirements, employees must also pass one of the duties tests for exemption from overtime for white-collar employees. The DOL has always required duties tests for “white-collar” executives, professionals, and administrative employees in addition to salary level requirements. However, the new rules clarify and/or modify those duties tests, as well as revise the tests for employees in outside sales and computer-related occupations.

Executive Employees: The final rule still requires that in order to qualify for the overtime exemption, an executive employee must have as a primary duty the management of the enterprise or at least of a customarily recognized department or subdivision thereof. In addition, the executive employee must regularly direct the work of two or more other full-time employees or the equivalent. The new regulations add a further requirement that an executive employee must also have authority to hire or fire other employees or have “particular weight” given to his/her recommendations or suggestions on hiring, firing, advancement, promotion, or other status change for other employees. Significantly, the final regulations do not include a special exemption for “sole charge” executives, even though such an exemption was included in the proposed rules.

Under a new special rule for business owners, an employee who owns at least a 20% bona fide equity interest in the enterprise, and who is actively engaged in its management, is considered exempt without having to satisfy the salary basis or salary level tests. Employees owning smaller interests or who are not actively engaged in management of the enterprise will be exempt only if they qualify under one of the white-collar standard duties tests.

Administrative Employees: There has been no significant change to the administrative employee exemption, which still requires that their primary duty be the performance of office or non-manual work directly related to the management or general operation of the enterprise or its customers, and include the exercise of discretion and independent judgment. Under the new regulations, this discretion and judgment must be exercised with respect to matters of significance. The proposed rule had contained significant changes – such as adding the requirements that the employee be in a “position of responsibility” that required “a high level of skill or training” – however these proposed changes were not included in the final rule.

Professional Employees: The learned professional duties exemption requires that the employee have as a primary duty the performance of work requiring advanced knowledge in a field of science or learning that can be customarily acquired by a prolonged course of specialized intellectual instruction. Examples of professional occupations include lawyers, doctors, pharmacists, accountants, teachers, architects, engineers, chemical or biological scientists, athletic trainers, chefs, and licensed funeral directors or embalmers. Accounting clerks, paralegals and engineering technicians are not considered exempt professionals. Registered or certified nurses, physician assistants, medical technologists and dental hygienists – if paid on a salary basis – may qualify for the professional exemption, however licensed practical nurses do not qualify for the professional exemption.

The creative professional duties exemption requires that the employee’s primary duty must include work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Musicians, composures, writers, actors, graphic artists and journalists may be considered exempt professionals, depending on the content of the work performed.

Computer-Related Employees: The computer employee exemption requires employment as a skilled worker in the computer field with his/her primary duty consisting of the application of systems analysis techniques and procedures and/or work with computer systems or programs related to user or system design specifications or machine operating systems.

Outside Sales Employees: The outside sales exemption requires that the employee’s primary duty must be to make sales or obtain orders or contracts for services or the use of facilities, and the work must be “customarily and regularly” away from the employer’s place of business.

The exemptions from overtime do not apply to any “blue collar” workers who perform work involving physical skill or energy or involve repetitive work with their hands. Nor do the exemptions apply to police, fire fighters, paramedics, emergency medical technicians or other rescue workers.

Finally, the new rule emphasizes that the FLSA provides only minimum standards that cannot be waived or reduced, but may be exceeded. As such, if state laws differ from the FLSA, employers must comply with the standard most protective to employees.

If you are interested in learning more about these significant changes to the FLSA and how they may impact the overtime eligibility of your employees, please contact any of the Arent Fox attorneys indicated below. We are also monitoring efforts in Congress to block full implementation of the new regulations, and will provide updated information as it becomes available.