Jottings By An Employer's Lawyer

Tuesday, April 20, 2004

Today, The Next Step Forward to the White Collar Exemption Reform


While I was away today, Secretary Chao was unveiling the final version (at least insofar as the administrative process is concerned) of the revised white collar regulations, which differer significantly from the initial version which drew more than 80,000 comments, not to mention millions of dollars of advocacy advertising, both pro and con. For a quick overview and links to the final regulations themselves, check out the Ogletree Deakins Legal Alert prepared by our crack client services group and our inveterate Washington insider, Hal Coxson.

HISTORIC OVERTIME REGULATIONS FOR EXEMPT EMPLOYEES RELEASED

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Today, the U.S. Department of Labor announced its eagerly-anticipated final overtime pay regulations which make substantial changes to the criteria for overtime exemptions under the federal Fair Labor Standards Act of 1938 ("FLSA"). The Labor Department asserts that the revised federal regulations will expand overtime eligibility to an additional 6.7 million low-wage workers, including 5.4 million workers who will be guaranteed overtime for the first time because their base salaries are now below the increased minimum salary level.

The 536-page final regulations are revisions to 29 CFR Part 541 (the "Part 541 Regulations"), which had become badly outdated. In recent years, the difficult-to-interpret federal Part 541 Regulations have resulted in employer misclassifications of salaried "white collar" employees as "exempt" from overtime pay, thus triggering employer liability for back pay and a growing number of "collective action" lawsuits.

Background

The final Part 541 Regulations, first proposed in March 2003, resulted in over 80,000 public comments. In the final regulations, the Labor Department devotes a substantial discussion in the Preamble - and several new substantive sections - responding to the misleading attacks from opponents. For example, new Section 541.3(a) makes clear that "blue collar" workers are entitled to overtime pay. New Section 541.3(b) clarifies that police, firefighters, paramedics, and emergency technicians are not exempt from overtime pay requirements. New Section 541.301(d) provides that military service veterans are not exempt from overtime pay as a result of their military training. New Section 541.301(e)(2) provides that licensed practical nurses (LPNs) are eligible for overtime, as are registered nurses (RNs) under current law. New Section 541.4 provides that nothing in the regulations relieves employers from overtime pay obligations to workers under union contracts.


Also, apparently reacting to public comments, the final regulations are significantly changed from those originally proposed last year.

Major Provisions

Effective Date. The final Part 541 Regulations will become effective 120 days from the date of their publication in the Federal Register (which is expected to occur later this week or the first of next week).


Basic Framework. Although the new regulations clarify the criteria for the Part 541 exemption, the basic regulatory framework remains the same. To be considered exempt under the Part 541 Regulations, "white collar" employees must: (1) be compensated above a specified "minimum salary level"; (2) be paid on a "salary basis"; and (3) perform certain specified primary "job duties" involving managerial, administrative, or professional skills.

"Salary Level" Test. The final Part 541 Regulations increase the minimum salary level required for exemption from overtime pay to $455 per week, or $23,660 annually, for all "white collar" employee classifications - executive, administrative, and professional employees. That means employees paid less than that amount will not be exempt from overtime pay without regard to their managerial, administrative, or professional job duties. The current minimum "salary level" is $155 a week using a "long test" of job duties; $170 per week for professionals; and $250 a week under a "short test" requiring performance of fewer managerial, administrative, or professional job duties. (Note that the March 2003 proposal set the salary level at $425/week, or $22,100/year. Thus, the final regulations are slightly higher than the original proposal.)

For many employers, the new minimum "salary level" will require increasing the salaries for "white collar" employees to retain their current exempt classifications, since any employee paid less than that amount will automatically be eligible for overtime pay.

"Highly Compensated Employee" Test. The final Part 541 Regulations provide a new, special streamlined test for "highly compensated employees" who are paid at least $100,000/year (including base salary, commissions, and non-discretionary bonuses). To qualify, a "highly compensated employee" must: (1) be paid at least $455 per week in base salary; (2) perform office or non-manual work; and (3) customarily and regularly perform one or more exempt "job duties" (as discussed below) required for executive, administrative, or professional employees, or computer or outside sales employees. (Note that the March 2003 proposal originally set the base annual compensation for the new "highly compensated employee" exemption at $65,000.)

"Salary Basis" Test. The final Part 541 Regulations retain the current requirement that exempt "white collar" employees must receive their full salary on a weekly or less frequent basis without regard to the quality (job performance) or quantity (number of hours) of work performed. Thus, the final regulations retain the controversial prohibition on deductions from pay for partial-day and many partial-week absences ("no pay-docking" rule).

The final Part 541 Regulations do, however, make important changes permitting deductions for full-day disciplinary absences (i.e., a one-day unpaid suspension). Current regulations only permit one-day deductions for violations of major safety rules; otherwise, unpaid disciplinary suspensions must be for a full workweek.

The final regulations also provide a broader interpretation of the "safe harbor" for employers that make improper deductions from exempt employees' pay. The "safe harbor" will prevent the loss of the overtime exemption for either "isolated" or "inadvertent" deductions from pay.

Under the final regulations, the overtime exemption would be lost only if a pattern or practice of improper deductions exists. Even then, the exemption would be lost only for the particular employees in the same job classification working for the same manager who is responsible for the improper pay deductions. The loss of exempt status would not extend to employees company-wide, thus reducing the incentive for trial lawyers to threaten or file multi-plaintiff collective actions.

Similarly, the final regulations provide an expanded "window of correction" for improper pay deductions which applies where employers: (1) have a policy that prohibits improper pay deductions; (2) clearly communicate that policy to employees; and (3) reimburse employees for any improper deductions. Unless the improper pay deduction is repeated or willful (such as where an employer does not take action in response to an employee complaint), the "window of correction" will prevent the loss of exempt status.

"Job Duties" Tests. Perhaps the most significant revisions in the final Part 541 Regulations are in the "job duties" tests for executive, administrative, and professional employees. The final Part 541 Regulations eliminate the current "long test"/"short test" dichotomy and substitute a single "standard duties" test.

The final Part 541 Regulations also eliminate the former requirement for all "white collar" employee classifications that exempt employees must not devote more than 20 percent of their time performing non-exempt work (or, under the former regulations, exempt employees in retail or service establishments spend no more than 40 percent of their time performing non-exempt work). Instead, the final regulations substitute a "primary duty" test for each "white collar" employee classification.

The final regulations, however, now retain the requirement from the current Part 541 Regulations, proposed to be deleted in the March 2003 version, that exempt "administrative" employees must consistently exercise "discretion and independent judgment." The "job duties" tests under the final Part 541 Regulations are:

Executive Employees. An exempt "executive employee" must be paid a salary of $455 per week and: (1) have the "primary duty" of the management of the enterprise or a recognized department or subdivision; (2) customarily and regularly direct the work of two or more other employees; and (3) have the authority to hire, fire, promote, etc., or where such recommendations as to hiring, firing, promotion, etc. are given particular weight. The final Part 541 Regulations delete the "sole charge" executive provision.


Administrative Employees. An exempt "administrative employee" must be paid a salary of $455 per week and: (1) have the "primary duty" of performing office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and (2) customarily and regularly exercise discretion and independent judgment. Note that the job duties criteria for exempt administrative employees are essentially the same as the current "short test." The final Part 541 Regulations delete from the March 2003 proposal the requirement that the exempt administrative employee must hold a "position of responsibility."


Professional Employees. An exempt "learned professional" employee must be paid a salary of $455 a week and have the "primary duty" of performing office or non-manual work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which can be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience. Note that the final Part 541 Regulations eliminate the reference in the March 2003 proposal to equivalent training in the armed forces, technical schools, and community colleges. An exempt "creative professional" employee must be paid a salary of $455 per week and perform the "primary duty" of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.


Outside Sales Employees. An exempt "outside sales employee" must: (1) perform the "primary duty" of making sales or of 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 (2) be customarily and regularly engaged away from the employer's place of business. Note that the final Part 541 Regulations eliminate the requirement under the current regulations that an exempt "outside sales employee" must not devote more than 20 percent of hours worked to nonexempt activities that are not incidental to and in conjunction with the exempt employee's own outside sales or solicitations.


Computer Employees. The final regulations make no changes to the current requirements for exemption of certain computer-skilled employees, either the salary level or job duties tests, since those requirements are codified in the FLSA's Section 13(a)(7).
The Future

It is expected that these Part 541 Regulations will be challenged on a variety of fronts - including under the Congressional Review Act and possibly in federal district court under the Administrative Procedure Act. We will keep you apprised of the latest developments with regard to these new regulations.

Further Information

Recognizing the significance of the final Part 541 Regulations, Ogletree Deakins will devote two panels to the topic at the 2004 Workplace Strategies Seminar to be held at The Ritz-Carlton, Buckhead in Atlanta on May 13 and 14. In addition, Ogletree Deakins and the Institute for Applied Management & Law (IAML) will co-sponsor an audio conference on the subject on Wednesday, May 19.

To register for the Workplace Strategies Seminar, visit our website or contact Kim Beam at (800) 277-1410 or kim.beam@ogletreedeakins.com. For more information on the audio conference, contact IAML directly at (949) 760-1700 or via their website at www.iaml.com. Be sure to request the special "Ogletree Deakins" rate.

You may obtain a copy of the final Part 541 Regulations [pdf] on the U.S. Department of Labor's special website. Also available on the website are fact sheets, frequently asked questions, and other useful information. The Department also has a toll-free number (1-866-445-WAGE) and e-mail address for additional questions.

OGLETREE, DEAKINS, NASH, SMOAK & STEWART, P.C.

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