United States: Department of Labor Issues FLSA Final Regulations

The final regulations guarantee overtime for employees who earn less than $455 per week ($23,660 annually), without any consideration of their job duties. In a press release, the Department of Labor estimates that this new rule "will strengthen overtime rights for 6.7 million American workers, including 1.3 million low-wage workers who were denied overtime under the old rules." Under the previous regulations, only employees earning less than $8,060 annually were guaranteed overtime eligibility.

Employees who earn between $23,660 and $100,000 are subject to a duties test to determine whether they are exempt from the overtime requirements. The final regulations eliminate the cumbersome and outdated long and short duties tests, replacing these tests with a standard duties test for each category of exempt employees. The newly revised standard tests for the executive, administrative, and professional exemptions are as follows:

• Earn at least $455 per week, exclusive of board, lodging or other facilities;

• Primary duty is management of the enterprise or of a customarily recognized department or subdivision thereof;

• Customarily and regularly directs the work of two or more other employees; and

• Has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.

In addition, any employee who owns at least a bona fide 20 percent equity interest in an enterprise and who is actively engaged in its management is automatically exempt.

The new regulations clarify that the concurrent performance of exempt and nonexempt work does not disqualify an employee from the executive exemption, as long as the employee makes his or her own decision as to when to perform nonexempt duties, and remains responsible for the management of the business.

• Earn at least $455 per week, exclusive of board, lodging or other facilities;

• Primary duty is 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

• Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

One industry the Department specifically focused on in the new regulations is financial services. The final regulations expressly provide that employees in financial services generally qualify for the administrative exemption if "their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products." However, employees who primarily only sell financial products do not qualify for the administrative exemption.

• Earn at least $455 per week, exclusive of board, lodging or other facilities;

• Primary duty is the performance of 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;

• The advanced knowledge must be in a field of science and learning; and

• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

Registered nurses, who are registered by the appropriate State examining board, generally meet the duties requirements for the professional exemption, and are therefore exempt as long as they are paid on a salary basis of at least $455 per week. Registered nurses who are paid on an hourly basis are entitled to overtime pay. Licensed practical nurses and other similar health care employees, however, generally do not qualify as exempt professionals.

To qualify for the creative professional exemption, the employee must meet the salary test and the primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The final regulations consolidate all of the regulatory guidance giving rise to this exemption, which separately had led to confusion. The regulations clarify that employees qualifying for this exemption may either be compensated on a salary basis at the rate of at least $455 per week, or, if compensated on an hourly basis, at the rate of at least $27.63 per hour. The primary duty test remains substantively the same, with the exception that the regulations have removed the additional requirement that the exempt computer employee must consistently exercise discretion and judgment. The exemption applies to computer systems analysts, computer programmers, software engineers, and other similarly skilled workers in the computer field, whose primary duty is:

• 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, creation, 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 computer programs related to machine operating systems; or

• A combination of the aforementioned duties, the performance of which requires the same level of skills.

Highly compensated employees who earn more than $100,000 a year may be entitled to overtime, subject to a separate test. Such highly compensated employees are exempt if they perform office or non-manual work and they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests.

The final regulations specifically provide that the exemptions do not apply to manual laborers or other "blue-collar" workers who perform work involving repetitive operations with their hands, physical skill and energy. In addition, certain categories of workers cannot be exempted from overtime pay eligibility, including, but not limited to, police officers, fire fighters, paramedics, emergency medical workers, and similar employees.

The final regulations allow employers to take deductions from an exempt employee’s salary for violations of company rules, without risking the loss of the employee’s exempt status. Under the new rules, exempt employees who violate company rules may lose a day’s pay and maintain their exempt status. This represents a change from the prior rules, which only allowed deductions for weekly intervals.

After the initial proposed regulations were issued in March 2003, the Illinois General Assembly acted quickly and passed legislation adopting the new salary basis test, but maintaining the duties tests as set forth in the regulations prior to the proposed changes. Therefore, under Illinois law, the prior regulations establishing the parameters of the executive, administrative, and professional exemptions remain in effect. However, Illinois has adopted the new minimum salary threshold of $455 per week ($23,660 annually) for employees to qualify for an exemption. Illinois legislators have vowed to carefully reconsider the recent state legislation in light of the Department of Labor’s final regulations. Thus, the state of the law in Illinois is subject to change now that the final regulations have been issued. Similarly, legislative changes from other states can be anticipated based on the issuance of the final regulations. If you have any questions concerning the new law, please contact one of our labor and employment attorneys listed here.

Copyright 2004 Gardner Carton & Douglas

This article is not intended as legal advice, which may often turn on specific facts. Readers should seek specific legal advice before acting with regard to the subjects mentioned here.