On April 21, 2004, the U.S. Department of Labor issued its long-awaited final regulations redefining the "white collar" exemptions from the Fair Labor Standards Act's overtime and minimum wage requirements. Reflecting significant changes from the controversial proposed regulations the Department published for comment last year, the final regulations, which become effective in August, will affect the overtime eligibility of millions of workers in the United States and merit the attention of virtually all employers.
Highlights of the New Regulations
The Fair Labor Standards Act (FLSA) generally requires the payment of at least the statutory minimum wage (currently $5.15) for every hour worked and the payment of one and one-half times an employee's regular rate of pay for all hours the employee works in excess of forty hours in a workweek. The FLSA exempts from these requirements certain categories of "white collar" workers – executive, administrative, and professional employees; outside salespersons; and computer employees – but does not define these categories. That task is delegated to the Department of Labor, and the Department's new regulations reflect the first changes that have been made to most of these definitions in decades. Among these changes are the following:
- With minor exceptions, executive, administrative, and professional employees must be paid a salary of at least $455 per week (or, for administrative and professional employees, fees totaling at least that amount) to qualify as exempt. Thus, most executive, administrative, and professional employees earning less than $23,660 on an annual basis will automatically be eligible for overtime. (Under the current regulations, employees earning as little as $8,060 annually can qualify for the executive and administrative exemptions, and employees earning as little as $8,840 can qualify as exempt professionals.)
- The current regulations relating to executive, administrative, professional, and computer employees contain dual tests for determining exempt status (the so-called "long" and "short" tests), with the appropriate test depending on the income level of the employee. The new regulations eliminate this dichotomy and apply a single set of standards for determining exempt status to each type of whitecollar employee.
- To qualify as exempt, all executive employees must have the authority to hire or fire other employees (or their recommendations as to hiring, firing, or other changes of employment status must be given particular weight). Currently, this requirement applies only to lower paid executive employees.
- The discretion and independent judgment exercised by exempt administrative employees must relate to "matters of significance," a term that suggests a narrower approach to the administrative exemption under the new regulations.
- Exempt computer employees must be paid either on a salary or fee basis at a rate of not less than $455 per week or on an hourly basis at a rate of not less than $27.63 per hour. The new regulations also specify with much greater detail the necessary "primary duties" of an exempt salaried computer employee.
- Making sales or obtaining orders or contracts for services or the use of facilities must be the primary duty of an exempt outside salesperson. Under the current regulations, outside salespersons who regularly or customarily engage in these activities away from the employer's place of business can qualify as exempt employees, even though making sales or obtaining orders is not their primary duty.
- Employees who perform office or nonmanual work and who are paid $100,000 or more per year (including at least $455 per week paid on a guaranteed salary or fee basis) are exempt from the FLSA's overtime requirements if they customarily and regularly perform at least one of the duties identified in the tests for the executive, administrative, and professional employee exemptions.
Practical Implications
Because the new regulations change the standards for each "white collar" exemption, employers should carefully review the exempt and nonexempt classifications they have assigned to white-collar employees to ensure that those classifications will remain appropriate after the new regulations go into effect in August 2004. Misclassifying an employee as exempt can expose an employer to substantial liability for unpaid overtime, particularly if the employee frequently works more than forty hours per week. Copies of the new "white collar" exemption regulations are available at the Department of Labor's web site at www.dol.gov/esa/regs/compliance/whd/fairpay/regulations.htm.
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