New Federal Rules for Overtime-Exempt

Department of Labor Announces New Federal Rules For Overtime-Exempt Executive, Administrative, Professional and Outside-Sales Employees
April 20, 2004

Summary

Today, the United States Department of Labor announced the final regulations governing overtime eligibility for “white-collar” workers under the Fair Labor Standards Act. These new regulations, which have been the topic of debate for over a year, had not been substantially updated for over 50 years. One of the primary changes in the new regulations, which have been dubbed the “FairPay” rules, increases the minimum salary necessary for employees to be exempt from overtime obligations. Now the minimum salary needed to be exempt from federal overtime will increase from the current level of $250 per week to a level of $23,660 per year — or $455 per week. The new FairPay rules will take effect in 120 days.

Details

Renewed Focus on Level of Compensation

According to the Department of Labor, the FairPay rules will strengthen overtime protection for 6.7 million low-wage salaried workers, including 1.3 million salaried workers who were not entitled to overtime pay under the existing regulations because they earned more than $250 per week.

In addition, to provide even stronger overtime protection for certain workers, the FairPay rules add new sections that clearly state that “blue-collar” workers, and “first responders,” such as police officers, fire fighters, paramedics, emergency medical technicians, and licensed practical nurses are entitled to overtime protection. In addition, the new FairPay rules provide new regulations for “highly-compensated” workers who are paid a total annual compensation of $100,000 or more.

Broadening of Exempt Duties

The definition of overtime-exempt duties has been broadened under the FairPay rules.

Executive Employees

Under the new FairPay rules, exempt executives must continue to have as their primary duty the management of the business or a recognized subdivision of the business. Executives must also customarily and regularly direct the work of two or more full-time equivalent employees, and executives must be paid a salary. The new regulations also require exempt executives to have the authority to hire or fire other employees, or have their recommendations regarding the hiring and firing of employees given particular weight.

Administrative Employees

The administrative exemption, which has been a challenge to apply in the past, may continue to be a challenge in the future. The primary duty of exempt administrative employees must still be the performance of non-manual work "related" to the management or general business operations of the employer or the employer's customers, but the FairPay rules eliminate the requirement that exempt work be "directly" related to management or general business operations. The FairPay rules emphasize that the implementation of policies and the carrying out of major assignments may qualify as exempt work. Time alone, however, is not the sole test, and nothing in the new rules require exempt employees to spend more than 50 percent of their time performing exempt work.

The FairPay rules continue to require that an employee's primary duty include the exercise of discretion and independent judgment with respect to matters of significance. Exercising "discretion and independent judgment" generally involves an employee comparing and evaluating possible courses of conduct, and acting or making a decision after the various possibilities have been considered.

The term "matters of significance" refers to the level of importance or consequence of the work performed. In determining whether or not an employee exercises discretion and independent judgment, all the facts involved in the particular employment situation must be considered. However, employees may exercise discretion and independent judgment even if their decisions or recommendations are reviewed, and occasionally reversed, at a higher level.

In the recent past, many seemingly exempt administrative employees have been found to be entitled to overtime because they were engaged in the day-to-day production of the employer's products and services. The retention of the requirement that exempt work be "related" to management or general business operations will perpetuate, to a degree, this dispute regarding the distinction between true, exempt managerial work and non-exempt production work.

Professional Employees

To be an exempt learned professional under the FairPay rules, an employee who meets the new $455 per week salary requirement must also have the primary duty of performing non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.

However, one significant change under the new rules is that in addition to receiving a bachelor’s degree, the "prolonged" study requirement could be met by alternative means, such as an equivalent combination of academic instruction and work experience. The relaxation of the requirement that employees have a particular academic degree will be a significant change in this exemption.

Outside Sales Employees

The definition of overtime exempt outside sales work has also been broadened in some regards. An individual will be exempt as an outside sales employee if the employee is customarily and regularly engaged away from the employer's place of business making sales or obtaining orders or contracts for services or the use of facilities. The current, twenty-percent limit on nonexempt work has been deleted, and the minimum ($455 per week) salary requirement does not apply to exempt outside sales employees.

Highly Compensated Employees of All Types

Under the new FairPay rules there is a new separate test for highly compensated employees. Under this test, any “white-collar” employee earning $100,000 a year or more must meet only one part of the standard test of any recognized exemption in order to be exempt from overtime. Thus, for example, an employee who earns $100,000 per year may qualify as an exempt executive if the employee regularly directs the work of two or more other employees, even though the employee does not meet any of the other requirements to be exempt. The $100,000 total compensation that is required may consist of commissions, nondiscretionary bonuses and other compensation earned during a 52-week period. There are also special rules for partial-year employees that permit a one-time “make-up” payment to meet the compensation test.

"Safe Harbor” and Other Issues

The new FairPay rules also add a variety of other changes to traditional wage and hour law. For example, there is a new “safe harbor” for employers who improperly deduct wages from exempt employees, and they provide some additional direction regarding those deductions. There is also helpful clarification of various alternative payment methods, specifically, “fee basis” or per-shift pay rates, as well as the clarification of the computer-professional exemption.

What this means

For many California employers these changes may have little effect because California employers must still follow the relatively more stringent California wage and hour rules. Moreover, California’s Wage Orders explicitly incorporate the old FLSA regulations. So, unless the Wage Orders are amended, the new rules will not affect California law.

However, the new federal rules will likely make the classification of employees more complex for those employers who have operations outside California. Employers must remember that, when a conflict between state law and the FLSA exists, the law establishing the higher standard applies. Thus, if an employer is subject to both the FLSA and the California wage and hour laws, it must comply with whichever is more stringent.

For further information about the new FairPay rules, the Department’s Wage and Hour Division web page at www.dol.gov has a one-stop FairPay information center on the new rules. You will also find a valuable online “seminar,” complete with PowerPoint slides presented from the Department’s Wage and Hour Division.

If you have any questions about this or any other topic, please contact Lonny Zilberman at (619) 237-5200 at Paul, Plevin, Sullivan & Connaughton.

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