Timely Employment Law Topics -Volume III, No. 2

May 9, 2004

    THE FAIR PAY REVISIONS TO THE FAIR

    LABOR STANDARDS ACT REGULATIONS

By Donald J. Spero

I.  The Purpose of the Revisions of the Fair Labor Standards Act Regulations

The Fair Labor Standards Act (the “FLSA”)^[1] which was enacted in 1938 requires the payment of the minimum wage, currently $5.15 per hour, to covered employees of covered employers.  Additionally it requires payment to these employees of one and one-half times their “regular rate” for hours worked in excess of 40 in a work week.  Among those not covered by the minimum and overtime pay requirements of the FLSA are employees included in the so called “white collar” exemptions.^[2]  The white collar exemptions apply to individuals employed in an executive, administrative, or professional capacity as well as to outside sales persons.

   The FLSA empowers the Secretary of Labor (the “Secretary”) to issue regulations “delimiting” the exemptions.^[3]  The  former regulations relating to the white collar exemptions required that executive, administrative and professional employees receive a certain minimum salary.  The regulations set two different salary levels within each of these exemptions.  Each exemption had a “short test” and a “long test.”  The minimum required salary for the long tests was $155 per week.  The duties requirements for the long test were more exacting than those for the short test.  The latter required a minimum salary or $250.00 per week.  These sums which were set in 1975 have only recently been revised in the new regulations published by the Secretary on April 23, 2004.  The revised regulations go into effect 120 days after that publication.^[4]

The Department of Labor recognized that the salary requirements for the white collar exemptions were unrealistic in the current economy.  It was further acknowledged that the employment landscape had changed dramatically over the years since the passage of the FLSA.  Some jobs have disappeared and many new jobs have been added.  Accordingly the Secretary published proposed revised regulations on March 31, 2003.  The revisions were intended to reflect the realities of the current economy and employment environment.  Additionally the Secretary sought to clarify and simplify some of the prior requirements which had given rise to considerable dispute over their application.  The Secretary solicited comments from the public about the proposed regulations and many were forthcoming.  The Secretary took account of many of the comments received relating to the proposed revisions.  Some are reflected in the final revisions  published on April 23, 2004. 

In addition to raising the salary level of those who are exempt to $455 per week the revised regulations change the duties requirements for the various exemptions.  The two tier short test/long test is eliminated.  There is now only one set of duties for all individuals within each exempt category.   The revised duties requirements are intended to make them more easily applied.  In addition a new category has been created exempting certain employees who earn no less than $100,000 per year.  The restrictions on permissible deductions from exempt individuals salaries have also been revised and clarified. 

The revised regulations explicitly state that the exemptions do not apply to certain types of employment.  “...Manual laborers and ‘blue collar’ workers who perform work involving repetitive operations with their hands, physical skill and energy . . . ” are not covered by the white collar exemptions.^[5]   Employees such as police officers, fire fighters, deputy sheriffs, correctional officers, fire fighters, paramedics, and hazardous materials workers  are not exempt unless they have supervisory or highly skilled duties that bring them into one of the specific exemptions.^[6]

The regulations relating to the duties test will be discussed below separately from  those relating to the salary test. 

II.  The Duties Test - Elimination of the Short Tests

A.  The Executive Exemption

To be covered by the executive exemption^[7] one:

1.  Must receive a salary of no less than $455 per week which sum does not include the value of board or lodging allowed to the executive.

2.  Must have as a primary duty the management of an enterprise or a customarily recognized department or subdivision of the enterprise,

3.  Must customarily and regularly direct the work of at least two other employees,

4.  Must have the authority to hire and fire employees or have his or her recommendations as to hiring and firing employees be given “particular weight.”^[8]

  The new duties requirements differ from those in the former regulations in that they eliminate the percentage limitation on duties not directly and closely related to management.  Otherwise under the new regulations the duties test is the same as the former long test with the added requirement relating to hiring and firing employees which was in the former long test.  The term “particular weight” in relation to hiring and firing recommendations takes into consideration whether making such recommendations is part of the individual’s job and the frequency with which the person is called on to make such recommendations.^[9]     

Management of an enterprise consists of such duties as selecting and training employees, setting their salary levels, assigning work, determining the types of tools and materials that will be used, controlling inventory, providing for safety, planning and controlling the budget and being in charge of legal compliance.^[10]    

The fact that an employee may perform non-exempt work does not automatically disqualify an otherwise exempt individual.^[11]  An exempt individual will have the discretion as to when to perform non-exempt duties.  The regulations give as examples of the permissible performance of nonexempt duties an assistant manager in a retail establishment serving customers, cleaning the establishment or stocking shelves.^[12] 

One who owns at least 20% of the business in which the individual is employed and is active in managing the business is also exempt as an executive regardless of whether or not the person receives a salary.^[13]

            B.  The Administrative Exemption

To be an “employee employed in a bona fide administrative capacity”^[14] one must meet the following criteria:

1.  Receive a salary of at least $455 per week exclusive of such extras as board and

lodging.

2.  The individual’s primary duty must be to perform office or non-manual work directly related to the business operations of the employer or the employer’s customers.

3.  The primary duty of the individual must be to exercise discretion and independent judgement with respect to matters of significance.^[15]

Item number 2 is adopted from the former long test.  Item number 3 is taken from the former short test.  The new definition retains two of the difficult to apply terms from the former regulations. They are “work directly related to the business operations” and “discretion and independent judgement.”  To the latter the new regulation has added the requirement that the discretion and independent judgement be applied to “matters of significance.”

The regulations state that work directly related to the business operations means running or servicing the business.^[16]  Examples given of such work include “...tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources...” along with a number of others.^[17]  This is distinguished from production line work or retail sales.   Examples of work directly related to the business operations of the employer are  advising or acting as consultants to the customers.^[18] 

The regulations go into some detail in tackling the issue of what constitutes discretion and independent judgement.  The term must be applied in the context of all of the circumstances of a particular employment situation.^[19]  It includes formulating or implementing management or operating policies, carrying out major assignments in the operation of a business, authority to make significant financial commitments, authority to depart from established policies without prior approval, advising management and long range planning.  An employee may be exercising discretion and independent judgement even if the individual’s decisions are subject to review and may be  reversed at a higher level. 

The exercise of discretion and independent judgement does not include following well established procedures set out in manuals or merely tabulating data.^[20]  However resort to manuals that can be understood and applied only by those with advanced or specialized knowledge or skills does not disqualify one from the exemption.^[21]  The fact that a misstep by an employee may cause the employer a serious financial loss will not by itself make an employee exempt.^[22]  Neither will the fact that the individual operates very expensive equipment     

The regulations provide some examples of persons who may be covered by the administrative exemption.  Among those given are insurance adjusters, financial services employees who gather or analyze customers’ financial information or service or promote the employer’s financial products, a team leader of other employees assigned to special projects, an executive assistant to a business owner or high ranking executive, a human resource manager who formulates, implements or interprets company employment policies, and purchasing agents with authority to commit the company to large purchases.^[23]  Some of those who the regulations indicate are not exempt are examiners, graders and comparison shoppers as well as other employees who perform ordinary inspection work along standardized lines using well established procedures.^[24]

C.  Employees of Educational Establishment Who are Exempt Administrative        Employees

The administrative exemption includes employees of educational establishments “Whose primary duty is performing administrative functions directly related to academic instruction or training...”^[25] and who receive a salary of not less than $455 per week.  Alternatively the compensation requirement for these individuals can be met by paying them a salary rate at least equal to the starting rate for teachers in the employing establishment.^[26]  The term educational establishment broadly encompasses elementary and secondary schools as well as institutions of higher learning.^[27]

D.  The Exemption for Professional Employees

The exemption for professional employees is applicable to those receiving a salary of no less than $455 per week whose primary duty consists of work:^[28]

(i) Requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized instruction; or

(ii) Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.^[29] 

As with the executive and administrative exemption the new regulation eliminates the two tier long and short tests distinction.  The salary and duty requirements are the same for all employees in the category.  Eliminated from the former rule is the requirement under the long test that no more than 20% the professional’s time was permitted to be devoted to work which was “... not an essential part of and incidental to ...” the individuals exempt work.  The long test in the former regulation required “...the consistent exercise of discretion and judgement.”  The term “consistent exercise” does not appear in the revised version.  The former short test merely required that the employee’s work needed to “include” work requiring the consistent exercise of discretion and judgement or of “... work requiring invention, imagination or talent in a recognized field of artistic endeavor.”  The word “include” does not appear in the new regulation.   

The term “work requiring advanced knowledge applies to work that is primarily intellectual  consistently requiring the exercise of discretion and judgement.  It excludes work that is routine, manual, mechanical or physical.^[30]  Embraced by the term “field of science or learning” are “law, medicine, theology, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other similar occupations that have a recognized professional status...” as distinguished from skilled trades.^[31]                      

Ordinarily an academic degree in the field in which the employee is working is required for professional status.  However in some cases an individual who obtained comparable knowledge from work combined with academic instruction will be covered by the exemption.^[32] Included among professionals if they have the requisite credentials are registered or certified medical technologists, registered nurses, dental hygienists, physician assistants, accountants, executive and sou chefs, paralegals but only if they use in their work advanced special degrees that they hold in other fields, athletic directors, funeral directors and embalmers.^[33]  

The category of professionals includes regular teachers in academic establishments as well as those who teach kindergarten or in nursery schools and teachers of gifted or disabled students.^[34]  Flight instructors, driving instructors and teachers of vocal or instrumental music are also exempt professionals. 

E.  Computer Employees as Exempt Professional Employees

  The revised regulations place computer employees by themselves in a separate section.  Computer employees may be exempt under 29 U.S.C. § 213(a)(1) or 29 U.S.C. § 213(a)(17).  The salary requirement for the former is $455 per week.  For the latter it is $27.63 per hour.  The computer employee exemption applies to employees whose primary duties consist of systems analysis, design or development of computer systems or programs, or design, development modification or testing of computer programs related to machine operating systems.^[35]  The computer employee exemption does not cover individuals employed in the manufacture or repair of computers or those who use computers to assist them in non exempt work.^[36]  Of course computer employees may have additional duties that qualify them for the executive or administrative exemptions.^[37]

F.  Outside Sales Employees

The outside sales person exemption applies to those whose primary duty is making sales or obtaining orders for contracts, services or facilities.^[38]  To be exempt the salesperson must, in making sales, be “...customarily and regularly engaged away from the employer’s place or places of business.”^[39]  The regulations state that any fixed site, including a home or office used by the employee’s headquarters is a place of business of the employer.^[40]  There is no salary requirement for outside sales persons.^[41]  Performing promotion work that is not done in conjunction with making sales is not exempt.^[42]

The new outside sales regulation differs from the former regulation in that it eliminates the prohibition against the sales person’ performing other work during more that 20% of the employee’s time.

III.  The Salary Test^[43]

A.  Highly Compensated Employees

The new regulations add a provision exempting employees receiving compensation of no less that $100,000 per year who “... customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee...”^[44]  The highly  paid employee exemption only applies to those whose primary duty consist of office or non manual work.^[45]  The individual must receive no less than $455 per week.^[46]  The total compensation may include nondiscretionary payments including nondiscretionary bonuses.^[47]  If, as the end of the compensation year approaches, the employee’s earnings are falling short of the $100,000 mark the employer may make up the difference with one final payment.^[48] 

An employee who has worked less than one year may be paid a pro-rata amount of the required $100,000 based on the amount of time the employee has worked.^[49]  An employer is not required to base the total compensation on a calender year.  It may do so on some other fixed 52 week period.^[50]

B.  The Salary Basis Test

The salary basis test in the new regulations like the former regulations require the payment of a predetermined amount not subject to deductions except under certain defined circumstances.^[51]

Deductions may not be made based on quantity or quality of production or for absences for personal reasons for non work days occasioned by the employer’s operating requirements.  The full salary must be paid for any week in which the employee works regardless of the number of days or hours worked.  While deductions may be made for the employee’s absence for a day or more for personal reasons other than sickness or disability, no deduction is permitted for such absences that are less than one day.^[52]  Deductions are permitted for sickness or disability absences of more than one day if the employee is covered by a plan or policy providing pay for such absences.^[53]

As in the former regulations an employer may not deduct from the exempt employee’s salary for absences due to jury duty or temporary military duty, but deductions may be made in the amount of the sums the employee is paid for such duty.^[54]  As with the former regulations disciplinary deductions may be made in good faith for violations of “... safety rules of major significance.”^[55]  In addition a new provision has been added allowing “... unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules” that are in writing and applicable to all employees.^[56]  Examples given are rules prohibiting sexual harassment or workplace violence.   

An employer may pay a pro-rata share of the salary for portions of a week that an exempt employee actually works where the individual works less than a full week during the first and last week of employment.^[57]  As in the former regulations an employer is not required to pay for unpaid leave taken pursuant to the Family and Medical Leave Act.^[58]

C.  Correcting Improper Deductions

Where an employer has an actual practice of making unpermitted deductions, the exemption will be lost during the period in which such deductions are made for all employees in the same classification as those who have had deductions made and who work for the managers who make such deductions.^[59]  Thus employees working for managers other than those who make improper deductions do not lose their exempt status.  Exempt employees who work for the rogue managers in exempt classifications other than the classifications of the employees who are having improper deductions taken do not lose their exempt status. 

Where an employer has inadvertently made an improper deductions in isolated incidents the employees will remain exempt if the employer pays to the employees the amounts deducted.^[60]   The new amendments allow that where an employer has a clearly disseminated policy of not making improper deductions along with a complaint procedure and the employer reimburses the employees for the improper deductions while making a good faith commitment to comply with the regulations in the future the exemption will not be lost.^[61]  This will not apply if the employer willfully makes improper deductions in the future.  Accordingly it is a good idea for employers to have in place a policy that meets these requirements. 

IV.  Definitions and Miscellaneous Provisions

The revised regulations have a separate section with fairly detailed definitions of a some of the more significant terms as well as some miscellaneous provisions.  The following are summaries of some of these provisions.  In specific cases the regulations should be consulted for the complete definitions.

A.  Primary duty

The primary duty consists of the most important, principal or main functions of the employee.^[62]  Consideration should be given to the relative importance of the exempt duties, the amount of time spent on them and the amount of the employee’s wage as compared to the pay of nonexempt employees who perform the nonexempt work that the purportedly exempt employee performs.

B.  Customarily and regularly

This term refers to frequency which must be more than occasional.  That frequency should be regularly as opposed to occasional.^[63]

C.  Directly and closely related

Functions that are directly and closely related to exempt work are also exempt.^[64]  This type of work facilitates the performance of the exempt work.  It may consist of physical or manual tasks.  Examples given are “... record keeping; monitoring and adjusting machinery; taking notes; using the computer to create documents or presentations; opening the mail for the purpose of reading it and making decisions; and using a photocopier or fax machine.”^[65]  This regulation should be consulted for a litany of more specific examples of directly and closely related work.

D. Use of Manuals

The Secretary has acknowledged that highly skilled exempt employees may need at times to consult with technical manuals that can be understood and applied only by people with their particular skill.  This is distinguished from those whose nonexempt work is performed by relatively routine selection of procedures from instruction manuals.^[66]

E. Trainees

Employees in training to perform white collar exempt positions are not exempt unless they are actually performing exempt work.^[67]

F.  Emergencies

An employee will not lose an exemption if it is necessary for the employee to perform nonexempt work due to an emergency to avert a threat to safety or a work stoppage.^[68]  Emergencies are rare events that cannot be reasonably anticipated.^[69]  Examples of emergencies in the regulations include a mine superintendent who helps dig out miners after an explosion; helping with nonexempt work during a period of heavy workload or to fill rush orders; replacing an ill employee during the first day of illness; and emergency (i.e. non routine) repair of equipment.^[70]

E.  Occasional tasks

The exemptions is not lost where the employee performs infrequently occurring nonexempt tasks that cannot feasibly be performed by nonexempt employees where those task are essential to the individual’s performance of exempt work.^[71] 

F.  Combination exemptions

An employee who performs work that is exempt in one classification will not lose that exemption by virtue of performing exempt work in another classification.^[72]  Thus an employee who performs work at times that is administrative and at other time work that falls under the executive exemption will remain exempt.  

G.  Special provision for employees of public agencies

 Where a public agency has an established pay system or policy under which employees  accrue personal leave and sick leave and that policy requires a pay reduction for less than one day of absence for personal reasons, illness or injury, the exemption will not be lost by virtue of such a deduction if the employee voluntarily chooses not to use accrued paid leave for the absence or where accrued leave is exhausted.^[73]   Neither will the exemption be lost if the employee has not asked to use the accrued leave or if the employee has asked for permission to use it and the request has been denied.