U.S.
Department of Labor Finalizes White Collar Exemption Criteria Under
Fair Labor Standards Act
James
Coleman
After a lengthy and contentious rulemaking proceeding, the Department
of Labor has released its final regulations revising the criteria
governing white-collar exemptions under the FLSA. While not yet
published in the Federal Register (that will happen later this
week), the DOL released what it sent to the Federal Register for
publication. The publication is more than 500 pages, most of which
is a lengthy preamble to the final regulation.
In a move that appears to be designed to improve the Labor Department’s
ability to defend the final regulations under the anticipated
Congressional scrutiny that will surely follow publication, many
changes have
been made to what was proposed in March 2003. Unfortunately for
employers, most of these changes narrow the scope of the exemptions
in various different ways.
In the spring of 2003 the U.S. Department of Labor, Wage and
Hour Division, began a rulemaking proceeding to amend the regulations
defining the so-called "white collar" exemptions under
the Fair Labor Standards Act. These regulations define which employees
are exempt from the FLSA’s minimum wage and overtime requirements
under the classifications of "executive," "administrative," "professional," "computer
employee," and "outside sales." For the most part,
these regulations have remained unchanged for several decades.
Most of these exemptions are conditioned upon the satisfaction
of several criteria generally related to the how the employee
is compensated, and what the employee’s job responsibilities
and duties are. If the exemption criteria are satisfied, then the
employee is exempt from the FLSA’s minimum wage and overtime
requirements.
The final regulations are significant in that they are comprehensive
and touch on virtually all aspects of the exemption criteria for
each of the exempt classifications. On the compensation side, where
salary levels are required, they have been increased to an even
higher level than what was proposed last year. On the job duties
side, the final regulations contain some changes to the criteria,
but here again, the Labor Department has backed off many of the
more significant changes it proposed last year.
Under the final regulations, employees earning a weekly salary
of less than $455 (this is up from the $425 proposed last year)
have no chance of qualifying for the executive, administrative
and professional exemptions. For so-called "computer employees," the
new compensation criteria is either a salary of not less than
$455 per week or an hourly wage of not less than $27.63. The
outside
sales employee exemption has never had a compensation criteria,
and the final regulations do not change that part of the exemption.
The final regulations also contain an abbreviated job duties
test for determining the exempt status of "highly compensated
employees." Again, however, unfortunately for employers,
the Labor Department has raised the annual compensation threshold
for qualification under this provision to $100,000 (up from
the $65,000 that was proposed last year). Thus, the final regulations
substantially narrowed this provision, and for practical purposes
rendered it inapplicable to anyone not compensated at or above
this very high threshold. Under the final regulations, in order
to be exempt under this provision, an employee will now have
to earn at least $100,000 per year in total compensation, which
includes salary, commissions, and incentive compensation. Moreover,
the employee must still be paid a weekly salary of at least
$455 as part of the total $100,000 in annual compensation.
When the highly compensated employee threshold is satisfied,
then a greatly abbreviated duties test applies, which requires
only that the employee’s primary duty be office or
non-manual work, and that the employee satisfy at least one
of the exempt
duties requirements of the executive, administrative or professional
employee exemptions. Satisfaction of the remaining more rigorous
duties criteria would not be required for such highly compensated
employees. Thus, the chances of having to defend against
litigation challenges to exempt classifications would be
greatly reduced
with regard to employees subject to these provisions.
On a positive note for employers, the final regulations retain
a provision from last year’s proposal that will allow for
full day salary deductions for unpaid disciplinary suspensions
imposed in good faith for infractions of workplace conduct rules.
With very rare exceptions, such salary deductions are not allowed
under the current regulations. The final regulation also includes
some clarifying language as to how employers may achieve a "safe
harbor" from the risk of having entire classes of exempt
employees retroactively disqualified based on improper salary
deductions.
The final regulations will be effective 120 days from publication
in the Federal Register, which is scheduled to happen on or
about April 23. However, organized labor has vigorously and
vocally
opposed the Labor Department on this rulemaking proceeding
every step of the way, including an almost six-month-long battle
in
Congress to defeat it by including funding restrictions in
the Labor Department’s appropriations legislation that
would have stopped the Labor Department from finalizing the
proposal
except as it related to increasing the compensation requirements
for the various exemptions. It is almost certain that strong
opposition to this final regulation will continue despite the
many changes made by the Labor Department in response to the
criticisms voiced by the opposition. Thus, there is some chance
that it may yet be derailed by either a court challenge, or
Congressional action.
Absent a successful challenge in court or Congress, the final
regulations will become effective in late August 2004. Thus,
employers need to carefully analyze the impact of the new final
regulations on their various exempt classifications. Indeed,
depending upon this analysis, some currently exempt employees
will lose their exempt status, and some currently non-exempt
employees may become qualified for an exempt classification.
There may also be a need to reevaluate and adjust job responsibilities
and/or compensation levels in an effort to conform to the new
exemption criteria.
A more detailed and comprehensive analysis of the final regulations
will soon be posted on the Constangy website. If you need further
assistance, please contact a Constangy attorney.
