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They're Here: The Department of Labor Issues Final Rules Regarding Overtime Pay

Labor, Employment & Immigration Update
May 06, 2004

After more than 50 years, the U.S. Department of Labor (DOL) updated the so-called "white collar" exemptions under the Fair Labor Standards Act (FLSA), the law mandating the payment of minimum wages and overtime to employees. The new regulations make significant changes regarding which employees are eligible for overtime. Employers must come into compliance by August 23, 2004. Employers must learn the new rules and reevaluate which of their employees are eligible for overtime.

EXISTING RULES
Certain employees who hold executive, administrative, professional or outside sales positions are exempt from the minimum wages and overtime pay requirements of the FLSA-collectively known as the "white collar" exemptions. 29 U.S.C. § 213(a)(1). The DOL established a two-part test for determining which employees fit within these exemptions: (1) the salary-basis test; and (2) the job-duties test. Employees who are paid above a specified salary amount and perform certain defined job duties are classified as exempt employees and are not eligible for overtime pay.

HIGHLIGHTS OF THE NEW RULES
The new rules continue to adhere to the general two part salary-basis test and job-duties test analysis; however, the salary threshold levels have changed dramatically, and portions of the job-duties tests for executive, administrative, professional, and outside sales employees were altered. In addition, the new regulations explicitly classify certain types of employees as non-exempt (i.e., eligible for overtime), including "blue collar" workers and virtually all police officers, firefighters, and emergency medical workers. The regulations exempt from overtime pay most employees making more than $100,000 per year. Moreover, the DOL established new rules and safeguards regarding an employer's ability to deduct from a salaried employee's pay without losing the all-important exemption.

The following is a brief summary of the major changes contained in the new regulations:

Minimum Salary Threshold Increased: To qualify for the white collar exemptions, employees now must be paid at least $455 per week on a salary basis. This is a significant increase from the previous tests of $250 per week ($13,000 annually) and $155 per week ($8,060 annually). Now, employees must be paid $23,660 or more annually to be exempt. This increase could have a significant impact on retailers and the restaurant industry, who likely must pay overtime to previously exempt employees.

  • In order to be paid on a salary basis, an exempt employee must be guaranteed a predetermined amount each pay period that cannot be reduced because of variations in the quality or quantity of work produced or hours worked.
  • An exempt employee must receive the full salaried amount for any week in which the employee performs any work, regardless of the number of days or hours worked; however, an exempt employee need not be paid for any workweek in which no work is performed.

New "Standard" Job-Duties Tests:
The new regulations establish "standard" job-duties tests, which contain significant-but not overwhelming-changes from the former tests addressing the executive, administrative, professional, and outside salesperson exemptions.

1. Executive exemption:

Old TestNew Standard Test
  • Primary duty of management of the enterprise or a recognized dept. or subdivision; and
  • Customarily and regularly directs the work of 2 or more employees.
  • Primary duty of management of the enterprise or a recognized dept. or subdivision;
  • Customarily and regularly directs the work of 2 or more other employees; and
  • Has authority to hire or fire other employees (or whose recommendations regarding tangible employment actions are given particular weight).

  • The third prong ("hire and fire authority") does not require that an executive employee have ultimate decision-making authority; rather, his or her recommendations or suggestions on personnel decisions must be given "particular weight," a defined term in the regulations.
  • An exempt executive also includes any employee who owns at least a bona fide 20% equity interest in the enterprise in which he/she is employed, if the employee is actively engaged in its management.


2. Administrative exemption:

Old TestNew Standard Test
  • Primary duty of performing office or non-manual work directly related to management policies or general business operations of the employer or the employer's customers; and
  • Customarily and regularly exercises discretion and independent judgment.
  • Primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; andPrimary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

  • "Production versus staff" distinction maintained: An employee who performs work "directly related to the management or general business operations" is one who performs work directly related to assisting with the running or servicing of the business (e.g., work related to finance, accounting, budgeting, marketing, purchasing, human resources, computer network and database administration, etc.), as distinguished from working on a manufacturing production line or selling a product in a retail or service establishment.
  • "Exercise of discretion and independent judgment" test survived: The DOL also decided to retain this test, traditionally the source of much confusion and litigation. The new regulations clarify the test and indicate the "exercise of discretion and independent judgment" involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after considering the various possibilities. This test includes whether the employee has authority to formulate, interpret or implement management policies or practices; whether the employee carries out major assignments in conducting business operations; whether the employee provides consultation or expert advice to management; or other listed factors.
  • However, the "exercise of discretion and independent judgment" must be more than the mere use of skill in applying well-established techniques, procedures or standards described in manuals or other sources.
  • "Matters of significance" means the level of importance or consequence of the work performed.
  • The DOL did list some professions as generally exempt administrators, including: insurance claims adjusters; financial service employees; team leaders of major projects; purchasing agents; and human resource managers.


3. Professional exemption: The regulations separate this exemption into two categories: "learned" and "creative" professional employees.

Learned Professional Exemption
Old TestNew Standard Test
  • Primary duty of performing work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study; and
  • Consistently exercises discretion and judgment.
  • Primary duty is performance of work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.

  • In addition to the traditional fields (e.g., law, medicine, engineering, teachers), the DOL specifically identified other professions as meeting this exemption: non-hourly, registered nurses (as opposed to licensed practical nurses); dental hygienists; registered or certified medical technologists; physician assistants; some accountants; licensed funeral directors; athletic trainers; and educational establishment administrators.

Creative Professional Exemption
Old TestNew Standard Test
  • Performs work requiring invention, imagination or talent in a recognized field of artistic endeavor.
  • Primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

  • Many journalists are considered exempt creative professionals; however, employees of newspaper, magazine and television are non-exempt if they merely collect and organize publicly available information or do not contribute unique interpretation or analysis to a news product.


4. Outside sales exemption
The new regulations eliminate the 20% restriction on non-exempt tasks previously used for outside sales employees. Now, an outside sales employee is exempt if he or she: (1) has a primary duty of making sales or obtaining orders or contracts for services; and (2) is customarily and regularly engaged away from the employer's place of business. The salary-basis test does not apply to this exemption.

The "employer's place of business" can include an employee's home if used as a home office or to solicit sales. Accordingly, if an employee works from home and makes telephone solicitations there, he cannot qualify as an exempt outside salesperson. The exemption is meant to apply to salespersons who primarily make their solicitations door to door, at trade shows or at customers' places of business.


Exempt "Highly Compensated" Employees
The new regulations add a new type of exempt employee: the highly compensated worker. An employee performing office or non-manual work earning total annual compensation of $100,000 or more and customarily and regularly performing at least one of the exempt duties listed for an executive, administrative, or professional employee is exempt from the overtime rules. The new rules also allow the employer to make a one-time "catch up" payment to an employee within one month of year end to reach the $100,000 mark.

"Blue Collar" Workers Always Eligible for Overtime: While traditionally found to be non-exempt employees, the DOL made it clear that manual laborers or "blue collar" workers are non-exempt, regardless of whether they receive a salary or how highly paid they might be. Examples include carpenters, electricians, mechanics, plumbers, operating engineers, construction workers and laborers.

Police Officers, Firefighters and Other "First Responders" Always Eligible for Overtime: Most employees engaged in police work, investigation, inspection, corrections, firefighting or prevention, rescue, emergency medical work, or similar types of "first responders" specifically are identified as non-exempt and eligible for overtime.

Expanded Ability to Deduct From Salaries for Disciplinary Reasons: In the past, employers could not give an exempt employee an unpaid suspension of less than one week for fear of losing the exemption. The new rules permit an employer to give an exempt employee an unpaid disciplinary suspension of one or more full days for violations of written workplace conduct rules (e.g., harassment, workplace violence, or drug and alcohol policies).

Safe Harbor for Remedying Improper Salary Deductions: Employers can lose the white collar exemption if they make improper deductions from exempt employees' salaries. However, the DOL established a new "safe harbor" for employers. Now, if an employer has a clearly communicated (preferably written) policy prohibiting improper pay deductions that includes a complaint mechanism, reimburses employees for any improper deductions and makes a good faith commitment to comply in the future, the employer will not lose the exemption for any employees unless it willfully violates the policy. Accordingly, employers will want to include these new policies in their handbooks and to provide copies of the new policies to employees.


OTHER ISSUES
Wisconsin employers must be aware that the DOL regulations altered only federal law-the state law remains unchanged. The federal regulations still allow a state to establish greater protections than those provided by the federal government. However, the Wisconsin Department of Workforce Development has not released any statement regarding its position on the new federal regulations or whether there is any possibility of similar state changes in the near future. As it stands, there are two sets of regulations with which Wisconsin employers must comply.

For now, employers must focus on the pending federal compliance date of August 23, 2004. Before that date, employers need to reanalyze their workforce under the new regulations. The employment attorneys at Godfrey & Kahn, S.C., welcome the opportunity to assist you in this analysis.

Please contact any member of our Labor and Employment practice group if we can be of any assistance on this, or any other, topic.

Employers also can check out the DOL web site for basic information about the new rules: http://www.dol.gov/fairpay.



POTENTIAL LEGISLATION MAY BLOCK DOL OVERTIME REGULATIONS BUT RULES STILL SET TO TAKE EFFECT ON AUGUST 23, 2004

As you may have heard in the media reports, certain politicians in Washington, D.C. are seeking to block the implementation of these final rules. Specifically, on May 4, 2004, the United States Senate approved an amendment to a separate, unrelated corporate tax bill that could block certain aspects of the new regulations from taking effect.

Whether this attempt to block these new rules will succeed is unclear. The Senate has yet to vote on the larger bill, with the new amendment attached. Furthermore, the House of Representatives has not even addressed this issue. As it currently stands, the Department of Labor, as well as President Bush, are committed to the new regulations and to their implementation on August 23, 2004. Accordingly, even if the corporate tax bill or some joint legislation is approved by both the House and the Senate, the President could still veto the bill.

The regulations are set to take effect on August 23rd. Because of the short window of time for employers to prepare for the effective date, we do not advise waiting until the outcome of the legislation is definitively known to begin your analysis of your workforce's eligibility for overtime pay.

The labor and employment lawyers at Godfrey & Kahn, S.C., will track this legislation and keep our clients informed of the new regulations through our website at: docs/labor.cfm.


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