New Overtime Regulations Necessitate That All Employers Review Existing Practices

5/10/2004

By Stacey A. DeKalb, Esq.

In April 2004 the United States Department of Labor (“DOL”) released its final “FairPay” overtime regulations guaranteeing overtime protection to workers earning less than $23,660 per year – or $455 per week. The new regulations become effective in late August, 120 days after publication in the Federal Register. Given this time frame, employers need to give immediate attention to existing practices to determine which employees qualify for overtime pay, to determine which employees are exempt under the new regulations and to consider other compliance measures.

Discussion about the new regulations suggests that many more employees will now qualify for overtime pay. According to information released by U.S. Secretary of Labor Elaine L. Chao, it is estimated that 1.3 million white-collar employees earning less than $23,600 per year, and currently classified as exempt, will now be eligible for overtime under the new regulations at an estimated cost of up to $375 million a year to employer’s payroll costs.

The regulations increase the minimum exempt salary level from $8,060 to $23,600 per year, regardless of the duties performed by the previously exempt employees. In addition, the regulations also modify the job duties tests utilized in determining whether an employee qualifies for the overtime exemption as an executive, administrative, and professional employee and create a new exemption for highly compensated employees. For purposes of qualifying for the various exemptions, the employee’s “primary duty” must be the performance of exempt work and the term “primary duty” is defined as “the principal, main, major or most important duty that the employee performs.” Although there are many definitions of the terms used in the regulations, the following generally summarizes the changes:

Executive Duties Test
An individual who is compensated on a salary basis at a rate not less than $455 per week and
 

    * whose primary duty is managing an enterprise, department or subdivision;
    * who customarily and regularly directs the work of at least two or more other full-time employees or their equivalent; and
    * who has the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees must be given particular weight.

Administrative Duties Test
An individual who is compensated on a salary basis at a rate not less than $455 per week and

    * whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
    * whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Professional Duties Test
The professional employee exemption has two types – learned professionals and creative professionals.

Learned Professional:
An individual who is compensated on a salary basis at a rate not less than $455 per week and

    * whose primary duty is work requiring “advanced knowledge” (predominantly intellectual in character and requires the consistent exercise of discretion and judgment);
    * whose advanced knowledge is in a field of science and learning; and
    * whose advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

    The regulations clarify that veteran status alone is not sufficient to satisfy the professional exemption.

Creative Professional:
An individual who is compensated on a salary basis at a rate not less than $455 per week and

    * whose primary duty must require invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

      The regulations indicate that a case-by-case determination may be made for the creative professional exemption.
      

Highly Compensated Test
A new exempt category has been created which exempts from the overtime requirements employees who perform office or non-manual work and who are paid total annual compensation of $100,000 or more (which includes at least $455 per week on a salary or fee basis). Such employees must customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee as defined in the standard exemption tests.

Other
The new regulations also address numerous other areas including stronger overtime protection for blue-collar employees, clarifying the educational requirements for exempt professionals, allowing employers to suspend exempt employees for misconduct in one-day increments provided such suspensions occur pursuant to a written policy, and providing that police officers, fire fighters, licensed practical nurses, emergency medical technicians and other first responders are not exempt from the overtime provisions. An employer can provide greater benefits than required under the law but may not require its employees to waive or reduce the rights provided through a collective bargaining agreement. For more information about these new regulations, visit DOL’s web site at www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm.

Improper Deductions
An important section of the new regulations for employers is the section addressing the affect of improper deductions. A safe harbor is provided to employers making improper deductions under certain circumstances, including where the employer has a clearly communicated policy (the regulations state that a written policy distributed before the improper pay deduction occurs is considered the best evidence of a clearly communicated policy), the policy includes a complaint mechanism, and the employer reimburses employees for any improper deductions, making a good faith commitment to comply in the future. In order to be in a position to take advantage of the safe harbor provision, should errors be made, employers should carefully consider adopting and distributing a written policy immediately.

Employers should act immediately to review the status of exempt and non-exempt employees, to determine if changes need to be made to employment policies and job descriptions, and to otherwise analyze whether or not their organizations are in compliance with the new regulations.


Contact Lommen, Nelson, Cole & Stageberg for assistance with the following:

    * Audit of wage and hour practices to ensure compliance with the new regulations.
    * Review of salary and workplace policies to ensure compliance.
    * Review and preparation of job descriptions that preserve the “exempt” status of certain employees.
    * Preparation of employment policies to take advantage of the new “safe harbor” provisions.
    * Review of workplace practices on suspending employees for misconduct without losing their exempt status.

The above is a brief summary of the overtime regulations issued by the DOL. The law contains very specific requirements that must be complied with by all employers. Employers should consult legal counsel before making any attempt to apply the law or any information offered above to their specific situations. This summary was written by Stacey A. DeKalb, Esq., of Lommen, Nelson, Cole & Stageberg, P.A. Ms. DeKalb chairs the firm’s Employment Practices Section. Ms. DeKalb is admitted to practice in both Minnesota and Wisconsin. For more information about compliance with this law or other employment-related matters, contact Ms. DeKalb at 612-336-9310, 800-752-4297, or stacey@lommen.com.