Final overtime regulations are expected to go into effect on August 23, 2004. The U.S. Department of Labor (DOL) recently issued these revised rules in an attempt to simplify and update current overtime exemption requirements. Although these revised rules have been met with mixed reviews, congressional efforts to block the rules have thus far been unsuccessful, and experts believe that the rules will most likely go into effect as intended on August 23, 2004.

So what does this mean for you, the employer? At the time of publication of this article, there are fewer than 30 days left before the revised rules go into effect. This doesn’t leave much time for you to review and update your systems to make sure you comply. Let’s look at the existing overtime rules, changes made by the revised rules, and steps you can take to make sure you are in compliance.

Existing Overtime Rules

As you are probably aware, the Fair Labor Standards Act (FLSA) generally requires that you pay your employees overtime pay of one and one-half times regular pay for each hour they work over 40 in a work week. The FLSA provides exemptions from this overtime rule for your employees who are employed as bona fide executive, administrative, professional, outside sales and computer employees (white-collar exemptions). You cannot rely on job title alone in determining exempt status. To qualify for these exemptions, your employees must be paid a salary, meet minimum salary requirements and satisfy certain tests regarding job duties. Unfortunately, the regulations and cases explaining these requirements are often ambiguous, confusing and contradictory. As a result, employers have found it increasingly difficult over the past few decades to decide which employees qualify for overtime and which employees do not. Because of the confusion, many employers have misclassified employees and failed to pay overtime when due. This has led to investigations, lawsuits and significant penalties against many employers. Court cases have made it clear that the employer has the burden of establishing that an employee is exempt and that any exemption is to be narrowly construed.

Changes Made by Revised Overtime Rules

The revised rules represent the DOL’s attempt to remedy many problems with the existing white-collar exemption rules. They simplify and update the old exemptions and add new exemptions as described below. When you apply these exemptions, it is important to note that the revised rules specifically state that blue-collar workers, police officers, fire fighters, EMTs, paramedics, ambulance personnel, rescue workers, hazardous materials workers and similar employees, are never exempt from the overtime rules.¹

New Salary Requirements

The revised rules set both minimum and maximum salary limits for the overtime exemptions. As a general rule, if you pay your employee less than $23,660 annually ($455 per week), he or she automatically qualifies for overtime, regardless of job duties.² On the other end of the spectrum, if you pay your employee $100,000 or more annually, he or she is treated as “exempt” under a newly created “Highly Compensated Employee” exemption, as long as the employee primarily performs office or non-manual work and customarily and regularly performs one or more of the duties of an exempt executive, administrative or professional employee (as defined in the rules).³ As with most of the exemption rules, special conditions and exceptions apply, including exceptions for teachers, lawyers and doctors (including interns or residents).

New Job Duties Tests

The revised rules continue to use duties tests to determine if an employee qualifies for each white-collar exemption, but modify each test as described below.

Executive Exemption

To qualify for the executive exemption, your salaried employees must:

1. have a primary duty of managing your entire enterprise or one of its customarily recognized departments or subdivisions;

2. customarily and regularly direct the work of two or more other employees; and

3. have hiring/firing authority or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees.⁴

Just because your employee performs both exempt and nonexempt work, that does not mean he or she cannot satisfy the executive exemption, as long as the above requirements are met. One important factor is whether your employee decides when to perform nonexempt duties and remains responsible for the success or failure of your business operations under his or her management while performing the nonexempt work. If more than 50 percent of your employee’s time is spent performing exempt work, the revised rules provide that the primary duty requirement is satisfied.⁵ However, even if this 50 percent threshold is not met, an employee may still be exempt. The revised rules also provide that, to determine whether your employee’s suggestions and recommendations are given “particular weight,” one of the employee’s job duties must be to make suggestions and recommendations about employees whom he or she customarily and
regularly directs.⁶

Over the years, case law has differentiated between retail and manufacturing supervisors. The revised rules adopt some of this case law by providing specific examples stating that if you operate a retail establishment, your assistant managers may be exempt, even though they carry out the same duties as subordinates, as long as they perform certain management functions. On the other hand, if you operate a manufacturing enterprise, your supervisors whose primary duty is performing nonexempt work in the production line in a plant are not exempt just because they are responsible for directing others’ work.⁷ Specific examples of “management” activities are also provided by the revised rules.⁸ In addition, a special rule provides that if you have any management employees who own at least 20 percent of your company, they are exempt from overtime, regardless of salary level.

Administrative Exemption

To qualify for the administrative exemption, your salaried employees’ primary duty must:

1. be the performance of office or non-manual work directly related to the management or general business operations of your company or its customers; and

2. include the exercise of discretion and independent judgment with respect to matters of significance.⁹

The revised rules added the “with respect to matters of significance” requirement to make sure that work performed by administrative employees is significant enough to qualify them for exemption. However, the fact that you may suffer financial loss if your employee fails to perform the job properly does not automatically constitute “significance.” The revised rules provide details about specific duties that may satisfy the duties tests,¹⁰ and specific examples of persons likely to satisfy the exemption, including insurance adjusters, financial services employees, project team leaders, assistants to senior executives, HR managers and purchasing agents.¹¹ The revised rules also provide specific examples of persons not likely to satisfy the exemption, and special requirements for salaried employees in educational establishments.¹² These examples and requirements should be carefully reviewed.

Professional Exemption

The revised rules continue to include two types of professional exemptions–“learned” and “creative.” To qualify for the “learned professional employee” exemption:

1. your salaried employees’ primary duty must involve the performance of work requiring advanced knowledge;

2. the advanced knowledge must be in a field of science or learning; and

3. the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction. ¹³

The revised rules include detailed descriptions of the specific requirements for this exemption and include a list of specific categories that may satisfy this exemption, including registered nurses (but not licensed practical nurses), dental hygienists, physician assistants, accountants, chefs (but not cooks), certain paralegals who possess advanced specialized degrees, athletic trainers, funeral directors and registered/certified medical technologists. The revised rules further recognize that new specialists may be created at any time, and that education and experience (rather than education alone) may qualify your employees for the learned professional exemption.

To qualify for the creative professional employee exemption, your salaried employees’ primary duty must be performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. This would include areas such as writing, graphic arts, acting and music. The revised rules state that, because duties of employees vary widely, you must analyze each of your creative professional employees on a case-by-case basis.

Note that the revised professional exemption rules provide specific guidelines for journalists and reporters, and special rules for teachers, lawyers and doctors.

Outside Sales Exemption

To qualify for the outside sales exemption, your employees must:

1. have a primary duty of making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by you or your customers; and

2. customarily and regularly be engaged away from your place(s) of business.¹⁴

You do not have to apply any minimum salary requirements under this exemption. In determining your employees’ primary duties, you must treat work that an employee performs incidental to and in conjunction with his or her own outside sales or solicitations, or that furthers his or her sales efforts (e.g., deliveries, collections, sales reports), as exempt outside work. As with the other exemptions, the revised rules contain detailed definitions of many of the above terms.

Computer Employee Exemption

To qualify for the computer employee exemption, your employees must:

1. be compensated on a salary or fee basis at a rate not less than $455 per week, or be compensated on an hourly basis at a rate not less than $27.63 per hour; and

2. be employed by you as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in a computer field performing the following primary duties:

(a) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

(b) 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) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

(d) any combination of the above, the performance of which requires the same level of skills. ¹⁵

This exemption does not apply if your employees are engaged in the manufacture or repair of computer hardware or related equipment.¹⁶ The revised rules provide that the listed job titles are not determinative because they vary widely and change quickly in the computer industry. Therefore, it is important that you review actual job duties. The revised rules also remind you that employees in computer-related fields may also satisfy the executive or administrative employee exemptions.

Docking of Employee Pay

The rules have long provided, with certain limited exceptions, that you must pay your exempt employees their compensation on a salary basis, payable weekly or less frequently, without regard to job performance or the number of hours actually worked. You cannot reduce an exempt employee’s salary because of variations in the quality or quantity of the employee’s work. Previously, this meant that you were not able to dock an exempt employee’s pay for disciplinary reasons, except in certain cases where safety rules of major significance were broken, and then only for complete workweeks. The revised rules now permit you to dock exempt employees’ pay under certain circumstances (such as penalties for significant safety rule infractions, certain unpaid disciplinary suspensions, FMLA leave), and for periods as short as one full day or, in some cases, in set monetary amounts.

Previously, if you made a mistake in taking deductions from exempt employees’ pay, you could be penalized by losing exempt status for the entire class of employees, rather than just the affected employees. The revised rules provide a “safe harbor” under which you will not lose the exemption for the entire class unless you are guilty of repeated and willful violations or a widespread practice of noncompliance. To qualify for the safe harbor, you must have a clearly communicated policy prohibiting improper pay deductions, including complaint mechanisms. In addition, you must reimburse your employees for improper deductions and make a good-faith commitment to comply in the future.

Conclusion

This article is only a summary of the revised rules. Many special exceptions, conditions and definitions apply. As an employer, you and your counsel should review the rules carefully and apply them to your particular situation. The checklist on page 20 may help you get started. It is also important to note that the FLSA provides minimum standards and that your state’s laws, or any union contracts to which you are a party, may afford greater protections to your employees. The State of Illinois, for example, has already passed legislation providing more stringent requirements. Other states may follow.

Employer Checklist for Compliance

Here is a checklist of important steps to take to make sure you comply with
the revised rules by the August 23, 2004 deadline: 4 Review the revised rules.

1. Identify employees earning $100,000 or more.
   Determine if you have “Highly Compensated Employees.” If you don’t want to pay them overtime, you may re-classify them as “exempt.”

2. Identify employees earning less than $23,660.
   Determine if you have current “exempt” employees who earn less than $455 per week. If so, decide whether to increase salaries to more than $455 per week, or re-classify the employees as “nonexempt” and start paying overtime.

3. Review employees’ job duties.
   Review job duties and descriptions to determine if any employee’s status has changed or if position descriptions need to be revised to maintain exemption.

4. Amend discipline policy.
   If you want to be able to suspend and make corresponding payroll deductions for exempt employees, review and update your employment policies.

5. Amend pay deduction policies.
   To qualify for the safe harbor, update policies to clearly communicate the prohibition against improper pay deductions, set forth complaint mechanisms, provide for reimbursement for improper deductions, and state your good-faith commitment to comply in the future.

6. Review union contracts and state law.
   You must still comply with more stringent requirements set forth in union contracts or applicable state laws (if any).

7. Update payroll system.
   Make sure that any changes you have made to a specific employee’s status or to employment policies are accurately reflected in your payroll system.

8. Communicate.
   You should take steps to communicate these changes to affected employees. Remember that not all employees will be thrilled by their change in status, even if it is to nonexempt. Some employees may view this as a “demotion.”

Endnotes