EMPLOYMENT LAW

Department of Labor Proposes Changes to the Fair Labor Standards Act

April 2003

By Andrea K. Johnstone and Marla B. Matthews*

for New Hampshire Business Review

The United States Department of Labor (“DOL”) recently released its proposed revisions to the “white collar” exemptions of the Fair Labor Standards Act (“FLSA”). This article summarizes the proposed changes and the anticipated impact on employers.

FLSA Minimum Wage and
Overtime Requirements

The FLSA requires the payment of a minimum wage to all employees. In addition, the FLSA guarantees overtime pay at time and one-half the regular rate of pay for all hours worked over 40 in a week to all employees who do not fall squarely within the limited exemptions under the law. It is presumed that that all workers are covered by the FLSA’s minimum wage and overtime entitlements and the law places the burden of proving otherwise on the employer. Companies that compensate their workforce on a salaried basis commonly rely upon the “white collar” exemptions of the FLSA in order to avoid the statute’s overtime pay requirements.

White Collar Exemptions

The FLSA’s “white collar” exemptions cover employees functioning in bona fide executive, administrative, professional, outside sales and computer-related capacities. To be exempt, the position must meet certain prescribed tests related to the employee’s primary job duties. In addition, the employee must be paid on a salaried basis and earn at least the minimum level specified in the FLSA regulations. Whether a given position satisfies the criteria for a “white collar” exemption under the FLSA has been the subject of ongoing disagreement and litigation. Misclassification of workers as exempt has resulted in costly awards of back overtime pay for employers across the country. For example, Einstein Brothers Bagels recently paid $495,930 in back overtime wages to assistant managers in 27 states nationwide following an investigation by the DOL. In another case, $2.85 million in back overtime pay was awarded to temporary health care workers around the country.

The proliferation of litigation regarding the FLSA’s “white collar” exemptions is partly the result of outdated standards. For example, the minimum salary requirement for the exemption was last set in 1975 at $155.00 per week. Similarly, the basic duties tests were established in 1938 and last revised in 1940.

In addition to being outdated, the current criteria are overly manufacturing focused and are not easily translated into the way tasks are accomplished in the modern workplace. Furthermore, they do not take technological realities into account. Thus, there has been considerable confusion and disagreement about whether the work being performed in certain positions an employer has classified as “exempt” actually meets the requirements for an exemption under the FLSA. Some of the confusion is attributable to the DOL’s use of a long and short test to determine whether the “white collar” exemption applies. Moreover, the DOL’s use of ambiguous phrases such as “managing the enterprise,” “exercises discretion and independent judgment” and/or “performs original and creative work” has left employers wondering whether a particular position is exempt under the FLSA. In recognition of these difficulties, the DOL undertook to overhaul and update its 50 year old regulations defining exemptions for “white collar” employees. The DOL recently published its proposed revised regulations at www.wagehour.dol.gov.

DOL’s Proposed Changes To the
“White Collar” Exemptions

The DOL’s proposed changes to the “white collar” exemptions include an increase in the minimum weekly salary to $425.00 per week. There is also a “special rule” for highly compensated employees earning $65,000 per year or more. The proposed regulations would do away with the current long and short tests for determining exempt status and would establish a single test for each category. The DOL’s proposed regulations also reaffirm the agency’s position that job titles alone are insufficient to establish the exempt status of an employee.
In addition to the requirement that the position be compensated on a salaried basis at a minimum of $425.00 per week, the anticipated revisions to the “white collar” exemptions include the following new standard tests.

Executive Employee Proposed Standard Test

• Primary duty of the management of the enterprise or a recognized department or subdivision;
   
• Customarily and regularly directs the work of two or more employees; and
   
• Has authority to hire or fire other employees (or whose recommendations are given particular weight).

In addition, the proposed regulations would recognize the following
executive employees as exempt: (1) someone who owns at least a 20% equity interest in a business in which the person is also employed; and (2) someone who is in “sole charge” of the day to day operations and directs the work of other employees in a separate division or branch location.

Administrative Employee Proposed Standard Test

• 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; and
   
• Holds a “position of responsibility” with the employer, defined as either (1) performing work or substantial importance or (2) performing work requiring a high level of skill or training.

The DOL envisions work in the areas of tax, finance, accounting, auditing, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations and similar activities as falling within the definition of “office or non-manual work.”

Expanding on the definition set forth in the standard test, the DOL proposal provides the following as examples of the duties of employees functioning in an administrative capacity: formulating or interpreting management policies, providing consultation or expert advice to management, making or recommending decisions that have a substantial impact on business operations or finances, analyzing or recommending changes to operating practices, planning long or short-term business objectives, analyzing data, drawing conclusions and recommending changes, handling complaints, arbitrating disputes or resolving grievances.

The proposed regulations also detail the types of functions and responsibilities which will allow certain positions in educational institutions to qualify for the administrative employee exemption.

Professional Employee Proposed Standard Test

(a) Learned Professional

• Primary duty of performing office or non-manual work requiring 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.

(b) Creative Professional

• Primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
   

Computer Employee Proposed Standard Test

Primary duty of:

• Application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional applications; or
   
• Design, development, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; or
   
• Design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
   
• A combination of these duties, the performance of which requires the same level of skills; or
   
• A computer systems analyst, programmer, software engineer or other similarly skilled worker in the computer field.

Outside Sales Employee Proposed Standard Test

This exemption does not contain a minimum salary requirement. However, under the proposed regulations the following standard test must be satisfied:

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

Anticipated Impact On Employers

The DOL is accepting comments on its proposed changes to the FLSA’s “white collar” exemptions until June 30, 2003. Should rule changes similar to the DOL proposals become final, employers will feel the impact of these new regulations in a number of ways. First, the DOL predicts that the increased minimum salary requirement will result in overtime entitlements to 1.3 million low wage salaried workers who are currently properly classified as exempt.It is also anticipated that some job classifications that currently meet the DOL’s “white collar” exemptions may not qualify for those exemptions under the revised proposed standard tests. Prudent employers will be left to audit their exempt positions to determine whether these positions satisfy the streamlined and modernized standard tests when they are finalized by the DOL. While the DOL is striving to create new regulations that will be understandable and easy to apply, its success in that regard remains to be seen since the agency and the courts will be asked to interpret these regulations once they become effective. Employers are encouraged to follow the on-going developments in this area and to take the proposed standard tests into consideration when updating or creating new position descriptions and job functions.

*Marla Matthews is admitted in New Hampshire.

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