Focus On The New DOL White-Collar Exemption Regulations

Effective August 23, 2004, the U.S. Department of Labor adopted new regulations for interpreting Section 213(a)(1) and 213(a)(17) of the FLSA, which are the regulations specifying overtime exemptions for white-collar exempt employees, including executive, administrative, professional, outside sales representative, and computer professional employees. The revised regulations, accessible on DOL's Web site at http://www.dol.gov/dol/allcfr/ESA/Title_29/Part_541/toc.htm, mainly had the effect of clarifying and reorganizing the criteria for distinguishing between exempt and non-exempt salaried employees. Following is a brief outline of the most notable changes the new regulations made.

Changes in the Salary Test

Instead of the old salary test divided into "long" and "short" tests that differ between categories of exempt employees, DOL adopted two clear dividing points, $455/week and $100,000/year. Here is how the new regulations divide salaried employees up:

Below a weekly salary of $455, all employees not covered by industry-specific exemptions will be presumed non-exempt;
If an employee earns at least $455/week ($23,660/year), but less than $100,000/year ($1923.08/week), the new duties tests apply to determine whether the employee is truly exempt;
If the employee earns at least $100,000/year and performs office or non-manual work, the employee is a "highly-compensated employee" and presumed to be exempt as long as they customarily and regularly perform at least one exempt duty.
The new salary test does not apply to owner-executives who own at least a 20% equity interest in their companies and are active in the management of their enterprises.

Changes in Deductions from Salary

Many of the long-standing rules about deductions from salary, including the prohibition against partial-day deductions from salary, remain in effect under the new regulations. For instance, deductions in units of a full day at a time are still allowed for absences caused by personal business, and for absences due to medical conditions, assuming that the employer has a sick leave pay policy. There were also no changes in the general rules for deductions for time missed for jury duty, witness duty, military duty, and office or plant closings due to business- or weather-related shutdowns: deductions for such absences may be made only in units of a full workweek at a time. However, the new regulations made the following useful changes:

The salary may be reduced in units of a full day at a time in the case of suspensions without pay for infractions of workplace conduct rules, pursuant to a written policy that applies to all employees. A common example would be an unpaid two- or three-day suspension for workplace harassment or habitual attendance violations.
The new regulations clarify that a deduction for an unpaid suspension for violation of a safety rule of major significance may be made in "any amount", i.e., in units of less than a full day at a time. The term "safety rules of major significance" continues to be defined as relating to the safety of the entire workplace and workforce, such as rules prohibiting smoking in an explosive or flammable environment.
The "window of corrections" or "safe harbor" regulation has been clarified to excuse isolated, one-time, or inadvertent salary basis violations if the employer does not have a policy or practice resulting in such violations, reimburses the employees for any deductions wrongfully made, and commits to preventing such deductions in the future.

Keep in mind that such salary deductions must be authorized in writing by the employee to be valid under the Texas Payday Law - for an illustration of this principle with regard to salary deductions, see item 12 in the sample wage deduction authorization agreement in "The A to Z of Personnel Policies" section of this book.

Simplified Duties Tests

The new regulations greatly simplify the duties tests applying to each category of exempt employee. The old "long test" standard of exempt duties at least 80% of each workweek was deleted, and the old "short test" standard of having exempt work as a primary duty was extended to cover each category. The test for "primary duty" was clarified to explain that it does not have to be performed at least 50% of the time to be considered the primary duty. Instead, the new regulation expressly incorporates the standards commonly recognized by courts, namely, 1) the relative importance of the exempt duties; 2) the amount of time spent performing exempt work; 3) relative freedom from direct supervision; and 4) the relationship between the employee’s salary and the wages paid to other employees for the same kind of non-exempt work. Following is a summary of the duties tests for the various exemption categories:

Executive – under the new test, an executive exempt employee's primary duty is management of the enterprise or a major division thereof; the employee customarily and regularly supervises two or more employees; and the employee has the authority to hire and fire other employees, or else the employee's recommendations as to hiring and firing are given particular weight by the company.
Administrative – the administrative exempt employee's primary duty must be performance of office or non-manual work related to the management or general business operations of the company or its customers, and the primary duty must involve the exercise of discretion and independent judgment with respect to matters of significance.
Professional – for the "learned professional" exemption, the employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. This usually involves at least a four-year college degree in the field of learning associated with the occupation; a high-school diploma or two-year associate's degree is insufficient. For the "creative professional" exemption, the employee’s primary duty must be the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
Computer professional - under the new regulations, the salary test is either $455/week or else $27.63 per hour straight-time pay for all hours worked, and the duties test is identical to the test reflected in FLSA section 213(a)(17):

The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;
The design, development, documentation, analysis, creation, testing, or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
A combination of the aforementioned duties, the performance of which requires the same level of skills.

Outside sales representative - in place of the former rule that a maximum of 20% of the workweek be devoted to non-sales work, the new regulations require only that the employee's primary duty be sales-related work and that such work be customarily and regularly performed away from the employer's regular place or places of business. Of course, this exemption does not apply to inside sales staff.

Employers should note that the basic principles applying to exempt employees continue to be important: the white-collar exemptions are intended for the most important, highest-ranking, and most highly-skilled employees, the ones for whom it is generally impossible to standardize their work with respect to time, and the ones whose decisions substantially impact the company as a whole.

The DOL has posted an overview of the changes in PowerPoint format on its Web site at:
http://www.dol.gov/esa/whd/regs/compliance/fairpay/presentation.ppt.

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