Much Ado About Very Little: Revised Overtime Pay Regulations

The publicity and Congressional reaction surrounding the United States Department of Labor (DOL)'s proposed changes to the overtime pay regulations suggests that those modifications would result in a radical departure from the existing state of the law. An objective review of the changes, however, as initially proposed and as finally implemented reveals that the DOL actually did little to alter the legal landscape.

Indeed, the revised regulations will probably do nothing to clarify the application of the white-collar employee exemptions under the Fair Labor Standards Act (FLSA) or to reduce the increasing volume of litigation against employers who mistakenly classify personnel. As a consequence, the DOL will not accomplish either of its stated goals in undertaking

the revision of the regulations. Moreover, the DOL's recent effort will unfortunately postpone for the foreseeable future the real regulatory reform that is genuinely needed in an area that directly affects millions of employers and employees.

The DOL's Stated Goals

In March 2003, the DOL published proposed changes to the regulations that govern the exemption of white-collar workers, including Executive, Administrative, Professional, Computer, and Outside Sales Employees, from overtime compensation under the FLSA. See 29 U.S.C. '213; 29 C.F.R. ”541.1, et seq. In publishing those modifications, the DOL correctly pointed out that the regulations had remained basically unchanged since 1954, the regulations had become obsolete as a result of intervening changes in business operations and job content, and ambiguities in the definitions of categories of white collar made it unnecessarily difficult for employers to understand and comply with their obligations under the FLSA. The DOL explained that the changes were intended to alleviate that situation, and hopefully eliminate the recent spate of litigation prosecuted by employees alleging that they had been wrongly exempted from statutory overtime pay.

The changes proposed by the DOL included the following:

• Employees earning salaries less than $425 per week or $22,000 per year would be entitled to overtime pay regardless of the nature of the duties that they performed. Thus, proposed regulations would eliminate the so-called “long test” used to determine whether employees earning salaries less than $250 per week qualified for exemption as a white-collar worker.
• Employees earning more than $65,000 per year, ie, “highly compensated employees,” would be entitled to overtime pay only if they perform office/non-manual work and at least one of the exempt duties of an Executive, Administrative, or Professional Employee.
• Clarifications of the criteria used to ascertain whether an employee was a white-collar worker.

Organized labor, other interest groups, and liberal members of Congress reacted angrily and loudly to those reforms, which were characterized as taking overtime pay away from several million employees who were currently entitled to such compensation. For example, bills were introduced in the Senate and House of Representative that would have nullified the regulatory revisions and denied the DOL funds to implement and enforce the changes. See Federal Register, Vol. 68, No. 61, pp. 15560-15597; H.R. 2660, 108th Congress, 1st Session, Sec. 106; Senate Bill 1485, 108th Congress, 1st Session In the Senate of the United States. That political firestorm in a presidential election year eventually forced the DOL to issue final regulations that effectively scrapped certain “controversial” aspects of the proposed regulations.

Substance Of The Final Regulations

On April 23, 2004, the DOL issued the final regulations that become effective on Aug. 23, 2004 unless a law that is passed by Congress and is not vetoed by President Bush bars implementation of those rules. See 69 Fed. Reg. 22122-22274. The DOL has already announced that the agency will monitor wage and hour litigation in order to ensure that judicial decisions properly “protect” workers' rights prior to that effective date.

The new regulations exclude from the white collar exemptions manual laborers and other “blue collar” workers regardless of their compensation rate or job title. 29 C.F.R. ”541.0-541.4. The regulations continue to allow the exemption of Executive, Administrative, Professional, Computer, and Outside Sales Employees. 29 C.F.R. ”541.100, et seq.

The regulations also specifically exclude designated public sector jobs, such as police officers, detectives, corrections officers, park rangers, fire fighters, emergency medical technicians, ambulance personnel and hazardous materials workers. 29 C.F.R. ”541.3. Those employees, however, must perform the law enforcement or fire-fighting duties normally associated with those job titles. That aspect of the regulations has prompted police and fire fighter unions to complain that many of their members will be disqualified from overtime pay.

The final regulations incorporate illustrative examples of the white collar exemptions that the current rules classify as “interpretative guidelines” and that some courts have refused to accord the same deference as those rules. 29 C.F.R. '541.100, et seq. The DOL hopes that change will change that judicial attitude.

Compensation Arrangements

Under the revised regulations, workers qualify for exemption as Executive, Administrative, and/or Professional Employees only if they earn a salary of at least $455 per week or $23,600.00 per year. That requirement, however, does not apply to teachers, practicing lawyer and doctors, and employees holding a general medical degree and participating in internship or residency programs. 29 C.F.R. '541.600. Thus, the regulations will effectively rescind the “long test” that could exempt workers earning salaries as little as $250 per week if they performed Executive, Administrative, and/or Professional Employee duties involving the requisite degree of discretion and judgment. 29 C.F.R. '541.600(a).

Individuals may qualify for exemption as Computer Employees if they earn the salary level specified for Executive, Administrative, and Professional Employees or an hourly rate of at least $27.63. 29 C.F.R. '541.600 (d). Employers may exempt Outside Sales Employees even if they are not paid a minimum salary. 29 C.F.R. '541.500(c).

The new regulations preserve the “salary basis” requirement for Executive Employees and permit Administrative Employees and Professional Employees to be paid in that manner or on a fee basis. 29 C.F.R. ”541.600 and 541.605. The regulations also continue the restriction on deductions from white-collar employees' pay for partial day absences with one important distinction. Employers will be able to impose disciplinary suspensions without pay for periods shorter than a week for a reason other than violations of important safety rules. The employee, however, must have violated a written policy, such as a non-discrimination rule, that applies to all company workers. 29 C.F.R. ”541.602 and 541.603.

Employers may make deductions for unpaid leave taken pursuant to the Family and Medical Leave Act. Deductions for FMLA leave or rules violations other than safety rules must be in proportion to the amount of time that the employee is absent from work. 29 C.F.R. ”541.602(b)(7) and 541.602(c).

The new regulations permit an employer to avoid the effect of inadvertent or isolated deductions from an employee's salary by promptly reimbursing the worker for the lost pay. As a consequence, an employee will be deemed non-exempt only if the employer has engaged in a pattern and practice of making improper deductions as demonstrated by the frequency and number of the deductions, the period over which the deductions were made, and the existence of a policy permitting or prohibiting deductions. 29 C.F.R. '541.603.

If a pattern or practice exists, an employer loses the exemption only for the period during which deductions were made and for employees in the same job title working for the same managers responsible for that practice. Employers may protect themselves from that result by implementing, disseminating, and enforcing a policy that prohibits such deductions 29 C.F.R. ”541.603(c) and (d).

The final regulations set $100,000 as the minimum annual salary that an individual must earn to be classified as a “highly compensated employee.” An employer may augment an employee's compensation if it appears at the end of the year that the worker's income will not reach that amount. For purposes of the rule, an employee's compensation includes nondiscretionary bonuses and commissions so long as he or she receives a weekly salary of least $455, but the cost of fringe benefits, such as pensions and medical and life insurance, are excluded from the computation. 29 C.F.R. '541.601.

A highly compensated employee qualifies for exemption as an Executive, Administrative, or Professional Employee if he performs at least one of the duties specified in the rules that define those workers. As a consequence, highly compensated employees are more easily exempted than lower paid workers based on job duties. 29 C.F.R. '541.601(a).

The revised regulations remove a source of uncertainty as to whether an employer destroys an employee's exempt status by paying compensation in addition to the regular set salary for hours worked in excess of the normal work week or by computing an hourly rate for a worker. The regulations provide that an employee does not become non-exempt as the result of that practice. 29 C.F.R. '541.604.

Duties Test

The new regulations modify certain criteria that are used to ascertain whether employees' duties qualify them for exemption. Those changes are summarized below.

• Executive Employees: The employee must possess the authority to hire and fire other personnel or to make recommendations on such actions that are given particular weight. The employee must also satisfy the requirement imposed by the current regulations that the employee regularly manage an entire or customarily recognized unit of an enterprise and customarily direct the work of at least two other workers as their primary duty. 29 C.F.R. '541.100(a)(4)
• Administrative Employees: The employee's primary duty must involve the exercise of discretion and independent judgment on matters of “significance.” 29 C.F.R. '541.200(a)(3). As a consequence, an employee will not qualify for exemption if he or she merely performs non-manual work directly related to management policies or general business operations of the employer or its customers.
• Professional Employees: Under the former regulations, an employee was covered by this exemption if his primary duty involves work requiring: a) knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction or study; b) the consistent exercise of discretion and judgment; or c) invention, imagination, or talent in a recognized field if artistic endeavor. 29 C.F.R. '541.300.
  The new regulations elaborate on those requirements by specifying that the employee's work must: a) be predominantly intellectual in character; or b) require invention, imagination, originality, or talent. 29 C.F.R. '541.301. An employee may also qualify for exemption if: a) his primary duty involves teaching, tutoring, instruction, or lecturing in an activity imparting knowledge at an educational establishment; or b) he holds a valid license or certificate to practice law or medicine or a degree for the general practice of medicine and is engaged in an internship or resident program. 29 C.F.R. ”541.303 and 541.304.
• Computer Employees: The new regulations drop the reference to specific job titles, such as computer analyst, computer programmer, and software engineer, as qualifying for exemption and focus instead on the nature of the employee's duties. 29 C.F.R. '541.400. Employees, such as systems analysts and computer programmers, may also qualify for exemption as an Executive and/or Administrative Employee if their primary duty includes planning, scheduling, and coordinating the development of systems to solve complex problems for employers or supervising at least two other workers. 29 C.F.R. '541.402.
• Outside Sales Employees: In order to qualify for this exemption, an employee must: a) customarily and regularly work away from the employer's place of business; and b) make sales or solicit orders as his primary duty. 29 C.F.R. '541.500. Hence, the new regulations, unlike the old rules, will grant an exemption even if an employee spends more than 20% of his hours working on non-exempt tasks.

Conclusion

The modest changes in DOL's rules summarized above will do very little to fix a regulatory scheme that has become obsolete, is confusing even to the most sophisticated employers, and is sorely in need of a wholesale and thoughtful revision. For example, Congress should consider legislation providing that the FLSA preempts the patchwork quilt of state wage and hour laws that impose overtime pay requirements on employers that differ substantially from their obligations under federal law. Unfortunately, neither the Congress nor the DOL has the interest or political fortitude to undertake real reform in this important area.

The publicity and Congressional reaction surrounding the United States Department of Labor (DOL)'s proposed changes to the overtime pay regulations suggests that those modifications would result in a radical departure from the existing state of the law. An objective review of the changes, however, as initially proposed and as finally implemented reveals that the DOL actually did little to alter the legal landscape.

Indeed, the revised regulations will probably do nothing to clarify the application of the white-collar employee exemptions under the Fair Labor Standards Act (FLSA) or to reduce the increasing volume of litigation against employers who mistakenly classify personnel. As a consequence, the DOL will not accomplish either of its stated goals in undertaking

the revision of the regulations. Moreover, the DOL's recent effort will unfortunately postpone for the foreseeable future the real regulatory reform that is genuinely needed in an area that directly affects millions of employers and employees.

The DOL's Stated Goals

In March 2003, the DOL published proposed changes to the regulations that govern the exemption of white-collar workers, including Executive, Administrative, Professional, Computer, and Outside Sales Employees, from overtime compensation under the FLSA. See 29 U.S.C. '213; 29 C.F.R. ”541.1, et seq. In publishing those modifications, the DOL correctly pointed out that the regulations had remained basically unchanged since 1954, the regulations had become obsolete as a result of intervening changes in business operations and job content, and ambiguities in the definitions of categories of white collar made it unnecessarily difficult for employers to understand and comply with their obligations under the FLSA. The DOL explained that the changes were intended to alleviate that situation, and hopefully eliminate the recent spate of litigation prosecuted by employees alleging that they had been wrongly exempted from statutory overtime pay.

The changes proposed by the DOL included the following:

• Employees earning salaries less than $425 per week or $22,000 per year would be entitled to overtime pay regardless of the nature of the duties that they performed. Thus, proposed regulations would eliminate the so-called “long test” used to determine whether employees earning salaries less than $250 per week qualified for exemption as a white-collar worker.
• Employees earning more than $65,000 per year, ie, “highly compensated employees,” would be entitled to overtime pay only if they perform office/non-manual work and at least one of the exempt duties of an Executive, Administrative, or Professional Employee.
• Clarifications of the criteria used to ascertain whether an employee was a white-collar worker.

Organized labor, other interest groups, and liberal members of Congress reacted angrily and loudly to those reforms, which were characterized as taking overtime pay away from several million employees who were currently entitled to such compensation. For example, bills were introduced in the Senate and House of Representative that would have nullified the regulatory revisions and denied the DOL funds to implement and enforce the changes. See Federal Register, Vol. 68, No. 61, pp. 15560-15597; H.R. 2660, 108th Congress, 1st Session, Sec. 106; Senate Bill 1485, 108th Congress, 1st Session In the Senate of the United States. That political firestorm in a presidential election year eventually forced the DOL to issue final regulations that effectively scrapped certain “controversial” aspects of the proposed regulations.

Substance Of The Final Regulations

On April 23, 2004, the DOL issued the final regulations that become effective on Aug. 23, 2004 unless a law that is passed by Congress and is not vetoed by President Bush bars implementation of those rules. See 69 Fed. Reg. 22122-22274. The DOL has already announced that the agency will monitor wage and hour litigation in order to ensure that judicial decisions properly “protect” workers' rights prior to that effective date.

The new regulations exclude from the white collar exemptions manual laborers and other “blue collar” workers regardless of their compensation rate or job title. 29 C.F.R. ”541.0-541.4. The regulations continue to allow the exemption of Executive, Administrative, Professional, Computer, and Outside Sales Employees. 29 C.F.R. ”541.100, et seq.

The regulations also specifically exclude designated public sector jobs, such as police officers, detectives, corrections officers, park rangers, fire fighters, emergency medical technicians, ambulance personnel and hazardous materials workers. 29 C.F.R. ”541.3. Those employees, however, must perform the law enforcement or fire-fighting duties normally associated with those job titles. That aspect of the regulations has prompted police and fire fighter unions to complain that many of their members will be disqualified from overtime pay.

The final regulations incorporate illustrative examples of the white collar exemptions that the current rules classify as “interpretative guidelines” and that some courts have refused to accord the same deference as those rules. 29 C.F.R. '541.100, et seq. The DOL hopes that change will change that judicial attitude.

Compensation Arrangements

Under the revised regulations, workers qualify for exemption as Executive, Administrative, and/or Professional Employees only if they earn a salary of at least $455 per week or $23,600.00 per year. That requirement, however, does not apply to teachers, practicing lawyer and doctors, and employees holding a general medical degree and participating in internship or residency programs. 29 C.F.R. '541.600. Thus, the regulations will effectively rescind the “long test” that could exempt workers earning salaries as little as $250 per week if they performed Executive, Administrative, and/or Professional Employee duties involving the requisite degree of discretion and judgment. 29 C.F.R. '541.600(a).

Individuals may qualify for exemption as Computer Employees if they earn the salary level specified for Executive, Administrative, and Professional Employees or an hourly rate of at least $27.63. 29 C.F.R. '541.600 (d). Employers may exempt Outside Sales Employees even if they are not paid a minimum salary. 29 C.F.R. '541.500(c).

The new regulations preserve the “salary basis” requirement for Executive Employees and permit Administrative Employees and Professional Employees to be paid in that manner or on a fee basis. 29 C.F.R. ”541.600 and 541.605. The regulations also continue the restriction on deductions from white-collar employees' pay for partial day absences with one important distinction. Employers will be able to impose disciplinary suspensions without pay for periods shorter than a week for a reason other than violations of important safety rules. The employee, however, must have violated a written policy, such as a non-discrimination rule, that applies to all company workers. 29 C.F.R. ”541.602 and 541.603.

Employers may make deductions for unpaid leave taken pursuant to the Family and Medical Leave Act. Deductions for FMLA leave or rules violations other than safety rules must be in proportion to the amount of time that the employee is absent from work. 29 C.F.R. ”541.602(b)(7) and 541.602(c).

The new regulations permit an employer to avoid the effect of inadvertent or isolated deductions from an employee's salary by promptly reimbursing the worker for the lost pay. As a consequence, an employee will be deemed non-exempt only if the employer has engaged in a pattern and practice of making improper deductions as demonstrated by the frequency and number of the deductions, the period over which the deductions were made, and the existence of a policy permitting or prohibiting deductions. 29 C.F.R. '541.603.

If a pattern or practice exists, an employer loses the exemption only for the period during which deductions were made and for employees in the same job title working for the same managers responsible for that practice. Employers may protect themselves from that result by implementing, disseminating, and enforcing a policy that prohibits such deductions 29 C.F.R. ”541.603(c) and (d).

The final regulations set $100,000 as the minimum annual salary that an individual must earn to be classified as a “highly compensated employee.” An employer may augment an employee's compensation if it appears at the end of the year that the worker's income will not reach that amount. For purposes of the rule, an employee's compensation includes nondiscretionary bonuses and commissions so long as he or she receives a weekly salary of least $455, but the cost of fringe benefits, such as pensions and medical and life insurance, are excluded from the computation. 29 C.F.R. '541.601.

A highly compensated employee qualifies for exemption as an Executive, Administrative, or Professional Employee if he performs at least one of the duties specified in the rules that define those workers. As a consequence, highly compensated employees are more easily exempted than lower paid workers based on job duties. 29 C.F.R. '541.601(a).

The revised regulations remove a source of uncertainty as to whether an employer destroys an employee's exempt status by paying compensation in addition to the regular set salary for hours worked in excess of the normal work week or by computing an hourly rate for a worker. The regulations provide that an employee does not become non-exempt as the result of that practice. 29 C.F.R. '541.604.

Duties Test

The new regulations modify certain criteria that are used to ascertain whether employees' duties qualify them for exemption. Those changes are summarized below.

• Executive Employees: The employee must possess the authority to hire and fire other personnel or to make recommendations on such actions that are given particular weight. The employee must also satisfy the requirement imposed by the current regulations that the employee regularly manage an entire or customarily recognized unit of an enterprise and customarily direct the work of at least two other workers as their primary duty. 29 C.F.R. '541.100(a)(4)
• Administrative Employees: The employee's primary duty must involve the exercise of discretion and independent judgment on matters of “significance.” 29 C.F.R. '541.200(a)(3). As a consequence, an employee will not qualify for exemption if he or she merely performs non-manual work directly related to management policies or general business operations of the employer or its customers.
• Professional Employees: Under the former regulations, an employee was covered by this exemption if his primary duty involves work requiring: a) knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction or study; b) the consistent exercise of discretion and judgment; or c) invention, imagination, or talent in a recognized field if artistic endeavor. 29 C.F.R. '541.300.
  The new regulations elaborate on those requirements by specifying that the employee's work must: a) be predominantly intellectual in character; or b) require invention, imagination, originality, or talent. 29 C.F.R. '541.301. An employee may also qualify for exemption if: a) his primary duty involves teaching, tutoring, instruction, or lecturing in an activity imparting knowledge at an educational establishment; or b) he holds a valid license or certificate to practice law or medicine or a degree for the general practice of medicine and is engaged in an internship or resident program. 29 C.F.R. ”541.303 and 541.304.
• Computer Employees: The new regulations drop the reference to specific job titles, such as computer analyst, computer programmer, and software engineer, as qualifying for exemption and focus instead on the nature of the employee's duties. 29 C.F.R. '541.400. Employees, such as systems analysts and computer programmers, may also qualify for exemption as an Executive and/or Administrative Employee if their primary duty includes planning, scheduling, and coordinating the development of systems to solve complex problems for employers or supervising at least two other workers. 29 C.F.R. '541.402.
• Outside Sales Employees: In order to qualify for this exemption, an employee must: a) customarily and regularly work away from the employer's place of business; and b) make sales or solicit orders as his primary duty. 29 C.F.R. '541.500. Hence, the new regulations, unlike the old rules, will grant an exemption even if an employee spends more than 20% of his hours working on non-exempt tasks.

Conclusion

The modest changes in DOL's rules summarized above will do very little to fix a regulatory scheme that has become obsolete, is confusing even to the most sophisticated employers, and is sorely in need of a wholesale and thoughtful revision. For example, Congress should consider legislation providing that the FLSA preempts the patchwork quilt of state wage and hour laws that impose overtime pay requirements on employers that differ substantially from their obligations under federal law. Unfortunately, neither the Congress nor the DOL has the interest or political fortitude to undertake real reform in this important area.