Changes to "Exempt" Status May Be Effective Soon

By: MARY M. KRAKOW

August 2003

Employers may soon need to review the "exempt" and "non-exempt" classification of employees under the federal Fair Labor Standards Act (FLSA) to determine whether they are correctly paying them. This is because the U.S. Department of Labor has proposed significant changes to FLSA regulations governing exempt employees. A recent attempt by members of the House of Representatives to derail the proposed regulations failed, making it more likely that the proposed regulations will become law.

A Little Background

Under current FLSA regulations, an "exempt" employee is exempt from the law's overtime and minimum wage requirements and is not required to keep a time record. "Non-exempt" employees must receive at least the minimum wage for every hour worked (the federal minimum wage is currently $5.15 per hour) and overtime - anything in excess of 40 hours in a workweek. Non-exempt employees also must keep a weekly time record showing time in and out each day (twice a day if she or he has an unpaid lunch period), total daily and weekly hours, and total daily and weekly overtime hours.

"Non-exempt" is the default designation, and it is the employer's burden to prove that an employee may be considered otherwise under one of the FLSA's specific exemptions. The most common of these are the "white collar" exemptions: 1) executive, 2) administrative, 3) professional, and 4) outside sales workers.

A salary does not make an employee exempt. Employees meet the white collar exemptions only if they: 1) meet the job duties test, and 2) receive a 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 instead of a salary and outside sales workers may be paid on a commission basis).

Two Significant Changes

The proposed regulations would change the current tests for "exempt" status in two significant ways.

First, the required minimum weekly salary would increase to $425. (Under current regulations, a white collar employee could receive a minimum weekly salary of $155 or $170, as applicable.) The Department of Labor estimates that the increase to $425 would result in at least 600,000 employees being eligible for overtime pay.

Second, the job duties tests for all four white collar exemptions would change. Under current regulations, if a white collar employee receives a minimum weekly salary of $155 or $170, the "long job duties test" applies. But, if the white collar employee receives a minimum weekly salary of $250, the "short job duties test" applies. The proposed regulations include a single "standard job duties" test for each exempt category.

While a thorough comparison of current and proposed tests is beyond the scope of this article, changes would include:

Executive Employees

Under current regulations, "exempt executives" must 1) have as their primary duty the management of the enterprise or a recognized department or subdivision, and 2) customarily and regularly direct the work of the equivalent of two or more other employees. Under the proposed regulations, exempt executives also would need to have authority to hire or fire other employees or, absent such authority, their recommendations regarding hiring, firing, promotion or other change of status of other employees would have to be given particular weight.

The current debate over whether assistant retail managers are exempt or non-exempt would largely be resolved by the proposed regulations. They specifically state that assistant retail managers will be exempt if the person's primary duty includes such activities as scheduling employees, assigning work, overseeing product quality, ordering merchandise, managing inventory, handling customer complaints, authorizing payment of bills, or performing other management functions, even though the assistant manager spends most of his or her time on non-exempt work.

Administrative Employees

Under the current regulations, "exempt administrative employees" must 1) have as their primary duty the performance of office or non-manual work directly related to management policies or general business operations of the employer or the employer's customers, and 2) customarily and regularly exercise discretion and independent judgment. The proposed regulations would eliminate the second requirement and instead require that exempt administrative employees hold a position of responsibility with the employer. This would mean that the employee would either customarily and regularly perform work of substantial importance or requiring a high level of skill or training. The requirement that exempt administrative employees be "staff," and not "production," employees also would be eliminated. These changes are designed to simplify the analysis for this currently difficult-to-satisfy exemption.

Professional Employees

Professionals will continue to be broken into three groups. For "exempt learned professionals," the proposed regulations would continue to require workers to consistently exercise discretion and independent judgment and have as their primary duty the performance of work requiring knowledge of an advanced type in a field of science or learning. But, instead of requiring a four-year degree as evidence of that knowledge, the proposed regulations also would allow acquisition of the knowledge by alternative means, such as an equivalent combination of intellectual instruction and work experience.

Under the proposed regulations, "exempt creative professionals" would only need to have work requiring invention, imagination, or talent in a recognized field of artistic endeavor as their "primary" duty, not their entire job.

The proposed regulations also attempt to simplify the current requirements for computer employees, while still requiring employment as a computer systems analysis, computer programmer, software engineer, or other similarly skilled worker in the computer software field for the exemption.

Outside Sales Employees

For the "exempt outside sales employees," the proposed regulations would eliminate the current often-ignored requirement that the employee devote not more than 20 percent of the hours worked by the employer's nonexempt employees to activities that are not incidental to or in conjunction with her or his own outside sales or solicitations. Instead, "exempt outside sales employees" would need to have as their primary duty making sales or obtaining orders or contracts from a client or customer, customarily away from the employer's place or places of business.

The Highly Compensated Employee

Another significant proposed change is a new exempt category for the highly compensated individual. Under this provision, any employee who performs office or non-manual work and is guaranteed a total annual compensation of at least $65,000 would be deemed exempt under the FLSA if she or he performs one or more of the exempt duties or responsibilities of an executive, administrative or professional employee. Compensation can include base salary, commissions, non-discretionary bonuses and other non-discretionary compensation.

Deductions Against Salary

The proposed regulations retain the current rules requiring exempt employees to be paid their full weekly salary regardless of the quantity or quality of the work performed and prohibiting partial day salary deductions. However, employers could deduct for a full-day disciplinary suspension, for example, in relation to inappropriate behavior in the workplace - something that is not now allowed.

A Possible Glitch

Assuming that the proposed FLSA regulations become law, they will not preempt any stricter state laws. Employers will need to continue to comply with both federal and state laws governing classification of employees and, when they conflict, apply the law that favors employees.

Employers are encouraged to watch for future articles regarding the status of the proposed regulations.