Once any revisions are adopted, all employers will need to ensure that employees who are currently exempt under the “white collar” overtime exemptions will continue to satisfy the exemptions under the new regulations.

An Overview Of The Proposed Rules

DOL proposes to retain the three most common categories of exempt “white collar” employees under the current rules:

1. “Executive” employees;

2. “Administrative” employees; and

3. “Professional” employees.

As in the current rules, each of these exemptions requires satisfaction of three separate tests:

1. A “salary level” test;

2. A “salary basis” test; and

3. A “duties” test.

Salary Level Test

Perhaps the most straightforward of the proposed revisions to the white collar exemptions is DOL’s proposal to increase the minimum salary levels for executive, administrative, and professional employees from the current $250 per week — under the so-called “short test” — to $425 per week. Thus, employees who earn less than $22,100 per year will not be exempt from overtime if the new rules are adopted. According to DOL, at this level, “approximately the bottom 20 percent of salaried employees would fall below the minimum salary requirement and be automatically entitled to overtime pay.”

In what most in the business community view as a step in the right direction, DOL has also proposed a “special rule for highly compensated employees.” Under this proposal, employees paid an annual salary of $65,000 or more “would be exempt if they have an identifiable executive, administrative, or professional function as described in the standard duties tests.” In other words, employees paid at least $65,000 annually would not have to meet all of the elements of the new “duties tests” (discussed below), but only one of the “identifiable functions” described in the tests.

DOL has requested comments on this proposal and specifically invites comments on whether a “salary only” test for highly compensated employees should be adopted as an alternative.

In fact, a “salary only” test for “highly compensated” employees may be preferable to DOL’s proposed “salary plus function” test because it establishes an entirely objective standard for this group of employees. On the other hand, there is likely to be considerable comment and debate over how the regulations should define a “highly compensated” employee.

DOL bases the $65,000 figure on government data that show that the top 20 percent of all salaried employees earn above this amount. Perhaps in a nod to bureaucratic symmetry, DOL also notes, “This level is consistent with setting the proposed standard test salary level at the bottom 20 percent of salaried employees.”

Salary Basis Test

Under the current regulations, an employee must be paid on a “salary basis” in order to qualify for the executive, administrative, or professional exemption. As specified in the current rules, the employee must regularly receive a predetermined amount of salary, on a weekly or less frequent basis, that “is not subject to reduction because of variations in the quality or quantity of the work performed.”

Many in the business community have urged DOL to delete this regulation from the overtime exemptions, especially since modern-day methods of compensation (comp time, job-sharing arrangements, etc.) are at odds with the rigidity of this requirement.

While DOL considered eliminating this test, it is retained in the proposed rules. In explaining this decision, DOL expressly endorses “the underlying concept of the test” — that guaranteed pay should not be subject to reduction because of variations in the quality or quantity of work performed. DOL also describes the “quid pro quo” that distinguishes exempt from non-exempt employees: “Exempt employees are not paid overtime for working over 40 hours in a week. In exchange, the employer must provide a guaranteed salary which distinguishes them from non-exempt workers.”

The proposed rule does, however, include two new provisions that address concerns raised by inconsistencies in the current body of case law. First, the proposed revisions include a new exception to the “no pay docking rule” for disciplinary suspensions. If imposed under a uniformly applied written policy, “deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of a full day or more imposed in good faith for infractions of workplace conduct rules.” A three-day suspension without pay for violating a sexual harassment policy, and a 12-day suspension without pay for violating a policy prohibiting workplace violence, are included as examples of appropriate pay deductions under this provision.

Second, the proposed rule would create a new “safe harbor” provision to protect employers from losing the overtime exemption “because of isolated incidents of improper pay deductions.” In fact, under the current rules, an employer who makes improper pay deductions for one exempt employee can lose the exemption for all employees in the same job category.

According to DOL, this change is intended to address the difficulty of administering and interpreting the so-called “window of correction” provision under the current rules, which permits the employer in only limited circumstances to retain the exemption.

Under the proposed rule, “the exemption would be lost only if there is a pattern and practice of improper deductions, and then only for employees in the same job classification and working for the same manager who is responsible for the improper pay docking decisions or policy.” While the business community can be expected to support this (or a similar) provision because it minimizes employer exposure for inadvertent deductions, labor unions and other employee groups will likely urge DOL to drop it from the final rules.

“Standard Duties” Tests

Finally, DOL proposes to revise the “duties test” for the executive, administrative, and professional exemptions. In general, DOL has eliminated the “long tests” and “short tests” that currently apply to these categories, and replaced them with a more streamlined “standard duties test” for each category. These new tests are summarized below.

Executive Employee Standard Duties Test

Under DOL’s proposed revisions, an employee satisfies the standard duties test of the executive exemption if the following requirements are met:

The employee’s primary duty is the “management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof.”

The employee “customarily and regularly directs the work of two or more other employees.”

The employee has “the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring and firing, advancement, promotion, or any other change of status of other employees will be given particular weight.”

The first two requirements of this test are identical to the current “short test” for exempt executive employees. DOL has taken the third requirement from the seldom-used “long test.” Employees who currently satisfy this exemption must, therefore, either have the express authority to hire or fire other employees, or their suggestions and recommendations with respect to an employee’s “change of status” must be given “particular weight” in order to retain this exemption, if the proposal is adopted.

Of course, if an employee satisfies only the first two requirements of this exemption, the employee would likely still be exempt under the revised “administrative exemption.” This is because, as the manager of an enterprise or a department, the individual would most certainly hold a “position of responsibility” and would perform “work of substantial importance” for the employer. (See the discussion of the “Administrative Employee Standard Duties Test,” below.)

DOL has also proposed a new provision that would extend the exemption to “any employee who owns at least a 20 percent equity interest in the enterprise in which the employee is employed.” The proposed rules also continue the current rule’s exemption for an employee who is in “sole charge” of an establishment.

Administrative Employee Standard Duties Test

Under DOL’s proposed revisions, an employee satisfies the standard duties test of the administrative exemption if the following requirements are met:

The employee’s primary duty is “the performance of office or non-manual work related to the management or general business operations of the employer or the employer’s customers.”

The employee “holds a position of responsibility with the employer.”

To meet the “position of responsibility” requirement, “an employee must either customarily and regularly perform work of substantial importance or perform work requiring a high level of skill or training.” “Work of substantial importance” is separately defined to mean “work that, by its nature or consequence, affects the employer’s general business operations or finances to a significant degree.”

DOL also provides examples of employee job functions that would satisfy this requirement (e.g., assistant buyer for retailer; insurance claims adjuster; human resources manager; labor negotiator, executive assistant to CEO). The “position of responsibility” test, if adopted in the final rule, would replace the current rule’s requirement that exempt administrative employees must “customarily and regularly exercise discretion and independent judgment.”

DOL’s proposed revision to the duties test for the administrative exemption has generated considerable discussion and debate. It is unclear whether employees who currently meet this exemption will continue to do so if the regulation is adopted as DOL has proposed. Indeed, while the “discretion and independent judgment” test has been the subject of much confusion and litigation, the proposed “position of responsibility” test is not devoid of ambiguity. Arguably, every employee holds a “position of responsibility” with an employer. On the other hand, the examples given by DOL in the proposed regulations (mentioned above) suggest the agency does not intend the exemption to be applied more broadly than under the current regulations.

It should be noted that DOL has specifically invited comment on whether the “discretion and independent judgment” test should be retained as an alternative to the “position of responsibility” test in the final rule.

Professional Employee Standard Duties Test

Under DOL’s proposed revisions, an employee satisfies the standard duties test of the professional exemption if the following requirements are met: The employee has a primary duty of performing office or non-manual work that requires either (1) “knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but which also may be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience,” or (2) “invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.”

With respect to the first category, DOL’s proposal would extend the professional exemption to individuals who do not hold a college degree “so long as such an employee’s level of advanced knowledge is equivalent to the knowledge possessed by an employee with the typical academic degree generally required by the profession.”

DOL has invited comments on whether the final regulations should specify “equivalences of intellectual instruction and qualifying work experience.”

As with the administrative exemption, DOL has proposed deleting the “discretion and independent judgment” requirement under the current short test for professional employees. The proposed rule also separately defines “learned professionals,” “creative professionals,” “teachers,” and employees in the “practice of law or medicine.” “Computer professionals” are addressed in a separate section.

Conclusion

While DOL’s proposed revisions to the so-called “white collar” overtime exemption are long overdue, many important issues have yet to be resolved in the pending rulemaking proceeding. Once the final regulations are issued — perhaps by the end of this year — employers will need to ensure that employees who are currently classified as exempt from overtime under the FLSA will satisfy all of the new requirements.

Attorney Laurie Baulig is with Gurne, Porter & Baulig, PLLC, Washington. She can be reached at lbaulig@gurnelaw.com.

Publication date: 06/16/2003