Introduction

On Tuesday, April 20, 2004, the United States Department of Labor ("DOL") announced long-awaited changes to the regulations governing overtime eligibility under the federal Fair Labor Standards Act ("FLSA"). The new regulations, which will go into effect on August 23, 2004, constitute the first significant change to the exemptions affecting "white collar" employees since 1949.  Although the new regulations contain both good news and bad news for employers, those who must interpret and implement the regulations will undoubtedly appreciate their increased clarity and relevance to the 21st-century workplace. While employers can expect to incur some additional costs as a result of the new regulations, particularly as they take the time to become familiar with and implement necessary changes, it is possible that these costs will be offset by reduced litigation expenses, fines and penalties resulting from improper classification under outdated and confusing rules. 

The FLSA, first enacted by Congress in 1938, provides a number of exemptions from the general requirement that workers must be paid one and one-half times their regular rate of pay for all hours worked over 40 in any given work-week. The "white collar" exemptions apply to workers employed in bona fide executive, administrative, and professional capacities, as outside sales employees, and in certain computer and software-related capacities.  Congress delegated to the federal Department of Labor ("DOL") the task of fleshing out the scope of the exemptions through regulations. It will probably come as no surprise to employers who have attempted to comply with the current rules that the DOL had not made any significant revisions to the regulations in over 50 years. The awkward "long test," with its salary requirement of $155 per week, and even the more streamlined "short test", with its $250 per week requirement, seem antiquated by today's standards.

While all employers will need to become familiar with the new regulations, they must be careful, in doing so, not to run afoul of their respective state’s wage and hour statutes and regulations. Many state regulations largely track the current DOL regulations. It is likely that the various states will revise their regulations in the near future in order to make them consistent with federal law. Until that happens, employers must arguably comply with the law that affords the greatest protection to employees.

Overview of The New Regulations

The regulations continue to emphasize that a job title alone is insufficient to establish whether a worker is exempt or non-exempt from federal overtime requirements. Even so, the new regulations specify that manual laborers and other "blue collar" workers who perform work involving repetitive operations with their hands, physical skill and energy will never be exempt. Neither will police officers, detectives, correctional officers, firefighters, emergency medical technicians and other employees who perform firefighting and other public safety work.
           
"Executive employees" subject to exemption are those who are (1) paid on a salary basis at the rate of at least $455 per week, (2) whose primary duty is management of the enterprise in which the worker is employed or of a customarily recognized department or subdivision thereof, (3) who customarily and regularly directs the work of two or more other employees, and (4) who has the authority to hire or fire other employees or whose suggestions and recommendations as to hiring, firing, advancement, etc. are given particular weight. Also exempt are employees who own at least a bona fide 20-percent equity interest in the enterprise in which they are employed, and who are actively engaged in management.
           
Exempt "administrative employees" are those who: (1) are paid on a salary or fee basis, at a rate of at least $455 per week, (2) 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 employer's customers, and (3) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Work directly related to management or general business operations includes, but is not limited to, work in areas such as: tax, finance, accounting, budgeting, auditing, insurance, purchasing, marketing, safety and health, human resources, and the like. As for the "exercise of discretion and independent judgment" portion of the definition, the regulations specify that this requirement can be met even if the employee's decisions or recommendations are reviewed at a higher level. The regulations provide some examples of workers who ordinarily qualify for the administrative exemption, such as: executive assistants to business owners or senior executives; human resource managers who formulate, interpret or implement employment policies; and purchasing agents with authority to bind the company on significant purchases. It also provides some examples of workers who ordinarily do not qualify for the exemption, such as inspectors who use well–established techniques and procedures; comparison shoppers; and examiners or graders.
           
"Professional employees" who qualify for the exemption must (1) be compensated on a salary or fee basis at a rate of not less than $455 per week, (2) have as their primary duty the performance of work: (a) requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. Obvious candidates for the professional exemption are doctors, lawyers, accountants, teachers and architects. While registered nurses and physician assistants ordinarily qualify for the exemption, licensed practical nurses do not. Accountants generally meet the test, but bookkeepers, accounting clerks and other employees who perform routine tasks do not.
           
The "computer employees" exemption applies to computer systems analysts, computer programmers, software engineers and other similarly skilled workers if they meet the $455 per week salary requirement and if their primary duty falls within an enumerated list of fairly high level computer and/or software skills.
           
"Outside sales employees" who qualify for exemption are those (1) whose primary duty is making sales or obtaining orders or contracts, and (2) who are customarily and regularly engaged in performing that duty away from the employer's place of business. The salary requirement does not apply to outside sales employees.
           
The new regulations provide one additional exemption for "highly compensated employees." Any employee with total annual compensation of at least $100,000 is deemed exempt from overtime requirements under the FLSA if he or she performs any one or more of the exempt duties or responsibilities of executive, administrative or professional employees.

Salary Requirements and Pay Docking
           
To qualify for the overtime exemption, an employee ordinarily must be paid a predetermined salary for every week in which he or she performs any work, regardless of the number of hours worked. The new regulations have made some slight changes to the rules relating to conditions under which employers may "dock" the pay of exempt employees. Employers may make deductions from pay and not thereby lose the exemption where an exempt employee: