Editor’s note: Albert R. Bell, Jr. is a member of the Labor and Employment Practice Group of Ward and Smith, P.A.

RALEIGH – The Fair Labor Standards Act of 1938 (“FLSA”) establishes minimum wage and overtime pay standards for American workers. Although simple in concept, the FLSA has remained a continuing source of labor and employment litigation since its passage in 1938. The reason is simple: with one hand, the FLSA provides minimum wage and overtime standards, and, with the other hand, it exempts employees from one or both requirements. The exemption status of computer-related occupations under the FLSA has been particularly troubling for employers. This article will briefly address the history of the development of the computer-related exemptions and, in more detail, the current state of the computer-related exemptions.

The White Collar Exemptions

The so called “white collar” executive, administrative, and professional exemptions of the FLSA require a fixed salary and the exercise of discretion and independent judgment in the employee’s duties. The “white collar” exemption for outside sales personnel requires that the outside sales person exercise discretion and independent judgment, but does not require a fixed salary. Historically, employees who used computers in their job but did not make decisions and, hence, did not exercise independent judgment and discretion in the performance of their duties, have not been eligible for a white collar exemption. An example is a computer-aided design draftsman who uses various software programs in producing a design. On the other hand, employees whose duties did qualify them for the white collar exemptions remained so qualified even though they worked with computers in conjunction with their duties. In addition, computer programmers frequently had obtained advanced degrees and qualified under the white collar professional exemption.

Prior to the recent amendments to the FLSA which consolidated computer-related occupation exemption issues, the rule of thumb was that as long as the requisite salary requirements were met for the white collar exemptions, a “systems analyst” was routinely deemed exempt, a “programmer” probably was exempt, and, in an anachronistic turn of phrase, a “key punch” operator generally was not exempt. For computer-related occupations, the white collar exemption in question was the administrative exemption, and the exempt/non exempt decision was based on the discretion and independent judgment issues. It was clear that the rapid development of the entire computer-related field had overwhelmed the regulators and the courts.

In 2004, the U.S. Department of Labor (“USDOL”) revised the white collar exemptions in an effort, among other things, to consolidate the provisions relating to computer-related occupations. The 2004 amendments established a single “duties test” for computer professionals, called “computer employees,” which resulted in some significant changes to the previous exemption picture. The 2004 amendments and their impact are addressed below in the form of a series of questions and answers.

How Do I Determine Whether an Employee Qualifies for Exemption?

To qualify for the computer employee exemption, the following tests must be met:

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

2. The employee must be employed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field and must perform the duties described below;

3. The employee’s 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 aforementioned duties, the performance of which requires the same level of skills.

Thus, in order to qualify for the computer employee exemption, the employee must meet a compensation requirement and meet a “primary duty” requirement. According to the USDOL, a primary duty is the “principal, main, major or most important duty that the employee performs.” Employees who generally spend more than 50 percent of their time performing exempt work generally will meet the primary duty requirement, but the amount of time spent on a duty is not conclusive. For example, the most important duty an employee performs could easily take up only a third of the employee’s time and the employee could still qualify for the computer employee exemption.

The computer employee exemption also requires that the employee be a systems analyst, programmer, software engineer, or similarly skilled worker. However, the USDOL has stated that “job titles are not determinative of the applicability of the exemption” due to the nature of the ever-changing computer industry. Therefore, employers should focus on whether a particular employee meets the duties test, rather than on the title of the position.

Does This Mean I Can Pay My Computer Employee an Hourly Rate and still Benefit from the Exemption?

Unlike the other white collar exemptions (i.e., the administrative, executive, professional, and outside sales exemptions), employers may choose to compensate exempt computer employees on an hourly basis and still receive the exemption so long as the employee receives a minimum compensation of $27.63 per hour for all hours worked. Based on an average 40 hour workweek, employees paid on an hourly basis have a much higher compensation threshold than employees paid on a salary basis – $1105.20 per week versus $455.00 per week. Thus, employers who wish to use the computer employee exemption must choose whether to compensate computer employees with a higher hourly rate or a lower salary basis.

Do All of My Employees Who Work With Computers Qualify for This Exemption?

The USDOL has taken the position that employees whose primary duties consist of educating and assisting computer users, such as “troubleshooters” or “help desk” personnel, generally do not qualify for the computer employee exemption. Such employees usually cannot meet the primary duty test of the exemption because their duties do not include actual analysis of the employer’s computer systems. Additionally, employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs (i.e., engineers, drafters, and others skilled in computer aided design software) are not exempt under the computer employee exemption. Again, such employees generally are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations identified in the primary duties test described above. Lastly, the computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment.

If One of My Computer Employees Does Not Qualify for the Computer Employee Exemption, Can the Employee Still Qualify for a Different Exemption?

Employees who do not qualify for the computer employee exemption nevertheless may continue to qualify for a different white collar exemption, such as the executive or administrative exemption. However, these latter exemptions retain the requirement that the salary and duties tests must be met in order for the employee to qualify for the exemption.

Where Are We Now?

Congress and the USDOL have taken giant strides to bring the FLSA and its implementing regulations into the 21st century. The establishment of a specific exemption for computer professionals was a recognition by Congress and the USDOL that old line manufacturing concepts fail when analyzing the scope of computer related work and the circumstances under which that work is performed. Over time, there will be further amendments to the FLSA and, in each instance, the impact will be hotly debated.

© 2007 by Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Albert R. Bell, Jr. is a member of the firm’s Labor and Employment Practice Group. He advises clients on a wide range of employment litigation, regulatory, and legislative issues. He can be reached at arb@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.