May 19, 2005
Author: , Esq.
A controversial new set of Department of Labor regulations took effect on August 23, 2004. The regulations define what are known as the "white collar" exemptions, i.e., those professional, executive, and administrative employees who are not entitled to overtime. The new regulations replace rules that had been in place for more than fifty years.
The controversy stems from a dispute over whether the new regulations make more employees exempt from receiving overtime and whether they clarify ambiguities that have led to increased litigation. On the one hand, the Department of Labor alleges the new rules will strengthen overtime rights for 6.7 million American workers, including 1.3 million low-wage workers who were denied overtime under the old rules. On the other hand, the AFL-CIO claims that the new rules will bar 6 million workers from getting time and a half. Both President Bush and Senator Kerry weighed in on the subject during the ongoing campaign.
The new regulations maintain the basic two-part framework for defining when white collar employees are exempt. First, employers must pay exempt white collar employees on a salary basis, i.e., a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. Second, only employees whose specific job duties meet all the Department of Labor's requirements will qualify as exempt. The Departments of Labor's attempt to define exempt job duties is what has led to disputes over whether employees are properly classified as exempt.
1. SALARY BASIS The new regulations raise the minimum salary level from $8,060 to $23,660 per year. Hence, full-time workers earning under $23,660 per year, including "white-collar" employees in that category, are entitled to overtime pay. Since most white-collar employees earn more than $23,660 per year, the effect of the new regulations will be minimal.
Importantly, the new regulations also contain a rule for "highly-compensated" workers, i.e., those who earn a total annual compensation of $100,000 or more. To qualify under the "highly-compensated" exemption, workers will also have to perform customarily and regularly at least one of the duties of an exempt executive, administrative or professional employee.
The regulations also clarify when an employer may "dock" an exempt employee's pay without jeopardizing his or her exempt status. The new rules enable employers to deduct pay for disciplinary suspensions, under limited circumstances, while maintaining the worker's exempt status. Such suspensions must be for one or more full days and be imposed pursuant to a written policy applicable to all employees. Additionally, the regulations contain a safe harbor provision for employers who make improper deductions from a worker's salary. Improper deductions that are either isolated or inadvertent will not result in the loss of the exemption for any of the employees subject to the improper deductions, as long as the employer promptly reimburses the employees once a mistake becomes known.
2. EXEMPT DUTIES Although the new regulations modify some of the primary duties in which an individual must engage to be considered exempt, they do little to clarify ambiguities that have led to litigation. Under the new rules, for example, a fast food manager must be involved in key staffing decisions like hiring, firing and promoting, in order to be deemed ineligible for overtime. Previously, that manager had to have the actual power to hire and fire employees in order to be considered an exempt executive employee.
The regulations also modify the duties test for the outside sales exemption. The old regulations required that an outside salesperson spend no more than 20% of his or her work time on non-sales related duties to be considered exempt from receiving overtime pay. The new regulations eliminate the 20% restriction and only require that the employee have the duty of customarily and regularly engaging in sales away from the employer's place of business.
Note: the new regulations did not make significant changes to the duties test for administrative employees. To qualify for the administrative exemption, the employee's primary duty must: (1) be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and (2) include the exercise of discretion and independent judgment with respect to matters of significance.
For more information, please contact James Rubin, Esquire, [email protected]