DOL Revises FLSA Exemption Regulations - Employers Have 120 Days To Comply!

Executive Summary

On April 20, 2004, the Department of Labor ("DOL") issued final revisions to the Regulations that define who is "exempt" from the overtime requirements of the Fair Labor Standards Act (FLSA). They take effect on or about August 18, 2004, and are a watered-down version of the March 2003 proposed Regulations.

• To be exempt, an employee must be paid a fixed salary of at least $455 per week ($23,660 per year), and meet one or more of the regulatory duties tests.
• The FLSA provides stiff penalties for violations. Misclassified workers can recover unpaid overtime (1-1/2 times the effective hourly rate for each hour worked over 40 in a week) for up to three years, plus an equal amount in penalty damages, plus attorney fees.

In recent years, "class" actions under the FLSA have become the hottest employment law claim. The new Regulations will undoubtedly bring more attention to this area and may stir up even more litigation.

Over the next 120 days, every employer must audit its current exempt/non-exempt classifications, its job descriptions, and its policies, to ensure compliance with the revised Regulations.

Overview of Changes

These changes had been long awaited. The "duties tests" for exemptions under the former Regulations had remained essentially unchanged since the 1940's; and the salary levels had not been increased since 1975. The final revisions do two things: (1) they modify the "salary basis" test; and (2) they clarify, modernize and, in some cases, change the "duties" tests for the executive, administrative, professional and outside sales exemptions. The final revisions do not contain some of the changes reflected in the proposed Regulations issued in March 2003.

Standard Test Adopted for Salary Basis
In order to be exempt under both the revised and former Regulations, an employee must be compensated on a "salary basis." The revised Regulations eliminate the distinctions between the "long" and "short" tests to determine if an employee is paid on a salary basis. Instead, DOL has adopted a "standard test." Now, an employee must be paid a minimum of $455 per week ($23,660 annually), and meet the primary duty requirements of the applicable exemption. This is an increase over the current short test minimum of $250 per week.

Special Rule for "Highly Compensated Employees"
Employees who are paid more than $100,000 per year and who perform non-manual work will be considered exempt if they customarily perform any identifiable executive, administrative, or professional duty described in the standard duties tests. In other words, a "highly compensated employee" needs to meet only one part of the corresponding duties test to qualify for the exemption. In determining whether an employee meets the $100,000 threshold, base salary, commissions, non-discretionary bonuses, and other non-discretionary compensation are considered. However, the individual must also meet the salary basis test. In other words, total compensation must include a fixed salary of at least $455 per week.

Executive Exemption is Narrowed
The new test for the executive exemption may result in fewer employees being eligible for that exemption. Under the former Regulations, the short test did not require that an exempt manager have the power to hire and fire workers. It was sufficient that the manager "customarily and regularly" directed the work of two or more employees and have management as his or her primary duty. Under the new standard test, however, an exempt executive is required to have the authority to hire and fire, or make recommendations as to hiring, firing, advancement, promotion or other change of status that will be given particular weight. Presumably, this new aspect of the test is met by supervisors who are responsible for doing performance evaluations where those evaluations impact an employee's wage or other status of employment. Employers need to review and revise job duties and job descriptions of all "exempt" managers and supervisors to ensure proper classification prospectively.

Twenty Percent Equity Owners are Exempt
Under the revised Regulations, any employee who owns at least a twenty percent equity interest in the enterprise in which he or she is employed and who is actively engaged in management, is an exempt executive. The salary basis test does not have to be met for this particular exemption.

Administrative and Professional Exemptions Not Changed
Under the former Regulations, the administrative exemption was the most difficult to determine. An employee had to exercise "discretion and independent judgment;" and his or her primary duty had to consist of work related to the management or general business operations of the employer as opposed to "production" or "sales" work. Unfortunately, the revised Regulations retain the existing requirements (deleted in the proposed Regulations). However, they provide modern day examples of jobs generally viewed as exempt, and clarify that the use as a reference by individuals with specialized skills of manuals, guidelines, and procedures relating to complex matters does not preclude the exemption.

Under the former Regulations, with limited exceptions, to be a learned professional, an employee needed an advanced, formal education, often beyond a four-year bachelor's degree. The revised Regulations do not change these requirements. They do, however, clarify the exemption and provide modern examples of exempt and non-exempt jobs.

Changes to the Outside Sales Person Exemption
Under the former Regulations, outside salespersons could spend no more than twenty percent (20%) of their time on non-exempt duties not incidental to sales activity. DOL has now eliminated this percent limitation which could expand the use of this exemption.

Full Day Disciplinary Suspensions Now Permitted for Any Rule Violation
The revised Regulations permit deductions for full day absences (or multiple full days) due to disciplinary suspensions imposed in good faith for infractions of written work rules applied uniformly to all employees. Under the old Regulations, less than a full week disciplinary suspension of an exempt employee was not permitted except for a violation of a major safety rule.

Safe Harbor Created
DOL has created a safe harbor for employers that have a written policy, which includes a complaint procedure, under which they reimburse employees for improperly deducted amounts. Thus, an employer will not lose the exemption for improper deductions under the salary basis test, unless its policy prohibiting improper deductions is repeatedly and willfully violated after it receives complaints. Furthermore, even if an exemption is lost, it will only be lost for the pay periods in which the deductions occurred, and only for the same classifications of employees working for the same manager responsible for the improper deductions. In light of this safe harbor, and DOL's new rule on disciplinary suspensions, employers who want to take advantage of these revisions will need to establish written policies in compliance with the new Regulations.

Recommendation
The net effect of the new Regulations is to expand exempt status to certain employees who formerly did not qualify for exemption; and to eliminate exempt status for certain employees who historically have been treated as exempt. DOL has provided 120 days within which employers must come into full compliance. Thus, every employer promptly needs to consider how its compensation practices, personnel policies, employee manuals and job descriptions need to be changed in order to comply with, and take advantage of, the new Regulations. This is essential!