The U.S. Department of Labor has issued revised regulations, effective August 23, 2004, which significantly change the guidelines to define those "white collar" employees who are exempt from overtime pay and those who are not.

The "Fairpay Rule Initiative," which follows a year of debate, changes the basis for making this determination by altering both the "salary test" and the "duties test," the two traditional methods for resolving entitlement issues regarding overtime pay.

As a general proposition, employers are required by the federal Fair Labor Standards Act ("FLSA") to pay "non-exempt" employees overtime at a rate of one-and-one-half times their regular rate of pay for all hours worked in excess of 40 hours in one workweek. If a non-exempt employee is treated incorrectly as "exempt," from the overtime requirement the employee could be entitled to unpaid overtime for up to 3 years retroactively.

Salary Test : For this purpose, the minimum weekly salary was raised by the Department of Labor from a threshold of $115 per week to $455 per week ($23,660 annually) for all exempt-status employees. An employee who is not paid this minimum is considered non-exempt, and must be paid overtime wages under the FLSA's new requirements, regardless of their duties.

Standard Duties Test : If an employee is paid this minimum salary or more, s/he must also meet the new standard duties test for "executive," "administrative" and "professional" employees. Under previous regulations, determination of exempt status for an employee was based on either a short or long form job-duties test, depending upon salary level. The new regulations replace this with a single standard duties test for all employees earning over $455 per week.

Redefining Exempt Categories : Under the new regulations, there are six (6) specific exempt categories in addition to a stream-lined exemption test for Highly Compensated Employees. A highly compensated employee — an employee who earns over $100,000 per year — is exempt from FLSA overtime pay rules if any one or more of the duties of an executive, administrative or professional employee are met.

Executive Employee : An employee is an exempt executive if their duties include: 1) the management of the enterprise or a department of the enterprise or 2) directing the work of two or more other employees, or 3) having the authority to hire or fire or make recommendations on personnel decisions which are given great weight. Examples of executive employees include department heads, store managers, and building superintendents.

Administrative Employee : The primary duties of an exempt administrative employee include: 1) performing office or non-manual work directly related to management policies or general business operations of the employer, or 2) customarily exercising discretion and independent judgment with respect to matters of significance. Purchasing agents, executive assistants, accountants, human resource employees, and public relations account executives are all good examples of administrative employees.

Learned Professional : An employee is considered an exempt learned professional if their primary duties require the level of specialized knowledge in a field of science or learning which would have been attained from an advanced course of study. Doctors, lawyers, nurses, and teachers are examples of learned professionals.

Creative Professional : Designers, artists, journalists, musicians, actors, writers, and decorators are all considered exempt creative professional employees because their primary duties require invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Computer Professional : An employee is considered an exempt computer employee if s/he is paid a salary no less than $455 per week (or on a hourly basis of at least $27.63) and their primary duties consist of the 1) application of systems analysis techniques or procedures, 2) the design, development, documentation, analysis, creation, testing or modification of computer systems, or 3) design, documentation, testing, creation or modification of computer programs related to machine operating systems.

Outside Sales Person : Finally, an employee is considered an exempt outside sales employee if their primary duties are "making sales" or obtaining orders and the employee is customarily and regularly engaged away from the employer's place of business.

Salary Basis and Permissible Deductions : An employee will not be considered exempt unless they are paid on a salary basis, whether or not they meet minimum salary and duties tests. Employees are paid on a salary basis if they regularly receive a predetermined salary each pay period which is not subject to deductions for any variations in the quantity or quality of work performed. Under the previous rules, the salary basis for testing was reduced if an employee was suspended without pay for any reason other than the violation of health and safety rules. The new regulations now specifically include "unpaid disciplinary suspensions for infractions of workplace, conduct rules" in the same category with health and safety rules. This exception enables employers to hold exempt employees to the same standard of conduct as that required of their non-exempt employees for violations of written work place rules, such as sexual harassment, work place violence, or other similar misconduct.

The new regulations also clarify that if an improper deduction has been made as a result of a clerical error, a "window of correction" exists by which an employer may reimburse that employee for the salary lost without jeopardizing exempt status. The regulation also creates a new "safe harbor" provision to be utilized in the event of an improper deduction. Under this provision, an exemption is not lost if 1) the employer has a clearly communicated written policy that prohibits the improper pay deductions and includes a complaint mechanism; 2) reimburses employees for any improper deductions; and 3) makes a good faith commitment to comply in the future. If an employer fails to reimburse an employee for an improper deduction, or continues to make improper deductions after receiving the employee's complaint, the safe harbor may be lost.

It can be anticipated that there will be much confusion and uncertainty as both employers and the Fair Labor Standards Administration grapple with issues under the new regulations. For additional detailed information contact Bennett Pine at (212) 278-1288 or bpine@andersonkill.com or another member of our Employment and Labor group.