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New FLSA Overtime Regulations Effective August 23, 2004 (Mann Report)

The United States Department of Labor's final regulations to the Fair Labor Standards Act (FLSA) went into effect August 23, 2004. The new regulations clarify the FLSA's "white-collar" exemptions to determine whether an executive, administrative, professional, computer or outside sales employee is "exempt" (and is not entitled to an overtime premium) or "nonexempt" (and must receive an overtime premium) from the FLSA's overtime provisions.

Following is a summary of the highlights of the new regulations:

1. The regulations impose a significantly higher minimum salary level for an employee to qualify as exempt. To qualify as exempt, an employee must earn at least $455 per week ($23,660 per year), a substantial increase from $155 per week ($8,060 per year) under the former regulations. Any employee earning less than $455 per week cannot be classified as exempt and is automatically entitled to an overtime premium.

2. The regulations replace the old "short" and "long" duties test with a "standard" test for each category. An employee who meets the minmum salary test will qualify as exempt only if the employee satisfies the criteria for one of the following categories, which will be based upon the employee's job duties, irrespective of his or her title:

Executive Employee: (a) The employee's primary duty is "management of the enterprise" or of a "customarily recognized department thereof;" (b) the employee "customarily and regularly" directs the work of two or more employees; and (c) the employee has the authority to hire and fire employees or has influence (e.g., the power to effectively recommend) "as to hiring, firing, advancement, promotion or other change
of status."

Administrative Employee: (a) The employee's primary duty is "performance of office or non-manual work directly related to the management or general business operation of the employer or the employer's customers"; and (b) the employee's primary duty "includes the exercise of discretion and independent judgment with respect to matters of significance."

Professional Employee: (a) A "Learned Professional" employee is one whose primary duty requires advanced knowledge in a field of science or learning, where such knowledge is customarily acquired by a prolonged course of specialized instruction. (b) A "Creative Professional" employee is one whose primary duty requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

Computer Employee: The employee's primary duty consists of (a) the application of  systems analysis techniques and procedures, including consulting with users, to determine  hardware, software or system functional specifications; (b) design development,  documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; (c) design, documentation, testing, creation or modification of existing computer programs related to machine operating systems; or (d) a combination of these duties, the performance of which requires the same level of skills.

3. The regulations exempt "highly compensated" employees. To qualify, an employee's "total annual compensation" (including commissions and non-discretionary compensation) is at least $100,000, and the employee must customarily and regularly perform one or more of the exempt duties of an executive, administrative or professional employee.

4. The regulations exempt outside salespeople "customarily and regularly" engaged away from the employer's place of business.

5. The regulations classify manual laborers and other "blue-collar" workers as non-exempt, irrespective of how much they are paid.

6. The regulations permit full-day decuctions from pay (docking) of an exempt employee without jeopardizing such employee's exempt status. They specifically permit such deductions for, among other reasons, disciplinary suspensions, violations of safety
rules and absences for personal reasons.

7. The regulations incorporate a "safe harbor" provision to prevent an automatic loss of an employee's exempt status (as well as the exempt status of similarly situated employees) due to an improper deduction. An employer must communicate clear policies concerning how its employees are paid, and institute a complaint procedure for employees to address alleged violations of such policies and to remedy any improper action. An employer's failure to cure an improper deduction will jeopardize an employee's exempt status.

8. The regulations do not affect an employer's obligation to pay overtime pursuant to the terms of a collective bargaining agreement.

What Should Employers Do?
The new regulations went into effect on August 23, 2004. and the United States Department of Labor has indicated that it will vigorously enforce the regulations. Employers are well advised to immediately:

• Evaluate existing jobs (and job descriptions) under the new regulations to determine whether employees are properly classified as exempt. In evaluating each employee's status, pay particular attention to the employee's "primary duty," and be sure to remember that any employee who earns less than $23,660 annually is automatically entitled to an overtime premium for all hours worked in excess of 40 in a workweek. Any changes should be clearly communicated to employees.
• Revisit existing policies and incorporate FLSA-specific policies and complaint procedures to receive the full benefit of the new "safe harbor" provision. Employers may also wish to review disciplinary policies to provide for full-day deductions from pay for suspensions and other permitted bases. Again, any changes should be clearly communicated to employees.