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Employer Bulletin No. 321
December 1999

PROPOSED REVISION OF WHITE-COLLAR EXEMPTIONS UNDER THE FAIR LABOR STANDARDS ACT

The U.S. General Accounting Office ("GAO") issued a report in September entitled "Fair Labor Standards Act: White-Collar Exemptions in the Modern Work Place" which identifies the most troublesome areas of the current, but woefully outdated, regulations for overtime exemptions. During the first 16 years after the passage of the Fair Labor Standards Act ("FLSA") in 1938, the Department of Labor ("DOL") developed executive, administrative and professional exemptions to overtime pay requirements for work hours in excess of a normal 40-hour week.  Outside salespersons were exempt from both overtime and minimum wage requirements.  Regulatory changes to the white-collar exemptions since 1954 have been primarily limited to increases in the salary-test levels and expanding exemptions to specific types of employees, including state and local government employees and high-wage computer programmers.

In contrast, the economy has changed drastically in 60 years.  As the number of employees working in certain service industries has nearly doubled between 1983 and 1998, the number of exempt white-collar workers has increased significantly.  The GAO estimates that in 1998 between 20 to 27 percent of the full-time U.S. workforce were executive, administrative or professional employees covered by the white-collar exemptions.  White-collar exempt employees in 1998 were more than twice as likely as non-exempt employees to work overtime.  Almost 44 percent of exempt employees worked more than 40-hour weeks and one-third of those worked more than 50 hours.

INFLATION HAS ERODED SHORT AND LONG DUTIES TESTS

Wage-Hour regulations set forth long and short tests for three white-collar exemptions.  First, the executive employee must be paid on a salary basis, although administrative and professional employees may also be paid on a fee basis.  Under the short test, the executive workers paid on a salary basis of $250.00 per week qualify for an exemption if they supervise two or more employees and their primary duty is managerial.  However, if paid $249.00, the short test is not available and the longer test requires proof that no more than 20 percent of their primary duties (or 40 percent if in retail or service) involves non-managerial work.  The administrative and professional exemptions have similar long and short tests tied to different weekly salaries.  The salary-basis levels were last changed in 1975, and the "long test" salary is still $155.00 per week, useless since it is below the current minimum wage.  The higher level of $250.00 per week used in the short test for exemption would include those making only $1.10 over the current minimum wage of $5.15 per hour.  To represent the same level of purchasing power now as it did in 1975, GAO estimates that the $250.00-per-week test would need to be increased to $757.00 per week, or $39,400.00 per year.

CONFUSION OVER SALARY BASIS TEST

The FLSA dispute most commonly litigated, according to the GAO, is that employees were not paid on a true salary-basis because their pay had been docked for disciplinary or performance infractions.  Court decisions and employer interviews show that employers are uncertain about limits of the salary-basis test in several areas:

  • Does one instance of pay docking destroy the exemption?
  • Can employers correct instances of improper docking and avoid liability?
  • If Family and Medical Leave time is taken in partial-day increments, does it violate the salary-basis test?
  • Can an exempt employee be disciplined for failure to complete a normal work shift?
  • In the retail industry, are employers able to dock an exempt manager's salary to recoup losses for cash shortages or employee thefts?

HIGHLY PAID TECHNICAL WORKERS

Employers have argued that many new technical positions should be exempt.  The administrative exemption is presently limited to those employees who perform non-manual or non-production work using independent judgment and discretion.  Many administrative or professional workers, long regarded as exempt, have had their work duties changed by technology so that they perform "production" work or follow strict written guidelines so as to have lost the independent judgment and discretion prongs of the administrative exemption.  On the other hand, highly paid and highly skilled technical jobs have evolved which may require the knowledge equivalent to an exempt professional, but they lack the college degree requirements for the professional exemption.

CONCLUSION

The GAO report identified widespread concern over all aspects of the regulatory tests:  (1) the salary-basis test; (2) revising the salary-test levels upward to reflect inflation and the changing economy; (3) adjusting the long duties test to recognize higher percentages of non-managerial duties; and (4) creating a new exemption for well-paid, highly skilled, non-supervisory workers.  While there may be a consensus on the need for revisions, there appears to be  a lack of consensus for any specific solutions.  Our clients should look carefully at their use of exemptions, as this topic gains more media attention, as well as greater awareness among white collar employees.  We anticipate an increase in investigations and enforcement actions in this area in the coming year.

Clients with questions or those needing advice with regard to present compliance issues or the proposed revisions should contact Donald Benson in the Atlanta office at (404) 525-8622.