July 21, 2015
Author: , Esq.

Last August, the U.S. Department of Labor made significant changes to the Fair Labor Standards Act (FLSA) regulations.¹ Even before these changes had been made, the FLSA had become an increasingly expensive hazard for U.S. employers. In fiscal year 2003 alone, employers paid more than $182 million in back wages (representing a 27 percent increase over the prior year) for violations in FLSA cases and over $3.2 million in FLSA civil money penalties. With the changes to the regulations in August 2004, the FLSA has become an even higher profile concern for employers.

In response to the rules changes in August 2004, many employers have conducted internal audits of their employee positions to determine which, if any, employees should be shifted to a new status. Many employers have also reviewed their employee handbooks to ensure they have a policy to better protect themselves from FLSA exempt status litigation. Have you taken these steps?

In order to conduct an audit of your employee positions, a basic understanding of the FLSA and the recent changes to the regulations is imperative. The FLSA requires that most employees be paid at least the federal minimum wage ($5.15/hour)² for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. The FLSA provides an exemption from both the minimum wage and overtime pay requirements for bona fide executive, administrative, professional, outside sales, and computer employees.

What’s New?

The new regulations update and clarify the definitions and tests for the exemptions. The minimum salary level for an exempt employee is increased from $155/week ($8,060 annually) to $455/week ($23,660 annually).³ The regulations replace the old “short” and “long” duties tests with a standard test for each type of exemption.

Executive Exemption

To qualify under the executive exemption, the employee’s primary duty must be “management of the enterprise” or a “recognized department or subdivision thereof” and the employee must “customarily and regularly” direct the work of two or more other full-time employees. In addition, the new rules added the requirement that the employee have “the authority to hire or fire other employees,” or the employee’s “suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.”

The new rules also added a separate executive exemption for any employee who owns at least a 20 percent equity interest in the business and who is actively engaged in its management, regardless of compensation level or basis.

Administrative Exemption

To qualify for the administrative exemption under the new regulations, the employee must 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 the primary duty must include the “exercise of discretion and independent judgment with respect to matters of significance.” The new rule provides explicit examples of the type of work that fits within the exemption, including work in functional areas such as:

• Tax
• Finance
• Accounting
• Auditing
• Advertising
• Human resources
• Labor relations
• Marketing
• Safety and health
• Legal and regulatory compliance
• Internet and database administration

Professional Exemption

The professional exemption consists of the “learned professional” and the “creative professional.” The “learned professional” is an employee whose primary duty is work requiring “advanced knowledge” (defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment) in a “field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” The new regulations list a number of specific examples of jobs falling under this exemption, including:

• Lawyer
• Doctor
• Registered nurse
• Registered or certified medical technologist
• Physician assistant (with a four-year academic degree)
• Dental hygienist (with a four-year academic degree)
• Executive chef or sous chef (with a four-year academic degree)
• Athletic trainers certified by the Board of Certification of the National Athletic Trainers Association, and
• Funeral directors and embalmers who are licensed by and working in a state with a four-year academic study requirement

The “creative professional” is an employee whose primary duty is work requiring “invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” The regulations list specific job titles falling under this exemption including:

• Actors
• Musicians
• Composers
• Conductors
• Soloists
• Essayists
• Novelists

Computer Employees

The new regulations make no substantive changes to the computer employee exemption. The employee’s primary duty must consist of:

* The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications.
* The design, development, documentation, analysis, creating, testing or modification of computer systems or programs, including prototypes based on and related to user or system design specifications.
* The design, documentation, testing, creation or modification of existing computer programs related to machine operating systems; or
* A combination of these duties, the performance of which requires the same level of skills.

Outside Sales Employees

The new regulations maintain the outside sales employee exemption with only minor modifications. The rules eliminate the 20% restriction on non-exempt work and state that the exemption applies to employees whose primary duty is making sales or “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 who are “customarily and regularly engaged away from the employer’s place or places of business” in performing that primary duty. Similar to the old regulations, this exemption does not apply to inside sales personnel who sell only over the phone or by mail or via the Internet.

Highly Compensated Employees

In addition to the exemptions listed above, the new regulations create a new exemption for highly compensated employees. To meet the exemption, the employee must:

• Earn at least $100,00 in total annual compensation (which must include at least $455/week paid on a salary or fee basis);
• Have a primary duty that includes performing office or non-manual work; and
• Customarily and regularly perform one or more of the exempt duties of an executive, administrative, or professional employee.

Full-Day Suspensions of Exempt Employees

Similar to the old regulations, the new regulations require the employer to pay each exempt employee on a salary basis, which means that the employee receives a predetermined amount of pay that may not be subjected to deductions because of variations in quantity or quality of work. Except for several specific exceptions listed in the regulations, the employer must pay the exempt employee his/her full salary, regardless of how many days or hours the employee has worked. If the exempt employee has not worked any time in a workweek, the employer does not need to pay the employee for that week.

The new regulations have expanded the allowable deductions. Under the old regulations, an employer was not allowed to suspend an exempt employee for less than a full workweek for inappropriate conduct. Now, an employer is allowed to suspend an exempt employee for one or more full days for violations of workplace conduct rules where the rule is specifically included in a written policy. As noted in the Preamble to the Final Regulations, the policy violation should concern “serious workplace misconduct like sexual harassment, violence, drug or alcohol violations or violations of state or federal laws.”

New Safe Harbor for Improper Deductions

The new regulations provide a safe harbor for employers who make an improper deduction from an employee’s salary. Generally, an employer who makes improper deductions from an exempt employee’s salary will lose the exemption for that employee. Under the new safe harbor provision, however, an employer who makes an improper deduction from an employee’s salary will not lose the employee’s exempt status if the employer:

• Has a clearly communicated policy⁴ prohibiting improper deductions and includes a complaint mechanism;
• Reimburses the employee for any improper deductions; and
• Makes a good faith commitment to comply in the future.

This safe harbor is not available if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.

What Actions Should Employers Take?

With wage and hour settlements at an all time-high and a growing number of class action wage and hour lawsuits, employers are well-advised to take the following steps immediately to make sure they are in compliance with the new FLSA regulations:

1. Conduct a review of existing jobs and job descriptions and determine whether each position is properly classified as exempt or non-exempt.
2. Ensure that all exempt employees are paid at least $23,660/year.
3. Look closely at each position’s “primary duty” to make sure it falls within the new guidelines.
4. If you decide you need to make changes to employees’ classifications, clearly communicate those changes to the impacted employees.
5. Take the appropriate steps to receive the full benefit of the new safe harbor provision by adopting a policy prohibiting improper deductions, train managers and supervisors, reprimand those who make improper deductions, and establish a complaint process.
   
   The DOL has drafted a model Safe Harbor Policy that can be found on the DOL website. Adopting this policy will satisfy the “clearly communicated policy” requirement of the safe harbor provision. Some employers, however, may choose not to adopt the DOL’s sample policy because it goes beyond the requirements of the regulations and provides employees too much information. Employers may draft their own policy as long as the policy meets the minimum requirements of the regulations. Specifically, the policy must
   
   • Explain the salary basis requirements of the FLSA
   • State that it is the company’s policy to comply with the salary basis requirements;
   • Prohibit all company managers from making any improper deductions from the salaries of exempt employees;
   • Describe the company’s complaint process.
6. Review your disciplinary policies to make sure they specifically spell out serious workplace conduct policies. This will enable you to make full-day salary deductions for suspensions for misconduct. Any policy changes should be communicated clearly to employees.

If you have not yet taken the steps enumerated above, be sure to do so now. It is never too late to avoid becoming an FLSA enforcement statistic.

For more information regarding the new FLSA regulations, visit the DOL’s FairPay web site at www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm.

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1 29 CFR Part 541
2 Many states, however, have higher hourly minimum wage requirements.
3 The salary requirement does not apply to outside sales employees, teachers and employees practicing law or medicine. In addition, computer employees are exempt if they are paid $455/week or if they are paid at least $27.63 per hour.
4 The best evidence of “clearly communicated policy” is a written policy distributed to employees prior to any improper pay deductions (e.g., at the time of hire, in the employee handbook, on the employer’s Intranet).

About the Author:
Trish Lewis, Esq., is a Consultant with Employment Practices Solutions in Boston, MA. As an employment lawyer and human resources professional, she has extensive experience counseling employers on a wide range of employment issues, conducting training on employment practice topics, conducting employee misconduct investigations, drafting employee handbooks, and conducting human resource audits. Trish has a B.A. from Tufts University and a J.D. from Boston College Law School. She can be contacted at [email protected].