New Overtime Regulations Finalized by the U.S. Department of Labor

Introduction

On April 23, 2004, the U.S. Department of Labor (DOL) published its long-anticipated overhaul of the white-collar exemptions to the overtime requirements of the Fair Labor Standards Act (FLSA). The new rules, which are set to go into effect on August 23, 2004, revise the salary and duties tests used to determine who is entitled to overtime under the law.

Under the new regulations, employees earning less than $455 per week or $23,660 annually will be entitled to overtime. In addition, the new rules contain provisions specifying that employees in certain occupations, i.e., public safety officials, will be entitled to overtime, regardless of pay level.

For those employees with annual earnings between $23,660 and $100,000, the new rules replace the former long and short duties tests with a single, standard test to determine exempt/non-exempt status. A separate highly compensated duties test will apply to employees earning at least $100,000 annually, such that employees earning at least that amount will be exempt if they customarily and regularly perform any one of the exempt duties of an executive, administrative or professional employee.

Keep in mind that the new federal regulations provide the minimum standards that must be observed, and which cannot be waived or reduced. Employers, however, are required to comply with state laws that provide greater worker protection. Employers also can continue to enter into collective bargaining agreements that provide wages higher than the statutory minimum, a shorter workweek than the statutory maximum, and/or a higher overtime rate. ¹

HIGHLIGHTS

Certain Occupations Will Remain or Become Non-Exempt, Regardless of Pay Level

Under the new regulations, exemptions continue to be inapplicable to manual laborers or other "blue collar" workers who perform work involving repetitive operations with their hands, physical skill and energy. Thus, for example, non-management production-line employees and non-management personnel in maintenance, construction, and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers and longshoremen, continue to be non-exempt regardless of pay level.

The new regulations also provide that exemptions will not apply to police officers, detectives, deputy sheriffs, state troopers, highway patrol officers, investigators, inspectors, correctional officers, parole or probation officers, park rangers, fire fighters, paramedics, emergency medical technicians, ambulance personnel, rescue workers, hazardous materials workers and similar employees, regardless of rank or pay level, who perform such work as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detecting crimes; conducting investigations or inspections for violations of the law; performing surveillance; pursuing, restraining and apprehending suspects; detaining or supervising suspected and convicted criminals, including those on probation or parole; interviewing witnesses; interrogating and fingerprinting suspects; preparing investigative reports; or similar work.

Licensed practical nurses and other similar health care workers generally will not qualify as exempt professionals. The rule pertaining to registered nurses remains unchanged, however, such that nurses who are registered with the appropriate state examining board will continue to be recognized as having met the requirement for a prolonged course of specialized instruction and study, thereby qualifying for professional exemption.

Salary Level and Salary Basis Test

As noted above, the salary level required for exemption will be increased to a $455 per week or $23,660 annual minimum. Employees must also continue to satisfy the "salary basis" test, which means that the employee must receive the same amount of minimum guaranteed salary for each workweek in which the employee performs any work, regardless of its quality or quantity.

Duties Test

Besides satisfying the new salary basis test at a rate not less than $455 per week, employees must also continue to satisfy the duties test applicable to their position. The new rules eliminate the former "long" and "short" tests, replacing them with a standard duties test for employees earning between $23,660 and $100,000 annually. Under the new duties tests, an employee will qualify for exemption if he/she falls into one of the following categories:

Executive Employees

• whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
  
  
• who customarily and regularly directs the work of two or more other employees; and
  
  
• who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring and firing, advancement, promotion or any other change of status of other employees are given particular weight.

Administrative Employees

• whose primary duty is 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; and
  
  
• whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional Employees

• whose primary duty is the performance of work:
  • requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction; or
  • requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Highly Compensated Employees

An employee earning at least $100,000 annually will be exempt under the new rules if he/she customarily and regularly performs any one or more of the exempt duties of an executive, administrative or professional employee.

Permissible Deductions from Salary

Notwithstanding the "salary basis" requirement for exemption, which prohibits deductions from salary because of variations in the quality or quantity of work, the new regulations contain exceptions, which allow for salary deductions under certain circumstances.

Most of the exceptions are holdovers from the current regulations, and provide for the following permissible deductions from salary:

• Absences from work for one or more full days for personal reasons other than sickness or disability. NOTE that deductions may be made for full day absences due to sickness or disability if the deductions are made in accordance with a bona fide plan that provides compensation for loss of salary caused by sickness or disability;
  
  
• Offsets to amounts received by employees for jury duty, attendance as a witness, or temporary military leave;
  
  
• Penalties imposed in good faith for infractions of safety rules of major significance;
  
  
• Unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules;
  
  
• Proportionate deductions from an exempt employee’s initial or terminal week of employment in order to pay the employee only for the time actually worked during those weeks; and
  
  
• Unpaid leave under the Family and Medical Leave Act. NOTE that under this exception, the employer can deduct for less than a full day’s absence. The most notable addition is the allowance of unpaid disciplinary suspensions for one or more full days for violations of workplace conduct rules.² Note that this new exception may only be imposed against exempt employees, however, pursuant to a written disciplinary policy applicable to all employees (which in most cases, already exists).

The new regulations retain the current "window of correction" for employers, such that improper deductions that are either isolated or inadvertent will not result in loss of exemption for any employee subject to the improper deduction, if the employee is reimbursed.³ A new "safe harbor" provision further provides that "if" the employer has a "clearly communicated policy" that prohibits improper pay deductions, and which includes a complaint mechanism, reimburses employees for improper deductions, and makes a good faith effort to comply in the future, the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.⁴ While not actually imposing a notice requirement, the regulations indicate that the "best evidence" of a "clearly communicated policy" is a "written policy that was distributed to employees prior to the improper pay deductions by, for example, providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employers’ Intranet."

As noted above, most employers already have written rules of conduct sufficient to put employees on notice that they could be subject to an unpaid disciplinary suspension for violations of workplace conduct rules, which will allow the employer to impose unpaid disciplinary suspensions of one or more days against exempt employees when the new regulations go into effect. In addition, we urge employers to avail themselves of the expanded protection afforded by the new regulations’ safe harbor provision, by taking the additional step of formulating and distributing a written policy that prohibits improper pay deductions, includes a complaint mechanism, and reimburses employees for improper deductions.

HOW SHOULD AN EMPLOYER PREPARE?

The DOL’s new regulations go into effect on August 23, 2004. Employers should begin now to familiarize themselves with the new regulations in order to be prepared by the August 23rd deadline.

• Review current payroll. Employees earning less than $455 per week or $23,660 annually will be non-exempt, which may represent a change in status for some.
  
  
• Likewise, apply the new "highly compensated" duties test to those employees earning over $100,000 annually, which may result in a change to exempt status for some.⁵
  
  
• For those employees earning between $23,660 and $100,000, review job descriptions and actual duties performed, and apply the new duties test to determine those employees’ exempt/non-exempt status.
  
  
• Compare employees’ duties against the list of positions that will not qualify for exemption, regardless of pay level, which again, may result in a change of status for certain employees.
  
  
• Review/formulate a written policy, applicable to all employees, that informs employees that they will be subject to unpaid disciplinary suspensions for violation of workplace rules of conduct.
  
  
• Formulate a written policy for distribution to all employees which indicates that improper deductions from salary are prohibited, which includes a complaint mechanism, and which indicates that employees subject to improper deductions will be reimbursed.

The summary above describes some of the highlights of the DOL’s new regulations and is designed to help employers prepare for compliance by August 23, 2004. In their entirety, the new rules leave much to be absorbed. If you have any questions about the new regulations, or how they apply to certain of your employees, please contact any of the attorneys listed below by calling (617) 348-4300, or by clicking on the e-mail address next to the attorney's name.

Illisa S. Clark (iclark@swmlawyers.com)
Sheryl D. Eisenberg (seisenberg@swmlawyers.com)
Anita M. Polli (apolli@swmlawyers.com)
Margaret W. Hassan (mhassan@swmlawyers.com)
Jerome N. Weinstein (jweinstein@swmlawyers.com)

Please note that this publication should not be construed as legal advice or a legal opinion on any specific facts or circumstances. The contents of this publication are intended solely for general purposes, and you are urged to consult an attorney concerning your own situation and any specific legal questions you may have.

¹ Portions of the final regulations are still being met with resistance in Congress. On May 4, 2004, the Senate approved an amendment proposed by Senator Harkin (D-Iowa) that would allow employees who are currently non-exempt to retain their non-exempt status. Another amendment adds ninety-nine specific categories of jobs that cannot qualify for exemption, no matter how highly paid the worker is. We will advise you if there are any statutory enactments that affect the implementation of the new regulations.

² The current regulation only allows for disciplinary suspensions for safety infractions of "major significance." The Department of Labor ("DOL") does not intend that the term "workplace conduct" in the new regulation be construed expansively. The term refers to "conduct," not performance or attendance issues, and relates to serious workplace misconduct like sexual harassment, violence, drug or alcohol violations, or violations of state or federal laws.

³ But be aware that if the facts demonstrate that an employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made, for all employees in the same job classification working for the same managers responsible for the improper deductions.

⁴ The new safe harbor provision will apply, for example, where an employer has a clearly communicated policy prohibiting improper deductions, but a manager engages in an actual practice (neither isolated nor inadvertent) of making improper deductions. In this situation, regardless of the reasons for the deductions, the exemption would not be lost for any employees if, after receiving and investigating a complaint, the employer reimburses the employee(s) for the improper deductions and makes a good faith commitment to comply in the future.

⁵ If an employee’s annual compensation does not total $100,000 by the last pay period of the year, the employer may, during the last pay period or within one month of the 52-week period, make one final payment sufficient to achieve the required level.