Who’s eligible?

On April 20, 2004, the U.S. Department of Labor issued its long-awaited final regulations updating the exemptions from the overtime rules of the Fair Labor Standards Act (FLSA). Some portions of the regulations have not been updated since 1949.

The new regulations are more than 60 pages long, and the DOL’s explanation is more than 200 pages long. Employers should discuss with their legal counsel how these regulations, which take effect Aug. 21, 2004, will impact their business.

The FLSA requires employers to pay overtime to employees. It also exempts certain employees from overtime pay. The most common exemptions are for administrative, executive and professional employees, the so-called “white-collar exemptions.” In order to be exempt under the white-collar exemptions, an employee must meet two basic tests — the salary test and the duties test.

Salary test

To be exempt, the white-collar employee must be paid on a salary basis. The new regulations increase the minimum salary from $250 per week to $455 per week. That is, if an employee makes less than $455 per week on a salary basis, he or she must be paid overtime for extra hours worked regardless of job duties.

To be paid on a salary basis means the employee must be paid the full weekly salary for any week the employee performs any work, without regard to the number of days or hours worked.

There are seven exceptions to the salary basis test in which an employer is allowed to dock an employee’s salary. Of these exceptions, the only new one allows docking for “good faith for violation of work place conduct rules.” These rules must be applicable to all employees and concern misconduct, such as workplace violence, theft and sexual harassment.

Significantly, the new regulations provide a safe harbor for situations when an employer makes a mistake and docks an employee’s pay improperly. Under the old regulation, if an employer inappropriately docked an employee’s pay, the overtime exemption could be lost for a class of employees. That led to the possibility that a minor mistake could result in major lawsuit liability.

Under the new safe harbor rules, the salary basis and overtime exemption will not be lost if the employer:

1. Has a clearly communicated policy prohibiting improper deductions, including a complaint mechanism

2. Reimburses employees for any improper deductions

3. Makes a good faith commitment to comply in the future

However, if the employer willfully violates the salary basis regulations by continuing to make improper deductions, the overtime exemption may still be lost for a class of employees.

Duties test

If an employee is paid at least $455 per work week on a salary basis, the analysis turns to the duties performed by the employee. These tests are slightly modified under the new regulations. Job titles are not controlling in this analysis. The actual duties performed determine if the employee meets these tests.

To qualify for the executive exemption, an employee must:

* Have the primary duty of the management of the enterprise or a recognized department or subdivision

* Customarily and regularly direct the work of two or more other full-time employees or their equivalent

* Have authority to hire or fire other employees (or if recommendations as to hiring, firing, advancement, promotion or other change of status of other employees are given particular weight).

To qualify for the administrative exemption:

* An employee must have the primary duty of performing office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers

* The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance

To qualify for the professional (learned or creative) exemption, an employee must:

* Have the primary duty of performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized, intellectual instruction

* Have the primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The new regulations also contain a special exemption for highly compensated employees. In some instances, an employee who earns more than $100,000 only needs to perform one of the exempt duties to be exempt from overtime.

These new regulations are extensive. Employers are well advised to contact their legal counsel promptly to discuss the impact of these changes on their business. Steven Miller is an associate in the Labor and Employment group of Vorys, Sater, Seymour & Pease LLP. Reach him at (513) 723-4000.