September 16, 2005
Last August, the U.S. Department of Labor issued final regulations governing employees who are exempt from the overtime provisions of the Fair Labor Standards Act (“FLSA”). The Department of Labor estimated that the new regulations would extend overtime protection to 1.3 million employees who were not previously eligible for overtime pay.
The new regulations did not change the basic premise of the FLSA – employees must receive overtime pay for all hours worked over 40 hours in a work week unless they are employed in one of five exempt classifications. The new regulations, however, (1) increased the minimum salary requirement for exempt employees, (2) revised the “duties” tests for exempt positions, (3) established a new highly compensated employee exemption, (4) revised the salary basis test and provided guidelines regarding allowable deductions from compensation, and (5) provided a “safe harbor” to correct inadvertent deductions.
Minimum Salary Requirement. The salary level employers must pay exempt employees under the new regulations nearly tripled. Under the new regulations, an employee must earn at least $455 per week (or $23,660 per year) to be exempt.
Job duties requirement – Exempt classifications. Executive employees are exempt if they (1) have the primary duty of managing an enterprise or a customarily recognized department or subdivision, (2) customarily and regularly direct the work of two or more other full-time employees or their equivalent, and (3) have the authority to hire or fire other employees or have their suggestions and recommendations regarding hiring, firing or promotion be given “particular weight.”
Administrative employees are exempt if they (1) have as their primary duty 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 (2) exercise “discretion and independent judgment” on matters of significance.
The professional employee exemption includes both learned and creative professionals. The major change in the regulations is that an employee no longer needs a degree in the field to be exempt under the learned professional exemption. The exemption is now available to employees who have substantially the same knowledge level and perform substantially the same work as degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. Employees are exempt as creative professionals if their primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
Outside sales employees are exempt if (1) the employee’s primary duty is making sales or obtaining orders or contracts for services or for the use of facilities and (2) the employee is “customarily and regularly engaged away from the employer’s place of business.” There is no salary requirement for the outside sales exemption.
Computer employees are exempt if (1) they are compensated on a salary or fee basis at a rate of at least $455 per week or, if compensated on an hourly basis, at a rate of at least $27.63 per hour, (2) they are employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field, and (3) their primary duties consist of the application of systems analysis techniques or the design, analysis, or modification of computer systems or programs.
Highly Compensated Employee. The regulations create a new “highly compensated employee” exemption for employees who earn at least $100,000 total annual compensation and who customarily and regularly perform one of the duties of an executive, administrative, or professional employee. The total annual compensation must include at least $455 per week paid on a salary or fee basis and may also include commissions, non-discretionary bonuses, and other non-discretionary income earned during a 52 week period.
Salary Basis Test and Allowable Deductions. In order to meet the salary basis test, an employee must regularly receive each pay period the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Thus, if an exempt employee is ready, willing and able to work, deductions may not be made for time when work is not available as long as the employee performed some work during that week. The new regulations, however, expanded the deductions an employer can make from an employee’s pay without violating the salary basis requirement. For example, an employer can now suspend an exempt employee without pay for one or more full days for violating written work rules that apply to all employees. Unpaid full-day absences for personal reasons and in some cases for illness will also not affect an employee’s exempt status.
“Safe Harbor” Provision. The new regulations contain a “safe harbor” provision for employers who make improper deductions. Impermissible deductions will not result in the loss of an employee’s exempt status if the employer (1) has a clearly communicated policy prohibiting improper deductions, including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future. This safe harbor provision does not apply, and the employer will lose the exemption, if the employer willfully continues to make improper deductions after receiving employee complaints.
The Department of Labor has increased its enforcement efforts over the past year. If an employer has not already done so, it is recommended that it review the salary and duties of all exempt employees and reclassify any employee who does not meet the revised standards. Employers should also implement and communicate a policy that prohibits improper salary deductions, provides for a complaint procedure, reimburses employees for improper deductions and makes a good faith commitment to comply in the future.
Mel Muskovitz is a member of the Employment and Labor Section in the Ann Arbor office of Dykema Gossett PLLC. He can be reached at (734) 214-7633 or via e-mail at [email protected]