Effective August 23, 2004, the United States Department of Labor will enforce changes to the Fair Labor Standards Act (“FLSA”) that effect existing FLSA overtime exemptions for professional, administrative, executive, outside sales, and computer professionals. To qualify for the overtime exemption, each of three tests must be met: (1) the amount of salary paid must meet minimum specified amounts (the “Salary Level Test”); (2) the employee must be paid a predetermined and fixed salary that is not subject to reductions because of variations in the quality or quantity of work performed (the “Salary Basis Test”); and (3) the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations (the “Duties Test”).

I. Exemptions Not Applicable to Certain Public Safety Personnel

The available overtime exemptions do not apply to police officers, detectives, deputy sheriffs, investigators, inspectors, fire fighters, paramedics, emergency medical technicians and similar employees, regardless of rank or pay level, who perform work such as: (i) preventing, controlling or extinguishing fires of any type; (ii) rescuing fire, crime or accident victims; (iii) preventing or detecting crimes; (iv) conducting investigations or inspections for violations of law; (v) performing surveillance; or (vi) other similar work.

Pursuant to 29 CFR 541.3(b), public safety personnel do not qualify as exempt executives because their primary duty is not management. They are not exempt administrative employees because their primary duty is not the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. Similarly, they are not exempt learned professionals because their primary duty is not the performance of work requiring knowledge of an advanced type in a field or learning customarily acquired by a prolonged course of specialized intellectual instruction. Although some have college degrees, a specialized academic degree is not a standard prerequisite for employment.

In promulgating this new rule, the Department of Labor stated: “The Department has no intention of departing from … established case law. Rather, for the first time, the Department intends to make clear in these revisions to the Part 541 regulations that such police officers, fire fighters, paramedics, EMTs and other first responders are entitled to overtime pay.” Fed Register, No. 69, at 22129.

29 CFR 541.3(b) appears to be absolute, though the comments in the Federal Register suggest some public safety personnel may still qualify for exempt status. The comments note that, although most courts typically find public safety personnel are not exempt, some federal courts have found “high-level police and fire officials” to be exempt executive or administrative employees “only if, in addition to satisfying the other pertinent requirements … their primary duty is performing managerial tasks”. Fed Register, No. 69, at 22130. “Another important fact considered in at least one case is that exempt police and fire executives generally are not dispatched to calls, but rather have discretion to determine whether and where their assistance is needed.” Id. In a footnote to the comments, the Department noted that some police officers and fire fighters treated as exempt executives under the current regulations “may be entitled” to overtime under the final rule because of certain additional requirements in the standard duties test. Id. Clearly, the footnote suggests that not all public safety personnel currently treated as exempt must be treated as nonexempt under the new rule. However, there is no clear statement to that effect.

II. Analysis of Exemption Requirements

1. Salary Level Test

Historically, an employee who earned at least $155 per week ($8,060 a year) could qualify as a “white collar” employee not entitled to overtime pay. Effective August 23, 2004, the salary threshold is $455 per week ($23,660 per year). Employees earning less than $455 per week, or $23,660 per year, are nonexempt regardless of the duties they perform. There are some exceptions/qualifications to the Salary Level Test:

a. Highly-Compensated Workers ($100,000 or more)

The new regulations contain a special rule for “highly compensated” workers earning an annual compensation of $100,000 or more. An employee is exempt from overtime if (1) he earns $100,000 or more annually, including at least $455 per week paid on a salary basis; (2) the employee’s primary duty includes office or non-manual work; and (3) the employee customarily performs at least some of the duties of an exempt executive, administrative or professional employee.

b. Computer Employees

Computer employees who earn at least $455 per week or $27.63 per hour meet the Salary Level Test.

c. Outside Sales

There is no salary requirement for outside sales employees.

d. Certain Professional Employees

There is no Salary Level Test for teachers, lawyers, doctors, medical interns or residents.

e. New Protected Categories

Under the new regulations, certain categories of employees are entitled to overtime protection, regardless of how highly paid they may be:

(1) Manual laborers and other blue collar workers; and

(2) First responders (as discussed above)

2. Salary Basis Test

The overtime exemption requires each exempt employee to be paid on a “salary basis”. Salary basis means the employee:

1. receives pre-determined compensation on a weekly or bi-weekly basis;
2. compensation cannot be reduced due to output or productivity; and
3. must receive his/her full salary each week, regardless of how many days worked that week, though the employee need not be paid for any workweek in which he/she performed no work.

If the employer makes deductions from an employee’s predetermined salary, then that employee is not paid on a “salary basis.” If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

i. Permissible Payroll Deductions

The revised FLSA permits employers to make deductions from the salary of exempt employees without violating the salary basis test only:

1. when the exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability (if an exempt employee is absent for one and a half days for personal reasons, the employer can deduct only for the one full-day absence);
2. for absences of one or more full days due to sickness or disability if the deduction is made in accordance with the employer’s bona fide plan, policy or practice for which the employee has been qualified (deductions for such full-day absences also may be made after the employee has exhausted the leave allowance under such plan or policy);
3. to offset amounts employees receive for jury or witness fees, or for military pay;
4. for penalties imposed in good faith for infractions of safety rules of major significance;
5. for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions;
6. for the initial or terminal week of employment; or
7. for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act (e.g., if an employee who normally works 40 hours per week uses four hours of unpaid leave under FMLA, the employer could deduct 10 percent of the employee’s normal salary that week).

Should an employer make improper wage deductions as a matter of practice, it could result in a reclassification of an employee, or group of employees, from exempt to non-exempt. However, an employer could seek the protection of a special Safe Harbor if it (a) has a clearly communicated policy prohibiting improper deductions and provides a complaint mechanism; (b) reimburses employees for any improper deductions; and (c) makes a good faith commitment to comply in the future. The Safe Harbor will not, however, protect an employer from willful violations.

3. Duties Test

The new rules abandon the long and short duties tests, including the requirement that an otherwise exempt employee loses the exemption if he/she devotes more than 20% of his/her time to non-exempt work.

a. Executive Exemption -To qualify for an executive exemption, the following must be true:

(1) the employee’s primary duty is management of the business or a customarily recognized unit or subdivision thereof;

(2) the employee customarily and regularly directs the work of 2 or more other full time employees, or the equivalent; and

(3) the employee has authority to hire or fire or make suggestions for hiring, firing, demotion and promotion that are given particular weight.

Under a special rule for business owners, an employee who owns at least a 20-percent interest in the enterprise and who is actively engaged in management of the enterprise, is considered an exempt executive.

b. Administrative Exemption – To qualify for an administrative exemption, the employee’s primary duty ¹ must consist of office or non-manual work directly related to management policies or general operations of the employer or of the employer’s customers.

c. Professional Exemption -To qualify for the professional exemption, an employee must satisfy the test for either the learned professional or the creative professional.

(1) Learned Professional – The employee’s primary duty must be the performance of work requiring: (i) advanced knowledge in a field of science or learning (predominantly intellectual) of a type that is customarily acquired by a prolonged course of specialized intellectual instruction; and (ii) the consistent exercise of discretion and judgment.

(2) Creative Professional – Primary duty is the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor

d. Computer Employees Exemption – Employed as a computer systems analyst, computer programmer, software engineer, or other similarly situated worker in the computer field. Qualification for the computer employee exemption requires the employee’s primary duty consist of:

(1) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications; or

(2) 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; or

(3) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or

(4) a combination of duties described in a, b, and c, the performance of which requires the same level of skills.

e. Outside Sales Exemption – The outside sales exemption requires that:

(1) the employee’s primary duty consists of making sales or obtaining orders or contracts for services or the use of facilities for which a consideration will be paid by a client or customer; and

(2) the employee is customarily and regularly engaged away from the employer’s place(s) of business.

An outside sales employee makes sales at the customer’s place of business. Outside sales does not include sales made by mail, telephone or the internet unless used in addition to personal calls. Employers should be aware that any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer’s places of business, even though the employer is not in any formal sense the owner or tenant of the property.

III. Responding to the New Rules

1. Conduct an Audit

Audit current employee job classifications and make any necessary changes. The audit should include a review of written job descriptions compared to actual work assigned on a customary basis, compared to the actual Duties Test requirements for exemption.

2. Alter Responsibilities or Salary

Alter responsibilities or salary of certain employees if needed to claim an exemption and the benefits outweigh the costs. For example, if an employee is earning less that $455 per week, it may be more cost effective to increase his or her salary to meet the Salary Test than to pay overtime. Likewise, it may be worth providing an employee more autonomy or responsibility so that he or she will meet the Duties Test.

3. Workplace Conduct Policies

Prepare, distribute, and make available to all employees legally enforceable workplace conduct policies (e.g., Family Medical Leave Act obligations and policies to prevent and or address hostile work environments). Without such written policies, wage deduction based upon workplace conduct violations may not only be void, they may invite a wage claim lawsuit and reclassification of an employee or entire class of employees.

For more information on compliance with the revised Fair Labor Standards Act and or assistance with the development of appropriate workplace conduct policies, please contact Kroger Gardis & Regas, LLP at (317) 692-9000.

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¹ “Primary duty” for an administrative employee includes exercise of discretion and independent judgment with respect to matters of significance.