New England Biz Law Update
After months of debate and delay, the Department of Labor in April promulgated new rules for classifying workers as exempt from overtime protections under the Fair Labor Standards Act. The new rules will become effective Aug. 23.
Not since the passage of the New Deal has the DOL sought to change the classification of protected workers so broadly. Among other things, the new rules will establish a higher guaranteed minimum salary of $23,660 (or $455/week) to establish exempt status, and would revise the definitions of exempt workers under the "Executive," "Administrative," "Professional," and "Outside Salesperson" exemptions. An additional exemption for "highly compensated employees" will be added, referring to those who perform some exempt worker functions and who make at least $100,000 annually.
There now exists a "long" duties test for workers who make over $155 a week and a "short" duties test for workers who make over $250 per week to determine which workers may be exempt from the FLSA’s pay provisions. Neither test refers to a reasonable salary level, and the long test’s extremely low wage level has rendered it nearly useless.
The new regulations will eliminate the "long" and "short" tests, create a single "standard" test and raise the determining wage to $455 per week. Here is a brief review of the current exemption tests and how they will change in the next 120 days:
Administrative Employees
The new regulations will retain the requirement from both the "long" and "short" tests that an exempt "administrative" employee have a "primary duty" of "performing office or non-manual work related to the management or general business operations of the employer or the employer’s customers."
The new regulations will, however, eliminate the percentage limitation on non-exempt work from the "long" test and the requirement in the "long" test that the employee assist another exempt worker or perform "specialized technical work."
Departing from the course the DOL had proposed earlier this year, the new regulations will also retain the requirement that an exempt "administrative" employee must exercise "discretion and independent judgment," but the regulations add that such must be exercised with respect to "matters of significance."
According to the DOL, "discretion and independent judgment" refers to "comparing and evaluating possible courses of action and making a decision after consideration of options."
What constitutes a "matter of significance" depends upon the "level of importance or consequence of work," but, presumably, a "matter of significance" should directly relate to "management" or "general business operations."
The new regs provide an illustrative list of the kinds of work contemplated by this exemption, including: 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.
The new regulations also offer some examples of specific jobs likely to be considered exempt or not exempt under this exemption to help employers understand the regulations.
For example, an "executive assistant" may be considered "exempt" while a secretary may not. Purchasing agents who can bind the company may be exempt, while comparison shoppers may not. Claims adjusters may generally be considered exempt, while inspectors or investigators may not. In the end, however, actual duties rather than mere titles will determine who may be considered "exempt."
Professional Employee
The new standard test will essentially retain the current scope of the "professional employee" exemption with small but significant variation.
Under the new rules, an exempt "professional employee" must have the primary duty of performing work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but it will also now expressly include workers in such fields with knowledge and skill acquired by an "equivalent combination of intellectual instruction and work experience."
This exemption will not be applicable for workers in occupations in which most people acquire their skill by experience rather than by advanced instruction. According to the new regulations, advanced knowledge cannot as a matter of law be obtained at the high school level.
The new regulations provide some examples to help employers understand how this exemption may apply to their workers. Nurses who are licensed RNs will likely be exempt whereas LPNs will not be exempt. Chefs will likely be considered exempt, while cooks will not be under this exemption. Dental hygienists will generally be exempt under this category, while paralegals will not.
Executive Employees
The proposed changes to the "executive employee" exemption offer less significant changes than those in other categories. The new "standard" duties test would combine certain elements of the "long" and "short" tests, raise the exempt wage to $455 per week, and eliminate other requirements that now exist in the regulations.
Specifically, the proposed new "standard" test would require that an exempt "executive" employee: (1) have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; (2) customarily and regularly direct the work of at least two full time employees (or the requirement); and (3) have the authority to hire or fire other employees or have particular weight given to suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees.
Perhaps most helpful for employers, the new regulations will eliminate the current percentage limitations on time spent on non-exempt work and will impose the "hiring/firing" component for all "executive" employees who might be exempt. These changes simplify record keeping and streamline the analysis for employers to follow.
Although duties rather than mere titles will ultimately determine exempt status, the list of examples provided by the new regulations can assist in determining who may actually be exempt under this section. For example, assistant managers in retail or restaurant operations can now be generally considered exempt, but a relief supervisor whose primary duty is performing non-exempt work on a production line would not be exempt, even if he or she directs the work of other non-exempt workers.
Outside Sales Employees
The DOL’s proposed new regulations contain a "primary duty" concept similar to the other exemptions, and eliminate the 20 percent restriction on nonexempt work by outside sales employees. By eliminating this percentage limitation, the DOL seeks to avoid any necessity that the employer track hours of outside sales employees. This should provide a consistent approach between this exemption and the exemptions for executive, administrative and professional employees.
Special Rule For Highly Compensated Employees
The new regulations will include a special, streamlined rule for employees paid $100,000 or more annually, counting base salary, commissions, non-discretionary bonuses and other non-discretionary compensation. Although all such forms of compensation may be considered, the employee must still receive a guaranteed weekly wage of at least $455/weekly to qualify for this exemption.
Under this proposed rule for highly compensated employees, employees paid $100,000 or more annually and performing non-manual work would be exempt if they customarily and regularly perform at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee as described in the standard duties tests.
These highly compensated employees would not have to meet all the elements of any standard duties test to qualify for the exemption as a highly compensated employee. For example, an employee who supervises two workers but does not participate in the hiring or termination decisions in the company would still be exempt if his or her annual pay equals or exceeds $100,000 because the employee has a function that is identifiable as an executive function.
The Salary Basis Test/No Docking Rule
Guaranteed salary perhaps constitutes the most fundamental prerequisite for exempt status in most situations. In exchange for guaranteed, predetermined payments to the employee every pay period, regardless of performance, disciplinary issues or availability of work, the employer receives unlimited hours of work availability without the requirement of premium overtime pay.
The new regulations loosen an employer’s ability to dock exempt salaried workers in the following circumstances:
1. Absence from work for one or more full days for personal reasons, other than sickness or disability.
2. Absence from work for one or more full days due to sickness or disability if deductions made under a bona fide plan, policy or practice of providing wage replacement benefits for these types of absences.
3. To offset any amounts received as payment for jury fees, witness fees, or military pay.
4. Penalties imposed in good faith for violating safety rules of "major significance."
5. Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of workplace conduct rules.
6. Proportionate part of an employee’s full salary may be paid for time actually worked in the first and last weeks of employment.
7. Unpaid leave taken pursuant to the Family and Medical Leave Act.
The New ‘Safe Harbor’
Currently, any employer who improperly deducts wages from salaried employees for absenteeism or any other performance reason risks losing the exempt status of such employees whose wages have been improperly docked. Losing such exempt status could create substantial liability for back overtime pay going back at least two years.
For large employers, such improper deductions can give rise to costly class actions Numerous employers have recently paid millions of dollars to class action plaintiffs for overtime or docking violations, including U Haul ($7 million), A&P ($3 million), Bank of America ($25 million), Radio Shack ($30 million), Starbucks ($18 million) and others.
The new regulations will create a new "safe harbor" for employers acting in good faith who have written policies that expressly prohibit improper pay deductions, including a complaint procedure for those who challenge their deductions.
Those employers who improperly make pay deductions in error, but who do not make a practice of making improper deductions and who do make it a practice to correct such deductions when notified, will not run the risk of losing their exempt status for their docked workers. The DOL hopes such a safe harbor provision will protect at least a significant number of good faith employers from the large class action suits of the type that have arisen in recent years.
>Other Provisions
Only "white collar" workers may be considered exempt. Under the new regulations, "blue collar workers," no matter how much they are paid, shall not be exempt from the minimum wage and overtime provisions of the FLSA.
The DOL considers "blue collar work" to involve repetitive operations with one’s hands involving physical skill and energy, and "blue collar" occupations include workers involved in "production, maintenance, carpentry, electrician work," and similar lines of work.
In addition, police officers, fire fighters and other "first responders" shall also be considered non-exempt workers, regardless of rank.
Christopher T. Vrountas leads Nelson, Kinder, Mosseau & Saturley, P.C.’s employment counseling and litigation practice in Boston and Manchester, N.H. He represents a number of local, national and international clients in matters involving covenants not to compete, trade secrets, employment discrimination, wage and hour claims, intellectual property matters and other business disputes. You can reach Chris at (617) 778-7500 or at [email protected]. The firm’s website can also be found at www.nkms.com.
Catherine M. Costanzo is a member of the employment counseling and litigation group at Nelson, Kinder, Mosseau & Saturley, P.C., where she has represented businesses in all sorts of employment matters, including wage and hour claims, discrimination claims, intellectual property and trade secret matters and other disputes in state and federal court, as well as before various state commissions and departments. You can reach Catherine at(603) 647-1800 or at [email protected].
