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Mary M. Krakow

Mary M. Krakow Employment & Labor

mkrakow@fredlaw.com
612.492.7164
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Employers Must Comply With New Federal Wage Regulations

By: MARY M. KRAKOW

June 2004

The federal Department of Labor recently issued new regulations governing the so-called “white collar exemptions” under the Fair Labor Standards Act (FLSA). The regulations take effect August 23, 2004.

In March 2003, the DOL first issued the proposed regulations, which became the subject of considerable Congressional debate. The DOL received tens of thousands of comments from labor unions, business associations, employers, and other interested parties. The DOL considered these comments prior to issuing its new regulations.

These new regulations mean employers should take the following steps prior to August 23, 2004:

  • Review the job duties of all employees to determine whether they meet the requirements for “exempt” status and make any necessary changes;
  • Review the pay and the company’s pay policies for all employees classified as “exempt” and make any necessary changes; and
  • Implement and distribute to employees a written policy prohibiting improper pay deductions and including a complaint mechanism for employees.

Brief Summary of the Major Changes

The most significant changes to the FLSA regulations are:

Required Weekly Salary Amount. A minimum weekly salary of $455 is required for all “exempt” executive, administrative, and professional employees (administrative and professional employees may also be paid on a “fee” basis). Employees whose guaranteed annual salaries are less than $23,660 do not qualify for the “white collar exemption.”

One-Day Disciplinary Suspensions. Employers may deduct against an exempt employee’s salary for a full-day disciplinary suspension. The suspension must be imposed in good faith in accordance with a written policy that applies to all employees; for example, violation of the employer’s sexual harassment policy.

Highly Compensated Employees. The new regulations create an exemption for any employee with total annual compensation of at least $100,000 if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee as defined by the regulations.

Extra Payments to Exempt Employees. An employer may pay exempt employees additional compensation without losing the exemption if the employee is guaranteed at least the minimum weekly salary of $455.

Some of What Stays the Same

Under both the current and new FLSA regulations, an “exempt” employee is not subject to its overtime, minimum wage, and timekeeping requirements. In contrast, “non-exempt” employees must receive at least minimum wage for every hour worked (the federal minimum wage is currently $5.15 per hour) and overtime at the rate of one and one-half times the employee’s regular rate for all hours worked over 40 in a workweek. Additionally, non-exempt employees must keep a weekly record showing time in and out each day (twice a day if the meal period is unpaid) and total daily and weekly regular and overtime hours.

Payment of a salary to an employee does not make him or her exempt under either the current or new regulations.

Employees must satisfy two tests to qualify for the white collar exemptions:

  1. receipt of the required weekly minimum salary that is not subject to reduction except in very limited, specified circumstances (professional and administrative employees may be paid on a fee basis and outside sales workers on a commission basis); and
  2. the applicable job duties test.

Some of the Changes Between the Current and New Regulations

Compensation

As noted above, the new required minimum weekly salary for exempt employees is $455. Alternatively, employers are allowed to pay administrative and professional exempt employees on a fee basis that equals a minimum of $455 per week. These requirements do not apply to outside sales employees.

The new regulations continue to require that exempt employees be paid their full weekly salary in any week in which they perform any work regardless of the quantity or quality of the work performed (limited exceptions include when an employee is absent a full day for personal reasons or for any absences under the federal Family and Medical Leave Act). And, again, an employer may deduct against an exempt employee’s salary for a full-day disciplinary suspension.

The penalty for making improper deductions against the salary of exempt employees will depend on the facts of the deduction—most importantly, a clearly communicated policy prohibiting improper deductions.

The required policy should:

  1. prohibit improper pay deductions specified in the regulations;
  2. include a complaint mechanism;
  3. specify that the employer will reimburse employees for any improper deductions; and
  4. set forth the employer’s good faith commitment to comply in the future.

With this type of policy, the employer who has made an improper deduction will not lose the exemption unless he or she continues to make improper deductions after receiving an employee complaint. The policy should be given to new hires and be distributed to employees by including it in an employee handbook or on the company’s Intranet.

The new regulations also allow employers to pay exempt employees additional compensation without losing the exemption if the employee is guaranteed a minimum weekly salary of at least $455. This is a significant clarification of the current regulations.

Required Job Duties

The new regulations include only one “standard job duties” test for each exempt category.

The required job duties for “exempt executives” have only one addition. In addition to managing the enterprise or a recognized department or subdivision and directing the work of the equivalent of two or more other full-time employees, an “exempt executive” must have authority to hire or fire other employees or be a person whose suggestions and recommendations as to hiring, firing, advancement, promotion or any other change in status of other employees are given particular weight.

The required job duties for “exempt administrative” employees also remain virtually the same – performance of office or non-manual work that includes the exercise of discretion and independent judgment – with the addition that the required exercise of discretion and independent judgment must be “with respect to matters of significance.”

The required job duties for all the “exempt professionals” also have few changes. The “learned professionals” who previously needed a four-year degree to be exempt, may now in rare instances have attained the advanced knowledge that enables them to perform on par with degreed employees through a combination of work experience and intellectual instruction. “Exempt computer employees” can be paid a weekly salary of not less than $455, or an hourly rate of not less than $27.63.

For “exempt outside sales employees,” the new regulations continue to require the primary duty of making sales or obtaining orders or contracts for services away from the employer’s place or places of business but eliminate the prior requirement that outside sales employees spend no more than 20 percent of their work time on non-sales activities.

The Highly Compensated Employee

A significant addition in the new regulations is an exemption for the highly compensated individual. Under this provision, any employee with total annual compensation of at least $100,000 will be exempt if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee as defined by the regulations.

The total annual compensation must include a guaranteed weekly salary or fee of at least $455 and may include commissions, non-discretionary bonuses and other non-discretionary compensation earned during the applicable 52-week period designated by the employer. It cannot include payments for medical or life insurance, contributions to retirement plans or the cost of other benefits.

For more detailed information on the new regulations, please visit www.fredlaw.com under “Articles.” Employers with questions regarding the new regulations are encouraged to contact their employment counsel.