New Department of Labor Regulations on Overtime

April 2004

On Friday, April 23, 2004, the United States Department of Labor published the final version of new regulations governing the payment of overtime under the Fair Labor Standards Act. The regulations, which are scheduled to become effective on August 21, 2004, make sweeping changes to the current rules.

The new regulations combine old "long" and "short" tests for exempt employees into one standard test. The minimum salary needed to qualify for exempt status will be $455 per week, or $23,660 annually. This is an increase from the $155 per week required under the long tests, and $250 per week under the short tests.

The Department of Labor has created a new exemption for "highly compensated employees" who earn at least $100,000 per year and customarily perform exempt duties. However, the new regulations specifically note that "blue collar workers" remain non-exempt even if they earn $100,000 per year because they ordinarily do not perform exempt duties. "Public safety employees" must always be paid overtime under the new rules.

The new regulations also change the rules governing deductions from pay for exempt employees guilty of disciplinary infractions. When the new regulations become effective, an employer will be able to make deductions from an exempt employee's pay in increments of one full day without altering the employee's exempt status. Currently, employers may only make deductions in increments of one full week, except for serious violations of safety rules.

The "window of correction" procedures, under which an employer may correct improper wage deductions without converting its exempt employees to non-exempt status, are also new. With the new regulations, under certain circumstances, "isolated or inadvertent deductions will not result in a loss of the exemption."

The new regulations make changes to the duties tests for several categories of exempt employees. In order to qualify as an exempt executive, an employee now must have the authority to hire or fire other employees. This test may also be met if the employee's recommendations as to hiring, firing, advancement and promotion are given "particular weight," a term of art that has now been specifically defined by the Department of Labor.

Administrative employees have a modified test under the new regulations. The requirement that discretion and independent judgment be "customarily and regularly exercised" has been dropped. Instead, the employee's primary duty must include the exercise of discretion and independent judgment regarding "matters of significance." "Matters of significance" refers to the "level of importance or consequences of the work performed." The regulations also provide modernized examples of what kinds of employees fall within the administrative exemption.

The professional exemption will be divided by the new regulations into several specific categories. To qualify as a learned professional, an employee must have knowledge of an advanced type that is usually acquired through specialized instruction. However, this knowledge may also be gained through alternative means such as work experience combined with education. Specific exemptions are carved out for the practice of law and medicine, and for teachers.

The outside sales exemption no longer involves a determination by percentage of the incidental, non-sales activities conducted by the employee. Instead, the Department of Labor has emphasized the requirement that outside sales employees customarily and regularly be engaged away from an employer's business. The exemptions for creative and computer professionals have undergone only minor revisions.

If you have questions regarding how these new regulations affect your work force, would like a copy of the regulations or information regarding the changes, please contact a Frost Brown Todd Labor and Employment attorney.

The following chart summarizes the important changes made by the new regulations. Because most exempt employees are paid over $250 per week - the threshold to qualify for analysis under the short test - the long test is not included.

 

Executive Employees

Current "Short" Test

New "Standard" Test

  1. Employee's primary duty must be the management of the enterprise or a subdivision thereof; and
  2. Employee regularly and customarily supervises two or more full time employees.
  1. Employee's primary duty must be the management of the enterprise or a subdivision thereof; and
  2. Employee regularly and customarily supervises two or more full time employees; and
  3. Employee has the authority to hire and fire, or the employee's recommendations as to hiring, firing and promotion are given particular weight.
 

Administrative Employees

Current "Short" Test

New "Standard" Test

  1. Employee's primary duty must be office or other non-manual work directly related to the management or general business of the employer; and
  2. Employee customarily and regularly exercises discretion and independent judgment.
  1. Employee's primary duty must be office or other non-manual work directly related to the management or general business of the employer; and
  2. Exercises independent discretion and judgment regarding "matters of significance."
 

Learned Professional Employees

Current "Short" Test

New "Standard" Test

  1. Employee's primary duty must be work that requires advanced knowledge that is usually acquired through prolonged study; and
  2. Employee customarily and regularly exercises discretion and independent judgment.
  1. Employee's primary duty must be work requiring advanced knowledge that is usually acquired through prolonged study or through alternative means such as work experience.
  2. Consistent exercise of discretion and judgment.

 

Practice of Law or Medicine Professional Employees

New "Standard" Test*

  1. Employee holds a valid license/certificate to practice, and
  2. Employee is engaged in the practice of law or medicine; or
  3. Employee holds the requisite academic degree, but not necessarily the license, for the practice of medicine and is engaged in an internship or residency.

*The salary test does not apply to these professionals.

 

Highly Compensated Employees

New "Standard" Test

  1. Employee is guaranteed compensation of at least $100,000 per year; and
  2. Employee performs at least one of the duties required of employees under the executive, administrative or professional exemptions.

Practices

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