The New White-Collar Regulations - What Employers Need to Know

Most employers are familiar with the Fair Labor Standards Act (FLSA), the federal law that governs minimum wage and overtime. However, recent changes to the regulations addressing white-collar employees may have employers scrambling to ensure that their workers are being properly paid. This article discusses the important highlights of the new regulations, which go into effect on August 23, 2004.

The "white-collar" exemption eliminates overtime requirements for "any employee employed in a bona fide executive, administrative, or professional capacity." When Congress enacted the FLSA, it did not explain what it meant by the terms "executive," "administrative," and "professional" employees, instead leaving it to the Department of Labor (DOL) to sort out who would be subject to the exemption. In recognition of the fact that the regulations implementing this exemption had become hopelessly outdated, the DOL has issued the first truly substantive changes to the FLSA since 1949.

The first and most imposing change to the white-collar regulations was to raise the minimum salary requirements for employees subject to the exemption. While the old regulations allowed employees who were paid as little as $190 per week ($8,060 annually) to be exempt from overtime, the new regulations require that most white-collar employees be paid a minimum of $455 per week ($23,660 annually) before that employee will qualify for the exemption. By its own calculations, the DOL believes this increase in the minimum weekly salary will result in more than 6.7 million new employees becoming eligible for overtime pay.

Another new change to the salary component of the regulations was the implementation of a new "highly compensated employee" provision, which says that employees who earn at least $100,000 annually, which amount includes at least $455 payable as a weekly salary, will be exempt from the FLSA so long as the employee is performing office or nonmanual work and is performing at least one exempt duty on a customary or regular basis.

The second factor in evaluating whether an employee can be classified as a white-collar employee—the salary basis test—is a carryover from the prior regulations. This test requires that employees be paid a predetermined amount constituting all or part of their income, which cannot be subject to reduction due to variations in the quality or quantity of the work performed. While the test remains substantially the same as it was before, the DOL responded to employer concerns by increasing the number of exceptions to the "no deductions" rule. Under the new regulations, employers may now make deductions for disciplinary suspensions for one or more days from an exempt employee's pay without losing the exemption.

The duties tests will likewise look familiar to most employers, although changes have been made there, too. The biggest was the elimination of two tests—the short and long tests—that were confusing to many employers. Another significant change was the elimination of the requirement that employees not perform more than a certain percentage of non-exempt work. Instead, the new streamlined duties tests focus more heavily on the primary duty performed by the employee in question, regardless of how much of the employee's time is taken up by that primary duty.

Practical Significance

The DOL has indicated that one of the goals of these changes was to make it simpler for employers to determine who in their workforce is a white-collar employee and who is not. It will take some time working with these new regulations before we know whether the DOL has achieved this goal. Employers should seek legal assistance in determining specifically how these new regulations are going to impact their existing employees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.