New Exempt/Nonexempt Overtime Pay Rules Took Effect August 23

By Gerard Panaro, Howe & Hutton, WSTDA Legal Counsel

Advice, recommendations. The only thing employers have to do after August 23 to comply with these new regulations is to make sure that those employees they currently classify as exempt are being paid at least the minimum salary ($455/wk or $23,660 per year; $100,000 per year (certain highly-compensated employees) or $27.63/hr ($57,470.40/yr) in the case of computer specialists) called for in the new regulations. If they do not, the employer has two choices: reclassify the employees as nonexempt and pay them overtime or increase their salaries to meet the new, higher minimums.

These new regulations do not oblige you to examine every position in your organization and determine whether any employees need to be re-classified as exempt or non-exempt. If an employee meets one of the criteria for exempt status under the old regulations, s/he will likely meet the criteria under the new.

You may wish to re-examine certain positions you may currently have classified as nonexempt to see whether or not they might meet the criteria for exempt status under the new regulations. If you do do that, however, be prepared for the possibility that the affected employee (one reclassified as exempt who previously was nonexempt and therefore entitled to overtime) may go to the Wage and Hour Division and claim that s/he is not, in fact, an exempt employee and should be entitled to overtime. The burden is on the employer to prove that an employee (and others in that category) meets the criteria for exempt classification.

Even if you have an employee whom you currently classify as nonexempt, but who could meet the criteria for exemption under the new regulations, but you don’t change his or her status, the issue may be moot if the person never (or hardly ever) works any overtime anyway.

The exempt/nonexempt categories come into play when employees routinely work more than 40 hours in a single workweek. That is because if an exempt employee works 50 hours a week, for example, you don’t have to pay him or her anything beyond his/her regular salary, whereas if a nonexempt employee works 50 hours in a week, you do have to pay him/her overtime for 10 hours.

Even at this date, there is still the possibility that Congress will overturn the new regulations legislatively. Sen. Tom Harkin of Iowa keeps trying. John Kerry has made it an issue in the presidential campaign. If the regulations were to be overturned by Congress, the next question would be: Would the law be prospective only (from date of enactment forward), or would Congress make it retroactive, which would mean that someone who had been classified as exempt after August 23 would revert to nonexempt status and you would owe that person overtime.

But at least two questions an organization should ask itself before undertaking what could be a time-consuming, comprehensive and expensive (in terms of professional consultants’ and/or attorneys’ fees) re-evaluation of all its positions are these: One, Is overtime pay a big issue for us? If not, you may want to maintain the status quo, at least until the application and interpretation of these new regulations becomes better defined through Wage Hour opinion letters, court cases and other means.

The second question to ask is this: Is the organization likely to save enough in avoided overtime pay to offset the cost of re-evaluating all its positions and the cost of possibly having to defend itself before the Wage and Hour Division or in court, in the event a re-classified employee sues?

Summary of the new regulations. The new regulations took effect August 23, 2004. Under current rules, an employee earning only $155 a week can qualify as a “white collar” employee not entitled to overtime pay. The new regulations raise this minimum salary to $455 a week. The new regulation retains the current “short test” reliance on an employee’s primary duty. It eliminates the long-inactive “long test” rule restricting exempt employees from devoting more than 20% of time in a workweek performing non-exempt duties.

Although there are more than a dozen “exempt” categories (exempt from having to be paid overtime) under the Fair Labor Standards Act (FLSA), perhaps only five or six will be applicable to the typical WSTDA member. Certainly, the “big three” are exempt executive, administrative and professional employees; but exemptions for outside sales people, creative personnel, and computer specialists may also be of interest as well.

Exempt executive employees. The “executive duties” test has three requirements: managing the enterprise; directing the work of two or more employees; and having authority to hire or fire (or such recommendations are given particular weight). The new rule for exempt administrative employees replaces the “discretion and independent judgment” test, which has been the subject of confusion and litigation, with a new test that employees must hold a “position of responsibility.” The new “professional” exemption recognizes as exempt “learned professionals” (accountants, lawyers) and certain employees who gain equivalent knowledge and skills through a combination of job experience, military training, attending a technical school or attending community college.

Exemption for highly compensated employees. Another significant change in the regulations is the exemption of “highly compensated employees.” An employee who performs office or non-manual work and is guaranteed a total annual compensation of at least $100,000 is exempt, if s/he performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee. “Total annual compensation” is defined to include base salary, commissions, non-discretionary bonuses and other non-discretionary compensation.

Disciplinary deductions. The new regulations allow deductions from the salary of exempt employees for full-day absences taken for disciplinary reasons, such as sexual harassment or workplace violence. Currently, only hourly workers’ wages are subject to such deductions. The new rule retains the “salary basis” rule prohibiting deductions from exempt salary for partial-day absences. The issue of actual pay deductions versus loss of leave time for exempt employees has been a source of confusion and resentment for years.

Exempt computer employees. Exempt “computer employees” are computer systems analysts, computer programmers, software engineers or other similarly skilled workers in the computer field. They are eligible for exemption as professionals. Employees who qualify for this exemption are highly skilled in computer systems analysis, programming, software engineering or similar computer functions. From the language of the new regulation, it appears debatable whether the average “IT” person would qualify; however, because job titles vary widely and change quickly in the computer industry, job titles are not determinative of the applicability of this exemption.

Under the new rules, to qualify for the computer occupations exemption, the employee must be paid either a salary at least $455 per week or an hourly rate at least $27.63 and have a primary duty consisting of the application of systems analysis techniques and procedures, the design or testing of computer systems or operating systems or a combination of such duties.

Exempt creative employees. “Creative professionals” are also classified as exempt employees under the new regulations (as they are under the old regulations as well). To meet this criterion, creative professionals must have a primary duty of performing office or non-manual work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work. To qualify for exemption as a creative professional, the work performed must be “in a recognized field of artistic or creative endeavor.” This includes such fields as music, writing, acting and the graphic arts.

For more information, visit the Department of Labor’s “Fairpay” webpage: www.dol.gov. When you get to the DOL website, click on “Fairpay Overtime Rules” on the right hand side.

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