Editors Note: John Lindsey is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.On August 23, 2004, the final revisions to the so-called “white-collar” exemption regulations are to take effect.
These regulations establish exemptions from the minimum wage and overtime pay requirements under the federal Fair Labor Standards Act (“FLSA”) enforced by the U.S. Department of Labor (“DOL”). The new rules are the first real changes in over 50 years to the tests used to determine whether an employee is eligible for the exemptions. Employers will need to insure compliance with the new rules by the effective date.
To qualify for the “white-collar” exemptions from the FLSA, employees must, with certain exceptions, be paid a predetermined and fixed salary that is not reduced because of variations in the quality or quantity of work performed (the “salary basis test”), the amount of salary paid must meet minimum specified amounts per 40-hour week (the “salary level test”), and their job duties must primarily involve the duties of an executive, administrative, professional, computer and outside sales employee, as specified in the rules (the “job duties test”).
Employees qualifying as administrative, professional or computer employees may be paid on a “fee” basis rather than a salary basis, provided the fee is equivalent to a rate that meets the salary level test. Employees qualifying as computer employees may be paid on an hourly basis, provided the hourly rate meets the minimum specified in the rules. The salary tests do not apply to outside sales employees.
Salary level minimums increase significantly
A significant change in the rules is the increase in the salary level test to $455 per week ($23,660 per year). For employees paid on a “fee” basis, the fee must be equivalent to this new level. Employees who qualify as computer employees and who are paid on an hourly basis must be paid at a rate not less than $27.63 per hour. After August 23, employees earning less than these amounts will no longer qualify for the white collar exemptions, regardless of job duties, and will be eligible for overtime pay.
Job duties tests simplified and revised
After August 23, the job duties tests for the white collar exemptions are the following:
Executives: These employees will be exempt if all of the following are met: (i) their primary duty is managing the company or a recognized department or subdivision, and (ii) they customarily and regularly direct the work of at least two or more other full-time employees or their equivalent, and (iii) they have authority to hire or fire other employees (or suggest and recommend hiring, firing, promoting or changing the status of other employees, which is given particular weight in the decision).
Administrative Employees: These employees will be exempt if all of the following are met: (i) their primary duty is performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers (such as work in the areas of tax, finance, accounting, auditing, marketing, research, human resources, computer network administration and legal and regulatory compliance); and (ii) the primary duty includes the exercise of discretion and independent judgment “with respect to matters of significance” to the company or its customers. This exemption is not available for secretarial and clerical staff.
Learned Professionals: These employees will be exempt if all of the following are met: (i) their primary duty is performing work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which requires the consistent exercise of discretion and judgment; and (ii) the advanced knowledge must be in a field of science or learning; and (iii) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
Computer Employees: These employees will be exempt if all of the following tests are met: (i) they are employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field; and (ii) their primary duty must consist of: (a) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (b) the 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) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (d) a combination of the foregoing duties, the performance of which requires the same level of skills. This exemption is not available for employees who manufacture or repair computers.
Outside Sales Employees: These employees will be exempt if all of the following tests are met: (i) their primary duty must be making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (ii) they must be customarily and regularly engaged away from the employer’s place or places of business.
A new exemption for highly compensated employees
In addition to the above, DOL has added a new category for exempting employees who make over $100,000 per year, which amount must include at lease $455 per week paid on a salary or fee basis. An employer’s highly compensated employees who perform office or non-manual work are exempt from overtime rules of the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee noted above.
Salary may be adjusted under certain circumstances without losing exemption
An employer is permitted to make deductions from the salary of exempt employees under limited circumstances. The new rules now permit employers to impose on exempt employees unpaid disciplinary suspensions of one or more full days that are imposed in good faith for violations of significant work place conduct rules (such as sexual harassment, violence, drug or alcohol infractions, or violations of the law), provided such suspensions are pursuant to a written policy applicable to all employees. Employers are still permitted to make deductions when an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability. In addition, deductions may be made to offset amounts employees receive as jury or witness fees, or for military pay. Deductions may also be imposed in good faith for violations of significant safety rules.
Some guidelines for employer compliance under the new rules
If your employees make under $455 per week (or the equivalent fee), make sure you pay them overtime, regardless of their job duties (or calculate whether it would be cheaper to increase the salary to the threshold level instead of paying overtime, assuming the job duties tests are still met). If the employees are paid more than $455 per week and have been classified as exempt employees under the old rules, check to see if this classification still works under the new rules. For executive employees, for example, make sure they meet the “hire and fire” test. If one exempt category no longer works, check to see if the employee’s job duties meet the requirements of another exempt category. Job titles do not determine exempt status under the rules; employees must qualify under the relevant job duties test. Where appropriate, employers may want to revise job descriptions or give employees additional responsibilities to be able to meet the job duties tests. If you have questions, check with your attorney. If you misclassify an employee, it can be expensive, since the employee may recover up to three years of overtime, plus liquidated damages up to the amount of the unpaid overtime, plus attorneys’ fees.
Also, be aware that the new FLSA rules are the minimum standards to be applied. Your company must still comply with any federal, state or local rules establishing a higher minimum wage or lower maximum work week. North Carolina follows the federal rules, but other states may not. Your company will also be required to comply with any higher wages or lower maximums set forth in any collective bargaining agreement with employees.
Certain employees not eligible for the exemptions
One other item to keep in mind with respect to the new rules. The new rules specifically provide that the “white collar” exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, or work using physical skill and energy (such as non-management employees who work in production, maintenance, and construction, for example), regardless of the pay received by these workers. In addition, the new rules specifically provide that the exemptions are not available to law enforcement, firefighting, medical response and public safety employees, regardless of pay received or rank.
Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. John Lindsey concentrates his practice in the areas of copyright, trademark, immigration, international trade and corporate law. Questions or Comments can be sent to firstname.lastname@example.org.