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FLSA Regulations on
Exempt Employees These rules generated criticism from anti-business groups (the usual suspects) and unions are trying repeal them. We will monitor this and alert you to any changes. The regulations include significant changes from the regulations employers have followed for the last 50 years and generally provide clearer guidance for employers on how to properly classify employees as exempt. Check now make sure your organization is in compliance with the new rules. Here are five things to do: 1. Evaluate each white-collar job. Your goal: See that each employee's duties meet the revised definition of exempt employees. If an employee’s status changed under the new rules, reclassify that employee. 2. Flag borderline employees who earn less than $23,660. Then judge whether your payroll costs are best controlled by simply raising their pay above the new $23,660 threshold to retain their exempt status (as long as they still meet the duties test). 3. Review employee job
descriptions. Make sure they accurately reflect the
work performed and skills required. One useful addition to every job
description: a notice -- just under the job title -- that says: "This an
( Remember: Make the exempt/nonexempt decision based on employees’ duties, not their titles. (In government, the Special Assistant to the Deputy Associate Undersecretary is the one who fetches the coffee and donuts!) 4. Examine your disciplinary policy. One little-noticed change to the salary-basis test allows employers to suspend exempt employees without pay for disciplinary reasons in one-day increments without jeopardizing their exempt status. Time was, any disciplinary pay deductions of less than a full week violated the exemption rules. Discuss this option and other new "safe harbor" rules with senior management. If you decide to change your policy, notify all affected employees in writing. 5. Communicate changes to staff. Employees may be nervous about these changes. Identify one knowledgeable point person to whom all questions should be funneled. We urge you to review the regulations and ensure that your employee classifications are fully compliant. The new regulations cover: Executive exemption -- To qualify for the executive employee exemption, all of these must be met: (1) the employee must be paid on a salary basis at a rate of at least $455 per week ($23,660 per year); (2) the employee's primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; (3) the employee must customarily and regularly direct the work of at least two other full-time employees or their equivalent; and (4) the employee must have the authority to hire or fire other employees, or their suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight. The executive exemption now requires employee to have "hire or fire" authority or to make corresponding recommendations that are given "particular weight". It also eliminates the special rule for "sole charge" executives. It also requires 20% owner/employees to be "actively engaged" in management and increases the salary requirement to $455 per week or $23,660 per year. Administrative exemption -- To qualify for the administrative employee exemption, all of these tests must be met: (1) the employee must be compensated on a salary or fee basis of $455 per week or more; in some jurisdictions (including Guam) the administrative employee must also customarily and regularly direct the work of at least two other full-time employees or their equivalent; and (2) the employee's primary duty must be office or non- manual work directly related to the management or general business operations of the employer or the employer's customers; and (3) the employee's primary duty includes the exercise of discretion and independent judgment in significant matters. The administrative exemption maintains the old requirement for the employee to "exercise discretion and independent judgment". The new rule includes "management or general business operations" and deletes the "management policies" wording in the old regulations. Professional exemption -- There are two general types of exempt professional employees: learned professionals and creative professionals. Learned professionals. To qualify for the learned professional employee exemption, all of these tests must be met: (1) the employee must be paid on a salary or fee basis at a rate of $455 per week or more; (2) the employee's primary duty must be work requiring "advanced knowledge," which means it is predominantly intellectual in character and requires the consistent exercise of discretion and judgment; (3) the advanced knowledge must be in a field of science or learning; and (4) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction -- hence, a controller or chief accountant will need a college degree in "accounting", not simply many years of work as a book keeper. The new regulations define "work requiring advanced knowledge" as "work that is predominantly intellectual in character, and includes work requiring the consistent exercise of discretion and judgment". The rules also clarify that veteran status alone is insufficient to satisfy the professional exemption. Creative professionals. To qualify for the creative professional employee exemption, both of these tests must be met: (1) the employee must be compensated on a salary or fee basis at a rate of $455 per week or more; and (2) their primary duty must require invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. The regulations allow for case-by-case determinations of the creative professional exemption, and they clarify the exemption as to journalists. Highly compensated employees -- A newly defined subcategory consists of "highly compensated" employees performing office or non-manual work who are paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis). These employees are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard exemption tests. The $100,000 standard will make it more difficult for employers to satisfy the threshold. Computer employee exemption -- To qualify for the computer employee exemption, these tests must be met: -- The employee must be compensated either on a salary or fee basis of at least $455 per week or, if paid on an hourly basis, at least $27.63 an hour; and -- The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled employee in the computer field performing these duties: (1) application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; (2) design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (3) design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) a combination of these duties, the performance of which requires the same level of skills. Outside sales exemption -- To qualify for the outside sales employee exemption, all of these tests must be met: (1) the employee's primary duty must be 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 (2) the employee must be customarily and regularly engaged away from the employer's place or places of business. The 20% limitation on non-exempt work has been eliminated in favor of a "primary duty" approach. Blue collar employees -- Exemptions apply only to "white collar" employees who meet the salary and duties tests in the regulations. The exemptions do not apply to "blue collar" employees who perform work involving repetitive operations with their hands, physical skill and energy. Non-management employees in production, maintenance, construction and similar occupations (like carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, and laborers) are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt from overtime, no matter how highly paid they might be. Although the new regulations are significantly clearer and more precise, employers should recognize that certain classifications of employees, -- inside sales employees, for instance -- cannot be classified as exempt unless they also satisfy the criteria of one of the exempt classifications. Special Notice: No Prorating Allowed If a part-time employee meets the duties test under one of the FLSA exemptions but does not earn a salary of at least $455 per week, that part-time employee may not be considered exempt under the new FLSA regulations. For example, if an employee working in an exempt position works 20 hours per week, the employer may not consider the minimum salary for that employee to be half of $455. Regardless of the number of hours worked per week, the minimum salary requirement for exempt employees is $455 per week. Some frequently-asked questions about the new regulations: 1) Question: Are blue collar workers protected from losing overtime pay? Answer: Yes. Blue collar workers’ overtime is guaranteed in the rule. The "white collar" exemptions explicitly spell out that "blue collar" workers are not subject to the overtime exemptions. The new rules guarantee the overtime rights of "blue collar" workers -- including carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers and non-management production-line employees. REMINDER: The law makes no provision for "comp" time or "compensatory time off" (CTO) in lieu of overtime pay. There are very rare instances when Wage-Hour Compliance Officers will allow an employer to give CTO, but only during the 40-hour workweek when overtime was worked and ONLY at the request of the employee. Comp time is common in government agencies facing budget/payroll problems, but that too is subject to certain controls -- the chief one being that CTO is given at the "time-and-a-half rate" (the employees receives 15 hours off for 10 hours of overtime work). 2) Question: Are first responders sufficiently protected? Answer: Yes. The overtime rights of first responders are explicitly guaranteed. The new rules describe the various duties performed by police, fire fighters and other first responders to ensure that employees performing those duties are entitled to overtime. The silence of the old regulations covering these employees resulted in significant litigation. 3) Question: What are the rights of Registered Nurses? Answer: There is no change from current law on the overtime protections for RNs. The new rules make no change to overtime protections for RNs. RNs paid on an hourly basis are entitled to overtime pay under the new rules. RNs who receive overtime under a union contract are expressly protected under the new rules. In general, RNs have been viewed as performing the duties of an exempt learned professional. 4) Question: Are union members’ overtime rights protected under the new regulations? Answer: Yes. Union members’ overtime rights are explicitly protected and may be strengthened by the new rule. The new rules say: "nothing in the Act or the regulations in this part relieves employers from their contractual obligations under collective bargaining agreements." 5) Question: Are inside sales employees entitled to overtime? Answer: Yes. The new rules strengthen overtime rights for inside sales employees. The new rules expressly states that there is no statutory authority to exempt inside sales employees from the FLSA minimum wage and overtime requirements under the outside sales exemption. 6) Question: Do the requirements for outside sales employees remain the same? Answer: Yes. Overtime protections for outside sales employees remain the same. The 20-percent time test in the old outside sales exemption was extremely difficult to understand. The change from employees who are employed for the purpose of making outside sales to employees whose "primary duty" is outside sales is not substantive. The definition of "primary duty" in the new regulations emphasizes that it must be the employee’s "principal, main, major or most important duty," Under both the old and new rules, employees will not be exempt from overtime unless their primary duty is outside sales. Assigning some outside sales work to an otherwise non-exempt employee will not make someone an exempt outside salesperson. 7) Question: Will those who lead teams gain overtime protections? Answer: Yes. Overtime protection is strengthened for those who lead teams. Despite a tremendous amount of misinformation being spread regarding "team leaders," the fact is the new rule is actually more protective of employees’ overtime rights than the old rule. 8) Question: Will working supervisors maintain their overtime pay? Answer: Yes. Overtime protection is strengthened for working supervisors. The new regulation makes it more difficult to deny overtime protection to employees based on a job title. Under the new rules, job titles are irrelevant. The new rule adds a new requirement to the executive exemption – making it harder for employers to deny overtime protection to working supervisors and low-level managers. The new rules specifically protect the overtime pay of "relief supervisors" and "working supervisors". 9) Question: How are computer employees affected by the new rules? Answer: Yes. There is no change to current law regarding computer employees. The new rules made no change to the FLSA regarding computer employees’ overtime status. The new rules on the administrative exemption mirror the old rules that classified systems analysts and computer programmers as exempt "white-collar" workers. The new rules also mirror existing federal case law. 10) Question: Does the "Discretion and independent judgment" standard remain a major aspect of the new regulations? Answer: Yes. In fact, the new rules strengthen the "discretion and independent judgment" requirement. The old rules required that an employee’s primary duty must be an activity that includes the exercise of discretion and independent judgment, in order to be classified under the "short test" for the administrative exemption. However, the new rules are more protective of overtime rights, because they strengthen the "discretion and independent judgment" standard by adding the requirement that the discretion be exercised "with respect to matters of significance." Reminder: The new rules expressly note that "A job title alone is insufficient to establish the exempt status of an employee. The exempt or nonexempt status of any particular employee must be determined on the basis of whether the employee’s salary and duties meet the requirements of the regulations." 11) Question: What is meant by a "reasonable relationship?" Answer: In certain cases, there must be a reasonable relationship between the guaranteed salary and the amount of pay an employee actually receives. Under new rules an employer may provide an exempt employee a guaranteed salary, with the employee’s actual pay amount computed on an hourly, daily or shift basis, but there must be a "reasonable relationship" between the guaranteed amount and what is actually received. This "reasonable relationship" requirement codifies the Wage and Hour Division’s long-standing interpretation of the salary basis test, which has been upheld in leading federal court decisions. 12) Question: Is the definition of a non-discretionary bonus for purposes of qualifying for the highly compensated test the same as current law? Answer: Yes. The definition of a non-discretionary bonus for purposes of the highly compensated test is unchanged. No change has been made to the definition of a non-discretionary bonus applicable to the computation of an employee’s regular rate of pay. In order to determine whether a bonus qualifies as non-discretionary, an employer would need to analyze whether it retains discretion as to both the fact that a bonus will be paid and the amount of the bonus until at or near the end of the period for which the bonus is paid. 13) Question: Does money received through a profit sharing program count towards qualification for the highly compensated test? Answer: Whether profits may count depends on the profit sharing program. Payments received under certain profit sharing programs qualify as non-discretionary payments for purposes of satisfying the highly compensated test. Generally, the Department considers programs that have set terms as to when employees qualify for the payment and which have a definite formula or method for determining the amount of the payment as nondiscretionary. 14) Question: May an employer make deductions to an employee’s salary without jeopardizing the employee’s exempt status? Answer: Deductions from a guaranteed salary are allowed only in limited circumstances. Deductions from pay are permissible: when an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability, or is absent for one or more full days due to sickness or disability if the deduction is made in accordance with a plan, policy or practice of providing compensation for salary lost due to illness; to offset amounts employees receive as jury or witness fees, or for military pay; for penalties imposed in good faith for infractions of safety rules of major significance; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. Also, an employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. 15) Question: May an employer take deductions from an employee’s leave bank for partial day absences? Yes. Employers may take partial day deductions from an employee’s leave bank, even if the deduction results in a negative leave balance. An employer may not dock an exempt employee’s salary for a partial day absence. Under the new rules, employers may take deductions from employees' leave accounts for partial day absences, the same as under the old regulations. The rules specifically state: "employers, without affecting their employees' exempt status, may take deductions from accrued leave accounts..." The rules also cite a number of Wage and Hour Division opinion letters allowing deductions from accrued leave accounts.
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