The new FLSA white-collar regulations: analysis of changes.

• Author: Lechner, Jay P.
• Position: Fair Labor Standards Act

The controversial new U.S. Department of Labor regulations on exemptions from overtime requirements took effect on August 23, 2004, despite fervent and ongoing efforts in Congress to derail their implementation. Although the new rules differ substantially from both the former regulations and the originally proposed amendments, many employers may have delayed making appropriate changes to their payroll practices due to the uncertainty caused by congressional wrangling as to whether the new regulations would ever take effect. However, because the DOL chose not to provide employers with a lengthy transition period in which to come into compliance with the new rules, employers need to be familiar with, and must ensure compliance with, the new regulations immediately.

Overview

The most common Fair Labor Standards Act (FLSA) exemptions--those applicable to executive, administrative, professional, outside sales, and computer professional employees--are commonly referred to as the "white-collar" exemptions. The white-collar exemptions contain three components: the "salary level" test; the "salary basis" test; and the "duties" tests, all of which are substantially changed by the new regulations. The most significant changes include: 1) the salary level test has been changed to increase the minimum compensation level for exempt employees and to provide a more lenient standard for certain "highly compensated" employees; 2) the salary basis test has been revised to allow salary deductions for full-day disciplinary suspensions, to expand the "window of correction" provision and to provide a "safe harbor" for employers who, among other things, have a "clearly communicated policy" prohibiting improper salary deductions; and 3) the duties tests have been combined to eliminate the separate "long" and "short" tests and to require exempt executives to have meaningful input into hiring, firing, promotion, or similar employment decisions.

The new regulations increase the minimum salary level to one standard, $455 per week. Accordingly, employees earning less than $455 per week will not be exempt, irrespective of their job duties and responsibilities.

However, there are still several exceptions to the salary level requirement. For example, the minimum salary requirements do not apply to lawyers, physicians, or teachers. Likewise, "academic administrative" employees may be paid a salary at a rate "at least equal to the entrance salary for teachers in the educational establishment by which the employee is employed." Moreover, there is no minimum salary requirement for the outside sales exemption. Finally, computer professionals may be paid an hourly rate of at least $27.63 as an alternative.

* "Highly Compensated Employees"

The new regulations create an exemption for "highly compensated" employees. An employee with total annual compensation of at least $100,000 is "deemed exempt," provided that employee receives at least $455 per week on a salary or fee basis, "customarily and regularly" performs any one or more exempt duties, and performs office or nonmanual work. The rule allows for a "make-up" payment to be paid within one month after the end of the year.

Example: A sales manager supervises other sales employees as well as engaging in sales activities herself. She is paid a salary of $5000 per month, and also receives commissions for her sales and those of her staff, which are paid at the end of the month in which the sale is made. At the end of the year, she has earned $96 K in total compensation. Although it is possible that she would meet the executive exemption, the employer need not worry about meeting all the requirements of that test if the employee makes $100,000 per year. The employer pays her $4,000 in additional compensation for the prior year by the end of January. She meets the highly compensated employee exemption.

Salary Basis Test

An exempt employee still must be paid a fixed and predetermined salary, which is not subject to reduction based on the quantity or quality of work (subject to certain exceptions). The new regulations retain this "no docking" requirement, but clarify certain exceptions and create a new exception for disciplinary suspensions of less than one week. The new rules also clarify that an exempt employee's salary may be computed on an hourly, daily, or shift basis, provided the employee is guaranteed at least the minimum salary level and a "reasonable relationship" exists between the guaranteed amount and the amount actually earned (e.g., the weekly guarantee is "roughly equivalent" to the employee's usual earnings). As with the old rules, the new regulations do not require that an employer pay an exempt employee during a week in which he or she performs no work for the employer.

* Deductions for Disciplinary Suspensions

The new regulations allow an employer to impose "unpaid disciplinary suspensions of a full day or more" if they are imposed in good faith for infractions of "workplace conduct rules"--such as sexual harassment, workplace violence, or drug or alcohol policies--provided the suspensions are imposed pursuant to a written policy applicable to all employees. The written policy must be sufficient to put employees on notice that they could be subject to an...