After more than 50 years, the U.S. Department of Labor (DOL) updated the so-called "white collar" exemptions under the Fair Labor Standards Act (FLSA), the law mandating the payment of minimum wages and overtime to employees.
The new regulations make significant changes regarding which employees are eligible for overtime. Employers must come into compliance by Aug. 23 of this year. Employers must learn the new rules and reevaluate which of their employees are eligible for overtime.
Certain employees who hold executive, administrative, professional or outside sales positions are exempt from the minimum wages and overtime pay requirements of the FLSA – collectively known as the "white collar" exemptions.
The DOL established a two-part test for determining which employees fit within these exemptions: (1) the salary-basis test; and (2) the job-duties test. Employees who are paid above a specified salary amount and perform certain defined job duties are classified as exempt employees and are not eligible for overtime pay.
However, the salary thresholds of the new rules have changed dramatically, and portions of the job-duties tests for executive, administrative, professional, and outside sales employees were altered.
In addition, the new regulations explicitly classify certain types of employees as non-exempt (i.e., eligible for overtime), including "blue collar" workers and virtually all police officers, firefighters and emergency medical workers.
The regulations exempt from overtime pay most employees making more than $100,000 per year. Moreover, the DOL established new rules and safeguards regarding an employer’s ability to deduct from a salaried employee’s pay without losing the all-important exemption.
To qualify for the white collar exemptions, employees now must be paid at least $455 per week on a salary basis. This is a significant increase from the previous tests of $250 per week ($13,000 annually) and $155 per week ($8,060 annually). Now, employees must be paid $23,660 or more annually to be exempt. This increase could have a significant impact on retailers and the restaurant industry, who likely must pay overtime to previously exempt employees.
The new regulations establish "standard" job-duties tests, which contain significant – but not overwhelming -changes from the former tests addressing the executive, administrative, professional and outside salesperson exemptions.
Let’s briefly examine each of the exemptions.
In addition to supervisors and managers, an exempt executive also includes any employee who owns at least a bona fide 20-percent equity interest in the enterprise in which he/she is employed, if the employee is actively engaged in its management.
The administrative exemption includes those employees whose primary duty is performing office or non-manual work directly related to management policies or general business operations of the employer or the employer’s customers; and customarily and regularly exercises discretion and independent judgment. The new rules maintain the "production vs. staff" distinction.
The new rules also keep the "exercise of discretion and independent judgment" test, which traditionally has been the source of much confusion and litigation. The new regulations clarify the test and indicate the "exercise of discretion and independent judgment" involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after considering the various possibilities.
This test includes whether the employee has authority to formulate, interpret or implement management policies or practices; whether the employee carries out major assignments in conducting business operations; whether the employee provides consultation or expert advice to management; or other listed factors.
The DOL did list some professions as generally exempt administrators, including: insurance claims adjusters; financial service employees; team leaders of major projects; purchasing agents; and human resource managers.
The regulations separate this exemption into two categories: "learned" and "creative" professional employees.
"Learned" professionals have the primary duty of performing work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study; and they consistently exercise discretion and judgment.
In addition to the traditional fields (e.g., law, medicine, engineering, teachers), the DOL specifically identified other professions as meeting this exemption: non-hourly, registered nurses (as opposed to licensed practical nurses); dental hygienists; registered or certified medical technologists; physician assistants; some accountants; licensed funeral directors; athletic trainers; and educational establishment administrators.
"Creative" professionals perform work requiring invention, imagination or talent in a recognized field of artistic endeavor. They have the primary duty of performing work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
Many journalists are considered exempt creative professionals. However, employees of newspapers, magazines and television are non-exempt if they merely collect and organize publicly available information or do not contribute unique interpretation or analysis to a news product.
Outside sales exemption
The new regulations eliminate the 20-percent restriction on non-exempt tasks previously used for outside sales employees.
Now, an outside sales employee is exempt if he or she: (1) has a primary duty of making sales or obtaining orders or contracts for services; and (2) is customarily and regularly engaged away from the employer’s place of business.
The salary-basis test does not apply to this exemption.
The "employer’s place of business" can include an employee’s home if used as a home office or to solicit sales. Accordingly, if an employee works from home and makes telephone solicitations there, he cannot qualify as an exempt outside salesperson.
The exemption is meant to apply to salespersons who primarily make their solicitations door-to-door, at trade shows or at customers’ places of business.
The new regulations also add a new type of exempt employee: the highly compensated worker. An employee performing office or non-manual work earning total annual compensation of $100,000 or more and customarily and regularly performing at least one of the exempt duties listed for an executive, administrative or professional employee is exempt from the overtime rules.
The new rules also allow the employer to make a one-time "catch up" payment to an employee within one month of the year-end to reach the $100,000 mark.
Further, the DOL made it clear that manual laborers or "blue collar" workers are non-exempt, regardless of whether they receive a salary or how highly paid they might be. Examples include carpenters, electricians, mechanics, plumbers, operating engineers, construction workers and laborers.
Wisconsin employers must be aware that the DOL regulations altered only federal law. The state law remains unchanged. The federal regulations still allow a state to establish greater protections than those provided by the federal government. As it stands, there are two sets of regulations with which Wisconsin employers must comply.
For now, employers must focus on the pending federal compliance date of Aug. 23. Before that date, employers need to reanalyze their workforce under the new regulations.
and Rochelle Klaskin are attorneys in the
corporate labor and employment law group
of LaFollette Godfrey & Kahn in Madison.