As most employers are well aware, last year the United States Department of Labor (“DOL”) proposed sweeping changes to the regulations governing the rules for the “white collar” exemptions from overtime found in the Fair Labor Standards Act (“FLSA”). Almost a year later, and after much political wrangling, the DOL is expected to issue final regulations by the end of March 2004.

The FLSA is the federal labor law that establishes the standards for minimum wage, overtime pay and child labor. Regulations issued pursuant to the law set the tests for determining whether any of the white collar exemptions apply to particular employees. The white collar overtime exemptions apply to four categories of employees: executive, administrative, professional and outside salespeople.

As a general rule, white collar employees are exempt only if they (1) meet the “duties test,” which analyzes an employee’s specific job duties to determine whether they primarily involve the type of skills mentioned in the regulations, and (2) receive a required weekly minimum salary. If an employee is properly classified as exempt, he or she need not be paid overtime for hours worked in excess of forty in a week.

The rules governing these exemptions have not been updated in decades, and both employer and employee organizations agree it is time for a change. However, just what changes are appropriate has been a hot issue. Labor organizations have dubbed the DOL proposals an attack on overtime, arguing millions will lose overtime entitlement if the regulations pass in their current form. On the other hand, the DOL and employer organizations maintain the changes will entitle more low-wage workers to overtime protections, while providing greater ease in applying the overtime rules.

Although further revisions to the DOL’s proposal are likely before the regulations are finalized, it is important to understand the changes proposed thus far. With this knowledge, employers can review current pay practices and develop an implementation plan for use if (and when) the final regulations take effect.

The highlights of the DOL’s proposal are outlined below. Although these points are useful in ensuring that your organization complies with the proposed regulations, employers should seek the advice of counsel to help clear up any confusion when applying the final regulations to specific employees.

Increased Minimum Salary Requirements

Under the current rules, an employee earning only $155 per week can qualify as an exempt white collar employee. The DOL’s proposal raises this threshold to $425 per week. According to the DOL, this increase will result in at least 600,000 employees being eligible for overtime pay.

New “Standard Duties Test”

The proposal creates a standard duties test to use when applying each white collar exemption. This change would replace the confusing “short” and “long” tests, which are currently used based upon an employee’s salary level. The new standard duties test closely matches the current “short test,” by focusing on the primary job duty of each employee.

New Rules For “Highly Compensated Employees”

The proposal also includes a new exemption for employees who earn an annual salary of $65,000 or more and have an identifiable executive, administrative or professional function. However, this exemption would be limited to employees who perform office or non-manual work. An employee’s base salary, commissions and non-discretionary compensation (such as bonuses) are all included for purposes of determining whether the employee meets the annual salary limits.

Changes To The Payroll Deduction Rules

The proposed regulations, like the current rules, require exempt employees be paid their full weekly salary regardless of the quantity or quality of work performed, and prohibit partial day salary deductions from exempt employees. However, the proposal would allow employers to deduct pay from exempt employees for full-day disciplinary suspensions.

Specific Changes To The Various Exemptions

Executive

The proposed regulations would require exempt executives have authority to hire or fire other employees, or have the authority to issue recommendations regarding hiring, firing or promotion which are given particular weight. This requirement would be in addition to the current executive exemption requirements, which include management of the enterprise or a recognized department or subdivision thereof as the primary duty, and the customary and regular direction of the work of two or more employees.

Administrative

Currently, exempt administrative employees must have as their primary duty the performance of office or non-manual work directly related to management policies or general business operations of the employer or the employer’s customers, and must customarily and regularly exercise “discretion and independent judgment.”

The proposed regulations would instead require exempt administrative employees hold a “position of responsibility” with the employer, replacing the “discretion and independent judgment” standard. The proposal defines a “position of responsibility” as either performing work of substantial importance or performing work requiring a high level of skill or training.

Learned Professional

The proposed regulations change the duties test for learned professionals by requiring the employee’s primary duty be the performance of office or non-manual work requiring knowledge of an advanced type of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. In addition, instead of requiring classroom-type learning as evidence of sufficient knowledge, the proposal allows the requisite knowledge be obtained through alternative means such as a combination of instruction and work experience.

Outside Salespeople

The proposal requires the primary duty of exempt outside salespeople be making sales or obtaining orders or contracts from clients or customers. In addition, these duties must customarily be performed away from the employer’s place of business. This change would eliminate the confusing current requirement that the employee not devote more than twenty percent of the hours worked by the employer’s non-exempt employees to activities that are not incidental to or in conjunction with his or her own outside sales or solicitations.

A Cautionary Note

Many states have laws which impose stricter overtime rules than those found in the FLSA. In these situations, employers need to comply with both federal and state law, and when a conflict arises, the law which most favors the employee must be applied. Although this is currently not an issue in New York, employers with operations in other states must keep this issue in mind.

Conclusion

Employers who become familiar with the proposed regulations will be better prepared to field questions from employees that are sure to arise. Remember, many groups, including labor unions, have published articles that place a negative spin on the proposed regulations. In addition, now is a good time to determine the cost and impact the new regulations will have on your organization. Many companies will face additional payroll costs, pay adjustments, and reclassification issues. Preparing for these changes now will help ease the inevitable transition.

Roy Galewski is an associate with Harris Beach LLP and a member of the firm’s Labor and Employment Law Practice Group.

An edited version of this article recently appeared in the March 2004 issue of the Rochester Business Alliance's HR News newsletter.