Legal Bulletins

On March 31, 2003, the U.S. Department of Labor published proposed revisions to the regulations issued under the Fair Labor Standards Act (FLSA) implementing the exemption from minimum wage and overtime pay for executive, administrative, professional, outside sales and computer employees. These exemptions are often referred to as the FLSA's “white collar” exemptions.

The “white collar” exemptions have engendered considerable dispute and disagreement regarding who is, and who is not, exempt. The applicability of the exemption generally involves a three part test: (1) the employee must be paid a predetermined and fixed amount, not an hourly wage that is subject to reductions because of variations in the quality or quantity of work performed (the “compensation basis test''), (2) the compensation paid must meet minimum specified amounts (the “compensation amount test''); and (3) the employee's job duties must primarily involve managerial, administrative or professional skills as defined by the regulations (the “duties tests'').

Compensation Basis Test

The compensation basis test has remained essentially unchanged since 1954. The proposal does not substantially change the “salary basis” rule prohibiting deductions from an exempt employee’s salary for partial-day absences. The proposed regulations would allow for deductions from the salary of exempt employees for full-day disciplinary suspensions Currently, such deductions can only be made where the suspension is for violation of a major safety rule.

Compensation Amount Test

The weekly compensation required for exemption was last updated in 1975, and the amounts adopted at that time were intended as an interim adjustment. The proposed regulations would make long over due changes to this aspect of the white-collar exemptions. Under the current DOL rules, an employee is subject to either a “short” or a “long” test, depending upon the amount of his or her weekly salary. An employee earning at least $155 a week is subject to the long test, with the short test being available if the employee receives a weekly salary of $225 or more. The short test is easier to satisfy and to apply, and the long test is largely an anachronism. DOL’s proposal would raise the minimum salary to $425 a week for the short test and dispense altogether with the long test. The DOL proposal would also provide that an employee who performs office or non-manual work and is paid an annual salary of $65,000 or more is exempt if his/her job includes at least one identifiable executive, administrative, or professional function, as described in the duties tests.

Duties Test

The basic “duties'' tests were originally established in 1938 and were last modified in 1949 and have remained essentially unchanged since that time. While the increase in the salary level necessary to qualify for exemption will result in more employees being non-exempt, the proposed changes to the duties test will have a mixed effect. The proposed rule eliminates the long test, under which exempt employees were restricted from devoting more than 20% (or as much as 40% in retail or service establishments) of their time in a workweek performing non-exempt duties. The proposed regulations retain the short test requirement that the employee’s primary duties must be of a qualifying nature, i.e., that the employee spend 50% of his or her time performing such duties.

More significantly, the proposed regulations would materially modify the definition of the types of duties required for exempt status:

• Executive Duties: The proposed executive duties test adds an additional requirement. Currently, the individual must be involved in the management of the enterprise and regularly direct the work of two or more employees. The proposed regulations would add the requirement that the individual have authority to hire or fire employees, or to effectively recommend such action.
  
• Administrative Duties: The proposed rules would replace the “discretion and independent judgment” test, which has been the subject of confusion and litigation, with a new test that employees must hold a “position of responsibility.” To be in a “position of responsibility,” the employee must either customarily and regularly perform work of substantial importance or perform work requiring a high level of skill or training. The proposed regulations also reduce the emphasis on the production versus staff dichotomy, while retaining the concept that an exempt employee must be engaged in non-manual or office work related to the general business operations or management of the employer or of the employer’s customers. The net effect of the proposed changes is to make this exemption easier to establish.
  
• Professional Duties: The proposal expands the category of “learned professionals” to include certain employees who gain equivalent knowledge and skills through a combination of job experience, military training, attending a technical school or attending community college. Currently, exempt status as a learned professional is limited to positions “requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study.”
  
• Outside Sales: This exemption applies to persons engaged is making sales or placing orders away from the employer’s offices and facilities. Currently, an exempt employee cannot spend more than 20 percent of his or her time engaged in activities that are not incidental to and in conjunction with the employee’s own outside sales or solicitations. The proposed rules would apply the “primary duty” standard and require that the employee be customarily and regularly engaged away from the employer’s place or places of business.
  
• Computer Employees: The proposed rules would merge the two alternative tests that currently exist for computer systems analysts, computer programmers, software engineers and other similarly skilled workers in the computer software filed. Such individuals can be exempt under the standard professional exemption or under the special exemption provided by Section 13(a)(17) for computer employees paid at least $27.63 an hour. Under the proposed rules, computer employees who meet the primary duty test for exemption under Section 13(a)(17), would qualify for exemption if paid a salary of at least $425 per week or at least $27.63 an hour.
  

   

Analysis
The DOL estimates that the proposed changes will “guarantee overtime pay for 1.3 million more low-wage workers.” Raising the salary level required for all of the white collar exemptions and adding an additional requirement to the executive exemption will certainly reduce the overall number of employees who qualify for the white collar exemptions. On the other hand, the modification to the educational requirements associated with the learned professional exemption and the changes with respect to the statement of duties necessary to qualify for the administrative exemption should increase the availability of those exemptions, while also making the determination as to the applicability of the administrative exemption easier in a given instance.

Note
At this time, we do not know what the final regulations will ultimately provide or when they will be issued.

Comments on the proposed rules may be submitted in writing on or before June 30, 2003. Comments should be addressed to Tammy D. McCutchen, Administrator, Wage and Hour Division, Employment Standards Administration, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, NW., Washington, DC 20210.

For More Information Contact:
The following charts were prepared by the Department of Labor and compare the current requirements for exemption from the Fair Labor Standards Act as an executive, administrative, professional, computer or outside sales employee with the regulations proposed by the Department.