Department of Labor Exempt Regulations—What 2004 Favorable Changes Are You Still Not Using?

The Fair Labor Standards Act was passed in response to the Great Depression. An important piece of New Deal legislation, the Act was concerned primarily with providing a minimum subsistence wage and protection against oppressive working hours. Congress passed overtime legislation to advance three goals: a shorter work week, compensation for overworked employees, and work spreading (sharing). The white collar exemptions essentially served as a line drawing tool between those workers in need of statutory protection and those whose skills, pay and position offered them sufficient bargaining power to protect themselves.

In the agrarian and manufacturing-oriented economy of the 1930’s and 1940’s, white collar workers had clearly defined decision-making responsibilities, were closer to management and were paid better than today. In such an economy, white collar workers were middle class in income, outlook, attitude and life.

In contrast, in a service-oriented economy, white collar workers are no longer middle class managers, but more likely to share traits associated with blue collar jobs such as repetitive, mechanical duties, rather than intellectual, creative responsibilities. Moreover, most white collar workers earn less than unionized blue collar workers and skilled craftsmen.

Summary. The Fair Labor Standards Act, as amended (“Act”), Section 13 (1)(1), provides an exemption from its minimum wage and overtime requirements for any employee employed in a bona fide executive, administrative or professional capacity (including any employee employed in the capacity of academic administrative, personnel or teacher in elementary or secondary schools or in the capacity of an outside sales employee).

Further, Section 13 (a)(17) of the Act provides an exemption from the minimum wage and overtime requirements for computer systems analysts, computer programmers, software engineers, and other similarly skilled computer engineers. The Act does not define terms, but charges the United States Department of Labor (“DOL”) with the duty to delineate and define white collar exemptions from “time to time.”

Test. Job titles are insufficient to establish exempt status. Whether an employee meets the exempt test is determined by whether the employees meet the (1) salary level test, (2) salary basis test, and (3) duties test under the Code of Federal Regulations (“CFR”). 29 CFR §541.2.

State Wage and Hour Laws. Employers in 18 states must check their workers’ status using both the new federal regulations and their own state law. States with laws governing overtime are Alaska, Arkansas, California, Colorado, Connecticut, Hawaii, Illinois, Kentucky, Maryland, Minnesota, Montana, New Jersey, North Dakota, Oregon, Pennsylvania, Washington, West Virginia and Wisconsin.

Salary Level Test

Automatic Exemption for Highly Compensated Employees

Rule. Highly compensated employees who earn a total of at least $100,000 per year will not be entitled to overtime pay if “the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, professional or administrative employee” and is paid at least $455 per week on a salary basis. 29 CFR §541.601(a)-(b).

The primary duty must consist of performing office, non-manual work. Manual workers, no matter how highly paid, are not eligible for this exemption. 29 CFR §541.601(d). The total annual compensation of $100,000 or more may consist of commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52 week period.

This compensation does not include credit for board or lodging, payments for medical or life insurance, or contributions to retirement plans or other fringe benefits. Employer may use any 52 week period as a year. If employer does not identify the 52 week year period in advance, a calendar year will provide. 29 CFR §541.601(b)(4).

For example, the employer pays the employee $80,000 as a base and $20,000 in commissions. If the employee does not earn the commission amount under the plan, the employer, in all events, must pay at least the remaining $20,000 within one month of year end for the prior year.

For example, the employers must pay employees, who fail to work a full year, a pro rata portion of the minimum amount based upon the number of weeks that employee has been employed. 29 CFR §541.601(b)(3).

Salary Basis Test

Docking. An employee must regularly receive a predetermined amount of salary on a weekly or less frequent basis that is not subject to reductions because of quality or quantity of work performed. Within the salary basis test, the  no-docking rule has always caused considerable consternation. 29 CFR §541.602.

Docking Rule. Employers can make deductions from guaranteed pay only under narrow circumstances, including: (i) when an employee was absent from work for a full day for personal reasons, other than sickness or disability; (ii) for absences of a full day or more due to sickness or disability, (iii) if taken in accordance with a bonafide plan, policy or practice providing wage replacement benefits; or (iv) for FMLA leave, jury duty, or for infractions of safety rules of major significance.

Now, one can also dock employees for unpaid disciplinary suspensions for a full day or more imposed in good faith for infractions of workplace conduct rules (that are in writing) such as sexual harassment policies or workplace violence.

Window of Correction. Under 29 CFR §541.603(c), “improper deductions that are isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions if the employer reimburses the employees for such improper deductions.” Reimbursement can be made at any time, even five days before trial. Employers can preserve the exemption by taking advantage of the safe harbor provision.

Safe Harbor. Employers must issue a clearly communicated policy prohibiting improper deductions, which includes a mechanism for employee complaints and immediate reimbursement of monies if the complaint is found valid. The policy, either oral or written, must be issued before the violation. This protects the employer from both inadvertent and/or deliberate deductions. “Clearly communicated” is met, for example, by “providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employer’s Intranet.” 29 CFR §541.603(d).

If the employer fails to reimburse the employees for improper deductions after receiving employee complaints, final subsection (d) clarifies that the “exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions.” Id.

Minimum Guarantee PLUS Extras. Under §541.604 an exempt employee may receive additional compensation for hours worked beyond a normal workweek so long as a reasonable relationship exists between guaranteed amount and the actual amount earned. Interestingly, in contrast, an employer may also prospectively make adjustments to salary with a like adjustment to scheduled hours to accommodate its business needs.

If, however, the salary changes are so frequent as to make the salary the functional equivalent of an hourly wage, the court will treat “salary” as a sham. Wal-Mart Stores, Inc., Fair Labor Standards Act Litigation, 2005 WL 226227 (10^th Cir. (Col.)).

Always Non-Exempt. Laborers or other blue collar workers who perform repetitive work using their hands, physical skills, and energy, are not exempt. Such non-exempt “blue collar” employees gain skills and knowledge through apprenticeship and on the job training and not through a prolonged course of specialized instruction. 29 CFR §541.3(a).

Thus non-management production-line employees and non-management employees in maintenance, construction and similar occupations, such as carpenters, electricians, mechanics, plumbers, ironworkers, craftsmen, longshoremen, construction workers, laborers, and similar workers must be paid overtime.

Further, first responders (police officers, sheriffs, state troopers, police investigators or detectives, park rangers, firefighters, paramedics and other public safety or emergency personnel) who perform work such as preventing, controlling, or extinguishing fires; rescuing fire, accident, or crime victims, preventing or detecting crimes, conducting investigations or inspections for law violations, and pursuing, restraining, and apprehending suspects are eligible for overtime regardless of rank or whether they also have some supervisory duties. 29 CFR §541.3(b)(i).

Duties Test

Bona Fide Executive Exempt Classifications.
29 CFR §541.100. Includes titles such as chief executive officer, controller, vice president, director.

Test.

Salary Basis Test. 29 CFR §541.000(a)(1). Currently paid at least $23,660 annually ($455 weekly) salary (increasing in December 2016) and regularly receives a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed.

Duties Test. 29 CFR §541.100(a)(2).

• Primary duty consists of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof. Note, a customarily recognized department or subdivision must have a permanent status and a continuing function. 29 CFR §541.103.

• Customarily and regularly directs the work of two or more full-time employees or their equivalents (for example, one full-time employee and two half-time employees or four half-time employees).

• Has the authority to hire or fire other employees OR makes recommendations that carry particular weight as to the hiring, firing, advancement, promotion or any other change in status of other employees. (This is a new test.)

Examples of Management. 29 CFR §541.102. Management includes activities such as interviewing, selecting and training, setting and adjusting employees’ rate of pay and hours of work, directing the work of employees and maintaining production or sales records for use in supervision or control, etc.

Exemption of Business Owners. 29 CFR §541.101. Employees who own at least a bona fide 20% equity in the enterprise in which the employee is employed and who are actively involved in management. Employee does not have to meet the salary basis test nor supervise two or more
employees.

Supervision of Two Employees Test. 29 CFR §541.104.  Supervision can be distributed among two, three or more
employees. Each such employee, however, must customarily and regularly direct the work of two or more other employees or their equivalent. Further, with respect to a “shared employee,” hours worked by an employee cannot be credited more than once for different executives.

However, an employee who merely assists the manager of a particular department and supervises two or more employees only in the actual manager’s absence does not meet the requirement.

Particular Weight Test. 29 CFR §541.105. In determining “particular weight” factors to be considered include, but are not limited to, whether it is part of the employee’s job duties to make such suggestion and recommendation, the frequency with which such suggestions and recommendations are made or requested, and the frequency with which the employee’s suggestions and recommendations are relied upon.

Concurrent Duties. 29 CFR §541.106. A relief supervisor or working supervisor whose primary duty is performing nonexempt work on the production line in a manufacturing plant does not become exempt merely because the nonexempt production line employee occasionally has some responsibility for directing the work of other exempt employees when supervisor is not available. The analysis should be qualitative (i.e., the most important duty) rather than quantitative (i.e., the percentage of time spent performing management functions).

Administrative Exemption. Section 541.200 et seq.

Title Examples. Administrative employees assist with the running or servicing of the business. This category includes, but is not limited to, work in functional areas such as: tax, finance, accounting and budgeting, auditing, insurance, quality control, purchasing, procurement, safety and health, quality control, government relations, internet and database administration, legal, advertising and marketing, personnel management, human resources, employee benefits, public relations, and similar activities. 29 C.F.R. §541.201(b).

This would include an executive/administrative assistant to a business owner or senior executive, of a large business if such employee, without specific instructions or prescribed procedures, has been delegated authority regarding matters of significance. 29 CFR §541.203(d).

Salary. 29 CFR §541.200(a)(1). Currently is paid at least $23,660 annually ($455 weekly) (increasing in December 2016)and regularly receives a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed.

Duty. 20 CFR §541.200(a)(2)-(3).

• Primary duty consists of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and whose primary dutyincludes the exercise of discretion and independent judgment with respect to matters of significance.

Administrative Tips.

Factors. Work must include the exercise of discretion and independent judgment with respect to matters of significance. 29 C.F.R. §541.202(b) lists some factors to consider:

(i) whether the employee has authority to formulate, affect, interpret, or implement management policies or operating procedures;

(ii) whether the employee carries out major assignments in conducting the operations of the business;

(iii) whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business;

(iv) whether the employee has authority to commit the employer in matters that have significant financial impact;

(v) whether the employee has authority to waive or deviate from established policies and procedures without prior approval;

(vi) whether the employee has authority to negotiate and bind the company on significant matters;

(vii) whether the employee provides consultation or expert advice to management;

(viii) whether the employee is involved in planning long or short term business objectives;

(ix) whether the employee investigates and resolves matters of significance on behalf of management;

(x) whether the employee represents the company in handling complaints, arbitrating disputes or
resolving grievances.

Other Examples of Administrative Employees. 29 CFR §541.203. Insurance claims adjusters, certain employees in the financial services industry, executive or administrative assistants to business owners or senior executives of large businesses, persons leading teams to complete the employer’s major projects (project manager), purchasing agents with authority to bind the company and human resource managers are examples listed in the regulations of employees who commonly qualify under the administrative employee exemption.

Administrative duties also include working directly with the management or business operations of an employer’s customers. Thus, employees acting as consultants to clients or customers may be exempt.

Not Covered. Employees performing examining work, grading, or those working as comparison shoppers do not commonly qualify under the administrative employee exemption. 29 CFR §541.203(h). The exercise of discretion and independent judgment must be more than the use of skill in applying well established techniques, procedures or specific standards described in manuals.

Therefore, clerical or secretarial work, recording or tabulating data or performing repetitive recurrent or routine work is not considered exempt work. Further, the fact that the employer may suffer financial losses if employee fails to perform does not meet the test (operating expensive equipment, manager entrusted with large sums of money).

Professional: Learned and Creative. 29 CFR §541.300. Includes titles such as accountant, nurse, engineer, composer, singer, graphic designer.

Test. 29 CFR §541.300(a)(1).

Salary. Currently is paid at least $23,660 annually ($455 weekly)(increasing in December 2016) . Regularly receives a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed.

Note: For teachers, licensed or certified practitioners of law and medicine, medical interns and residents covered under this exemption, the salary basis and salary requirements do NOT apply.

Duties for Learned Professional.

Learned Professional. 29 CFR §541.301. To qualify for the learned professional exemption, an employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. This primary duty test includes three
elements:

• The employee must perform work requiring advanced knowledge (generally not obtained at high school level);

• The advanced knowledge must be in a field of science or learning (mechanical act classifications areexcluded); and

• The advanced knowledge must be customarily acquired course of specialized intellectual instruction.

Administrative Tips for Learned Professional.

• Work Requiring Advanced Knowledge. 29 CFR §541.301(b). The phrase “work requiring advanced knowledge” means work which is predominately intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment, as distinguished from performance of routine menial, manual, mechanical or physical work. Advanced knowledge cannot be obtained at the high school level.

• “Science or Learning”. 29 CFR §541.301(c). The phrase “field of science or learning” includes the traditional professions of law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical, and biological sciences, pharmacy and other similar occupations that have a recognized professional status as distinguished from the mechanical arts or skilled trades where in some instances the knowledge is of a fairly advanced type, but is not in a field of science or learning.

• “Customarily Acquired by Prolonged Study”. 29 CFR §541.301(d). The phrase “customarily acquired by a prolonged course of specialized intellectual instruction” restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best prima facie evidence that an employee meets this requirement is possession of the appropriate academic degree.

However, the word “customarily” means that the exemption is also available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees but who attained the advanced knowledge through a combination of work experience and intellectual instruction.

Thus, for example, the learned professional exemption is available to the occasional lawyer who has not gone to law school, or the occasional chemist who does not possess a degree in chemistry. However, the learned professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, with knowledge acquired through an apprenticeship or with training in the performance of routine mental, manual, mechanical or physical processes.

The learned professional exemption also does not apply to occupation in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction.

Duties for Creative Professional Exemptions. 29 CFR §541.302.

Creative Professional Examples. Includes titles such as actors, musicians, composers, painters, cartoonists, or persons holding more responsible writing positions in advertising agencies.

Test for Creative Professional.

• Primary duty consists of the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work. 29 CFR §541.302(a).

• “Recognized field of artistic or creative “endeavor” includes writing, acting and the graphic arts. Inventive work is distinguishable from work that primarily depends on intelligence, diligence and accuracy. Determination must be on a case by case basis.29 CFR §541.302.

Computer-Related Exemptions. 29 CFR §541.400.

Job Titles. Employees who qualify for this exemption are highly-skilled and have achieved a level of proficiency in the theoretical and practical application of a body of highly specialized knowledge in computer systems analysis, programming or related work in software functions.

Although job titles alone are not determinative of the exemption applicability, the DOL lists the following as common job titles for this exemption: computer programmer, systems analyst, computer systems analyst, computer programmer analyst, applications programmer, application systems analyst, application systems analyst/programmer, software engineer, software specialist, systems engineer and systems specialist.

Test.

Salary. 29 CFR §541.400(b). Currently is paid at least $23,660 annually ($455 weekly)(increasing in December 2016) OR $27.63 per hour. That is, this exemption does NOT have to meet the salary basis requirement to regularly receive a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed IF paid at least $27.63 on an hourly basis.

Primary Duty consists of:

• The application of system-analyst techniques and procedures, including consulting with users to determine hardware, software or systems functional specifications;

• The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on andrelated to user or system design specifications;

• The design, development, testing, creation or modification of computer programs related to machine operating systems; or

• A combination of the aforementioned duties, the performance of which provides the same level of skills. 29 CFR §541.400(b)(1)-(4).

Administrative Tips.

Trainees. 29 CFR §541.705. Does not include trainees learning to become proficient in such areas or employees in these computer-related occupations who have not attained a level of skill and expertise which allows them to work independently and generally without close
supervision.

Computer Manufacture/Repair. 29 CFR §541.401. Does not include employees engaged in the operation of computers or in the manufacture, repair, or maintenance of computer hardware and related equipment. Employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs, e.g. engineers, drafters and others skilled in computer-aided design software like CAD/CAM but who are not in computer systems analysis and programming occupations are excluded from the exception.

No Degree Required. Level of expertise and skill required is generally attained through a combination of education and experience in the field. Although employees commonly have a bachelor degree, no particular degree is
required.

Cases.

Data Process Manager – Not Covered. A data process manager was held not to be a bonafide executive where his primary duty was operating relatively simple data processing equipment and he supervised only one full-time and one part-time employee. Brennan v. Carl Roessler, Inc., 361 F.Supp. 229 (D. Conn. 1973).

Information Support Specialist – Not Covered. An information support specialist who installed and upgraded hardware and software on workstations, configured desktops, checked cables, replaced parts and “troubleshooted” Windows problems, all pursuant to predetermined specifications in the system design created by others, was not exempt. Maintaining computer systems within predetermined parameters does not rise of the level of “theoretical and practical application of highly-specialized knowledge. Martin v. Indiana Michigan Power Company, 381 F.3d 574, 581 (6^th Cir. 2004).

With respect to an employee who had very similar duties to the Martin employee above, a Court held that the administrative exemption was also not applicable because the duties were not directly related to management policies or general business operations of the employer. Jackson v. McKesson Health Solutions, LLC, 2004 WL 2453000 (D. Mass.) See also Turner v. Human Genome Sciences, Inc., 292 F.Supp. 2d 738 (D. Md. 2003); Burke v. County of Monroe, 225 F.Supp. 2d 306 (W.D. N.Y. 2002); and Koppinger v. American Interiors, Inc., 295 F. Supp. 2d 797 (N.D. Ohio 2003).

Senior Network Administrator – Not Covered. Senior network administrator/project manager who assists the User Support Manager with projects, assumes responsibility for network activities and oversees other information technology department personnel, performs operation system installations, troubleshoots, system integrates, and schedules work pertaining to network problems and software upgrades is not exempt either as an administrative or professional exemption according to the Department of Labor. Opinion Letter, Wage and Hour Division. May 11, 2001.

Outside Sales Person. 29 CFR §541.500 Includes titles such as salespersons, contract negotiators.

Test.

Salary. The salary basis and salary requirements do NOT apply for this exemption. That is, this exemption does NOT have the salary basis requirement to regularly receive a predetermined amount constituting all or part of the employee’s salary, which is not subject to reduction because of variations in the quality or quantity of work performed, AND this exemption does NOT require payment of $23,660 annually ($455 weekly)(increasing in December 2016) .

Duties. 29 CFR §541.500(a).

Primary duty consists of making sales or obtaining orders for contracts for services or for the use of facilities for which consideration will be paid by the client or customer. Customarily and regularly is engaged away from the employer’s place or places of business.

Administrative Tips.

Outside Sales – Away from Employer’s Business. 29 CFR §541.502. The DOL eliminated the percentage limitation for time spent on outside sales work. An outside sales person typically makes sales at the customer’s place of business or home. “Outside sales” do not include sales made by mail, telephone, or over the Internet unless such contact is used together with personal sales calls.

Promotional Work. 29 CFR §541.503(a). Promotional work may or may not be exempt, depending on the situation. If the promotion activities are directed toward consummation of the employee’s own sales, it is exempt. If promotional activities (manufacturer’s representative) are designed to stimulate sales that will be made by someone else, activities are not exempt sales work.

Replenishing Stock. 29 CFR §541.503(c). Arrangement of merchandise on shelves or replenishing of stock is not exempt work unless it is incidental to and in conjunction with the employee’s own outside sales.