The New FLSA Regulations

Presented by

Richard G. Vernon, Esq.

Marc R. Engel, Esq.

The New Regulations

‘Evolutionary” changes, not “revolutionary”.

Bona fide executive, administrative and professional employees,

Outside sales representatives, and High-level computer employees.

The new regulations only affect these exemptions.

The New Regulations

The regulations do not:

Change the rules for non-exempt employees Eliminate such things as a fluctuating work week plan Change the rules with respect to compensating employees for

such things as on-call time, travel time and training time Eliminate the need for an employer to maintain discretion in

awarding bonuses Affect the exemptions for truck drivers, drivers’ helpers, loaders

and mechanics who are in interstate commerce

The New Regulations

Two other major groups are excluded from the exempt categories in the new regs:

Manual laborers or other “blue collar” workers who perform work “involving repetitive operations with their hands, physical skill and energy.”

Police officers who do hands-on criminal investigations or arrest suspects, fire fighters, or emergency or rescue workers.

SALARIED

SALARIED

EXEMPTDUTIES

The New Regulations

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Reference

The Department of Labor’s “Fairpay” website is located at:

HTTP://www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm

It has a wealth of information available.

The New Regulations

The regs keep the major elements of the so-called “salary basis” rules with which you are familiar:

• The individual is paid a “predetermined amount” of compensation on a regular basis

• That “predetermined amount” cannot be reduced because of variations in the quality of quantity of work performed, that is, if an employee’s absence is caused by the employer or by operating requirements of the business. (Section 541.602(a))

Exceptions

Seven exceptions to the prohibition against deductions from pay, that is, deductions from pay for full days missed may be made in the following situations:

1. An absence for personal reasons, other than sickness or disability.

Note: If the employee is absent for a day-and-a-half, a deduction may only be made for the full day of absence

Exceptions

2. An absence for one or more full days as a result of sickness or disability, if the deduction is made in accordance with a bona fide plan, policy or practice of paying for such absences.

Note: Deductions are also permitted before the employee has qualified under the plan and after the employee has exhausted his or her available leave.

3. Offset of amounts received by an employee for jury duty, attendance as a witness, or temporary military leave.

4. Penalties imposed in good faith for violations of “safety rules of major significance.”

Exceptions

5. A disciplinary suspension of one or more full days imposed in good faith for infractions of workplace rules, if there is a written policy.

6. Less than complete initial or terminal weeks of employment.

7. Weeks in which an employee takes unpaid FMLA leave.

Correcting Improper Deductions

• Improper deductions from salary invalidate an employee’s exempt status, if the employer did not intend to pay the employee on a salary basis. This generally will happen only if the employer has an “actual practice” of making improper deductions.

• Evidence of an “actual practice” includes:

• The number of improper deductions

• The time period during which the improper deductions were made

• The number and geographic location of the employees affected.

Correcting Improper Deductions

• Evidence of an “actual practice” (continued):

• The number and geographic location of managers who made the improper deductions

• Whether the employer has a clear policy permitting or prohibiting improper deductions

• If the employer has an “actual practice,” the exemption is lost only during the time period in which the improper deductions were made, and only for employees in the same job classification working for the same manager(s) responsible for the deductions.

Correcting Improper Deductions

“Safe Harbor” if an employer

• Has a clearly communicated policy that prohibits improper deductions,

• Has a complaint mechanism,• Reimburses employees for any improper

deductions, and• Makes a good faith commitment to comply

The exemption is not lost, unless the employer willfully continues to make improper deductions after receiving employee complaints.

Salary Additions

• Additions to an exempt employee’s pay generally do not invalidate a salary basis of pay, so long as the employee receives the guaranteed salary as part of his or her compensation

• Such pay may even be on an hourly basis for the extra hours worked.

The Salary Basis Test

• The two major changes to the salary basis test:

1. In order to qualify as an exempt executive, administrative or professional employee, the individual must be paid a salary of at least $455 per week (or biweekly at $910, semimonthly at $985.83, or monthly at $1,971.66.) That amounts to only $23, 660 per year.

• Exempt computer employees need to be paid at $27.63 per hour.

• The compensation requirements do not apply to lawyers , doctors, teachers and medical interns or residents.

The Salary Basis Test

• The two major changes to the salary basis test :

2. Employees who have a total annual compensation of $100,000 or more (not including benefits) and who regularly perform one of more of the exempt duties of an executive, administrative or professional employee are exempt.

Primary Duty

• In order to qualify for one of the “white collar” exemptions, an employee’s “primary duty” must be the performance of exempt work.

• “Primary duty” means “the principal, main, major or most important duty that the employee performs.”

• Determination of an employee’s primary duty is based on all the facts in the particular case, with the major emphasis on the character of the job as a whole.

Primary Duty

• Factors to be considered in determining the primary duty include:

• The relative importance of the exempt duties, compared with the other duties,

• The amount of time spent performing exempt work,

• The individual’s relative freedom from direct supervision, and

• The relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee.

Primary Duty

• The amount of time spent performing exempt work is a useful guide in determining whether exempt work is the primary duty of an employee.

• However, time alone is not the sole test, and the exempt employee is not required to spend more than 50% of time performing exempt work.

Exempt Executive Employees

• An exempt executive employee fulfills all of the following:

• Salary of $455 per week

• Primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision.

• Customarily and regularly directs the work of two or more other employees

• Must be two full-time equivalents (FTE’s)

Exempt Executive Employees

• An exempt executive employee must also have the authority to hire or fire other employees or his/her suggestions and recommendations as to hiring, firing, advancement, promotion or other change of status of other employees must be given “particular weight.”

Suggestions and Recommendations

• Factors to be considered in determining whether an employee’s suggestions and recommendations (“suggs and recs”) are given particular weight include include:

• Whether it is part of the employee’s job to make such suggs and recs,

• What is the frequency with which the employee makes suggs and recs, and

• What is the frequency with which the employee’s suggs and recs are relied upon.

• The suggs and recs must pertain to the employees whom the executive regularly directs.

Professional Exemption

• The “professional exemption” applies to two different kinds of employees:

• An individual whose primary duty is the performance of work “requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” (The “learned” professional exemption)

• An individual whose primary duty is the performance of work “requiring imagination, originality or talent in a recognized field or artistic or creative endeavor.

Professional Exemption

• An exempt learned professional employee receives a salary of at least $455 per week and fulfills all of the following standards:

1. The individual performs work requiring advanced knowledge

• The work must be predominantly intellectual and requires the consistent exercise of discretion and judgment

• Advanced knowledge cannot be attained at the high school level

Professional Exemption

• An exempt learned professional employee receives a salary of at least $455 per week and fulfills all of the following standards:

2. The advanced knowledge is in a field of science or learning, including law, medicine, accounting, various types of physical, chemical and biological sciences, and pharmacy.

• Distinguished from the mechanical arts and skilled trades.

Professional Exemption

• An exempt learned professional employee receives a salary of at least $455 per week and fulfills all of the following standards:

3. The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

• The exemption is available to employees in the appropriate professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction.

Professional Exemption

• The exemption is not available for occupations that may be performed with only general knowledge acquired by an academic degree in any field, with knowledge acquired through an apprenticeship or with training in the performance of routine processes.

Professional Exemption

Scorecard with respect to certain specific positions:

• Registered or certified medical technologists• Exempt, if appropriate education

• Registered nurses• Exempt

• Licensed practical nurses• Non-exempt

• Accountants• Exempt

• Bookkeepers and Accounting Clerks• Non-exempt

Break

Please take a moment to enjoy some food or drinks in our adjoining conference room.

We will reconvene in five minutes.

Administrative Exemption

• Former requirements(Short test: $250 per week)

• Primary duty of performing office or non-manual work directly related to management policies or general business operations of the employer or the employer’s customers

• Customarily and regularly exercises discretion and independent judgment

Administrative Exemption

• Former requirements(Long test: $155 per week)

• Short term plus…

• Regularly and directly assists proprietor or other exempt employee or performs specialized or technical work under only general supervision

• 20% (40% for retail) limit on activities not directly or closely related

Present Issues

• What constitutes discretion and independent judgment?

• Work involving technical knowledge

• “Production worker” issue

New Rule

• Standard test - $455/week

• Primary duty of performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers

• Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance

• The exercise of discretion and independent judgment usually involves considering possible courses of conduct and acting or making a decision after various possibilities have been considered

• Regulation identifies “discretion and independent judgment” factors

-Directly Related to Management or General Business Operations

To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example from working on a manufacturing production line or selling a product in a retail or service establishment. Work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.

Discretion and Independent Judgment

• Ten factor test to determine discretion and independent judgment:

• Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices;

• Whether the employee carries out major assignments in conducting the operations of the business;

• Whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business;

• Whether the employee has authority to commit the employer in matters that have significant financial impact;

• Whether the employee has authority to waive or deviate from established policies and procedures without prior approval;

Discretion and Independent Judgment

• Ten factor test to determine discretion and independent judgment:

• Whether the employee has authority to negotiate and bind the company on significant matters;

• Whether the employee provides consultation or expert advice to management;

• Whether the employee is involved in planning long or short-term business objectives;

• Whether the employee investigates and resolves matters of significance on behalf of management;

• Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances

Manuals

The special issue of manuals• Use of manuals relating to highly technical, scientific,

legal, financial or other similarly complex matters that can be understood or interpreted only by those with an advanced or specialized knowledge or skills does not preclude exemption

• These materials and procedures provide guidance in addressing difficult or new circumstances and therefore the use of such materials would not affect an employee’s exempt status

Specific Occupations

• Insurance claim adjusters

• Financial services industry employees (including banks)

• “Team Leaders” (run teams of workers, though don’t supervise; probably a limited exemption for team leader involved in major projects)

• Executive Assistant (no real change; not secretarial or clerical assistants)

• Human resources managers

• Purchasing Agents

• Inspectors

Summary

• Small changes overall

• DOL clarifies that discretion and independent judgment does not need to be exercised “customarily and regularly”

• DOL clarifies rule on use of manuals of SOPs

• DOL discusses other factors indicating presence or absence of discretion

Computer Employees

• Requirements

• Amendments are intended to consolidate and clarify requirements

• Employers have a choice paying on a salary basis (at least $455/week) or on an hourly basis (at least $27.63/hour)

• The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system function specifications

Computer Employees

• The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications

• The design, documentation, testing, creation or modification of computer programs related to machine operating systems

• A combination of the aforementioned duties, the performance of which requires the same level of skills

• No requirement to exercise discretion and independent judgment

• Not eligible for “highly compensated” test

Outside Sales

• Current requirements

• Employed for the purpose of making sales or in obtaining orders or contracts

• Customarily and regularly engaged away from the employer’s place of business

• Does not devote more than 20% of the hours worked by nonexempt employees of the employer to activities that are not incidental to and in conjunction with outside sales

• No salary requirements

Outside Sales

• New Rule

• Primary duty of making sales or in obtaining orders or contracts

• Customarily and regularly engaged away from the employer’s place of business

• 20% limitation on inside sales and non-incidental work no longer applicable

• No salary requirements

Proactive Measures For Employers

• Review and revise classification of employees

• Change low-paid supervisory personnel and others earning less than $455/week to non-exempt status

• Convert misclassified employees to non-exempt status

• Opportunity to correct past policies

Proactive Measures For Employers

• Review and revise job descriptions• Clarify and list actual duties

• Emphasize exempt duties

• Describe discretion and independent judgment, where applicable – use as many of factors as possible

• Expressly give executives authority to hire and fire or to make recommendations that will be given particular weight

• Weigh and document the determination of a position’s primary duty

• Document why workers are exempt, and under which exemption

• Seek counsel for close classification issues

Proactive Measures For Employers

• Review payroll practices

• Review sample payroll runs for salary of part-time and other workers and $455/week threshold

• Make sure they are complying with salary basis test

• Train managers and payroll workers to avoid impermissible deductions

• Be sure anyone over $100,000 is now exempt

Proactive Measures For Employers

• Review and revise policies and handbooks

• To comply with salary basis test

• To allow disciplinary deductions in full day increments

• To define the workweek

• To distinguish policies for exempt workers from nonexempt, salaried and hourly workers

• To add in “safe harbor” policy to allow correction for improper deductions

Our Professionals

Richard G. Vernon

Marc R. Engel

www.LerchEarly.com

301.986.1300