Issue of the Month

April 2003, Who Qualifies To Be a Salaried Exempt Employee?

The U.S. Department of Labor Proposes to Move Up to the 21st Century

The U.S. Department of Labor, Wage and Hour Division (Department) has proposed new rules to modernize its 50 year old regulations defining overtime exemptions from the federal Fair Labor Standards Act (FLSA) for "white-collar" employees. Although there have been several attempts since the Carter Administration (1981) to update the salary standard, it is believed that the rules will be revised this time around for three reasons: 1) there has been a substantial increase in wage and hour actions charging employers with misclassifying their employees resulting in large fines against employers; 2) individuals within the Wage and Hour Division believe that these changes are long overdue; and 3) the regulations do not accurately reflect the wages and duties of employees working in today's workforce.

According to the Department's analysis, the new regulations would make at least 1.3 million more employees eligible for overtime (in other words, those employees would no longer be considered exempt due to the increased salary standard.) Specifically, an employee would no longer be exempt, regardless of job duties, if he/she earns less than $22,100 per year. Also, per the Department's analysis, 10.7 million more employees would be eligible for overtime pay with the update of the duties tests. For example, an employee would no longer be exempt under the executive exemption if the employee did not have responsibility for hiring and firing employees and an employee would no longer be exempt under the administrative exemption if the employee does not hold a "position of authority." Finally, the Department estimates that 640,000 more employees would qualify to be exempt from overtime because of the clarified duties tests.

Although there are many changes in the newly proposed regulations, including simplifying and clarifying the outdated regulatory language, the most important substantive changes include:

1. Increase the current $155 per week guaranteed salary to $425 per week for executive, administrative and professional employees. The salary requirement has been updated six times since the law was initially passed in 1938, but has not been updated since 1975.
   
   
2. Eliminate the "low" and "high" salary duties tests. Current law has always allowed for a low salary test (currently $155) with expansive duties requirements and a "high salary test," currently at $250 per week, with a shorter list of duties to qualify for the exemptions. Eliminating the "low salary test" would also eliminate the percentage of work test. (Under current law, in order for an employee to be exempt under the low salary test, the employee may spend no more than 20% of work time performing non-exempt duties; 40% in the retail and service industries.)
   
   
3. In order to qualify for the executive exemption (those who supervise other employees), employees would be required to have the authority to hire or fire other employees, or at least to make recommendations as to the hiring, firing, promotion or other change of status of other employees that are given particular weight. This requirement currently applies only to those exempt employees covered by the low salary test.
   
   
4. The regulations would recognize any employee who owns at least a 20 percent equity interest in the enterprise to be an exempt employee.
   
   
5. Under the administrative exemption (those who have as their primary duty performing office or non-manual work related to the management or general business operations), the "customarily and regularly exercises discretion and independent judgment requirement" would be replaced with a standard that the individual must hold a "position of responsibility." That is defined as performing work of substantial importance or performing work requiring a high level of skill or training. There are multiple examples of what this means in the proposed regulations, including: formulating or interpreting management policies and analyzing data, drawing conclusions and recommending changes. The regulations would also spell out the types of work that would be included under this exemption: tax, finance, accounting, auditing, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations and similar activities.
   
   
6. Under the professional exemption (those who currently are required to have an advanced degree), the "consistently exercises discretion and judgment" requirement would be eliminated. This regulation would be changed to allow for the fact that advanced knowledge may be acquired by an equivalent combination of intellectual instruction and work experience. The regulation would permit education and experience together to potentially qualify someone for a professional exemption.
   
   
7. Under the outside sales exemption, the 20% restriction on devoting hours worked to no more than 20% of the activities performed by nonexempt employees would be eliminated.
   
   
8. There would be an automatic overtime exemption for employees who earn $65,000 or more per year.
   
   
9. Under the current law, an employer may not dock an exempt employee's pay except for personal days; sick days that are taken in accordance with a bona fide plan, policy or law such as worker's compensation; or for major safety violations. The proposed changes would permit an employer to dock an exempt employee's pay for full-day disciplinary suspensions, for such conduct as sexual harassment, workplace violence or other misconduct.
   
   
10. Finally, under the current law, an employer who makes improper deductions from an exempt employee's pay can lose the exemption for an entire class of employees. The proposed guidelines would create a new safe harbor provision. If an employer has a written policy prohibiting improper pay deductions, has notified employees of that policy, and reimburses employees for any improper deductions, then that employer would not lose the exemption for any employees unless the employer's policy prohibiting improper deductions is repeatedly and willfully violated.
    

If these changes, or a comparable version is passed, it will be even more important for employers to audit the salary and job duties of its exempt employees to ensure that those currently treated as exempt still qualify. Employers may also want to use this opportunity to determine if any employee who is currently paid as an hourly employee now qualifies to be overtime exempt. In any event, it is recommended that employers audit their pay practices on an annual basis to make sure that employees are properly paid. The Fair Labor Standards Act has a two year statute of limitations (three years in the case of willful violations) and, unlike other types of employment claims which usually arise out of a single incident or decision, a new wage and hour violation can be created with every processed payroll.

Watch for future Issue of the Month updates on this important legislation.

For more information regarding Krukowski & Costello's training programs and publications, please call (414) 423-1330 or e-mail Krukowski & Costello's educational services department.