4.21.04

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.

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