The New White Collar Regulations: Now Who is an Exempt Employee? By: Dean L. Silverberg, Daniel Abrahams, Mitchell S. Allen, Epstein Becker & Green, P.C.

A Little Bit of History

The Federal Fair Labor Standards Act (“FLSA”) was passed in 1938 as the capstone of President Franklin Delano Roosevelt’s New Deal legislation to help bring the sluggish American economy out of the doldrums of the Great Depression. Revolutionary when created, the FLSA set a federal minimum wage, required overtime premiums after forty hours, regulated child labor and set record-keeping rules for employers engaged in interstate commerce.

Section 13(a)(1) of the FLSA exempts certain employees from minimum wage and overtime pay. The Secretary of Labor issued implementing regulations at 29 C.F.R. Part 41 which defined and delimited the scope of the Section 13(a)(1) exemptions. Because the FLSA delegates to the Secretary of Labor the power to “define and delimit” the specific terms of the exemptions, the regulations so issued have the binding effect of law.

However, consider these very interesting facts:

Fast Forward to 2004

On April 20, 2004, more than a year after proposed regulations were issued in March 2003 to the general public for comment, the Department of Labor (“DOL”) released its long-awaited final regulations concerning the exempt status of executive, administrative and professional (“EAP”) and other “white-collar” employees under the FLSA. These rules, which became effective on August 23, 2004, are to be codified in Title 29 of the Code of Federal Regulations, Part 541. After many years, these rules revise the salary levels and the “duties” and “salary basis” tests that white collar employees must meet to be exempt from the FLSA’s requirements for minimum wage and overtime compensation. The new regulations are the first major regulatory overhaul of the EAP exemption “duties” tests since 1949. Also, for the first time since 1975, the regulations increase the minimum salary that an employee must receive to qualify for the exemptions.

General Rules for Exempt Status

Question: Under the FLSA, how do you know which of your firm’s supervisors, managers, legal administrators and executives are exempt from the FLSA’s overtime requirements? Let’s see how the new regulations apply.

Under the new regulations, the minimum salary needed to be considered an exempt employee is $455/week ($23,660/year). DOL refers to this minimum as the “standard” test. The “long” and “short” tests with different salary levels for different exemptions have been eliminated.

CAUTION: However, to maintain exempt status from among other things, overtime compensation:

AND: The employee must also perform duties which qualify for the executive, administrative or professional exemption, as more fully described in a later part of this article.

So, first of all, . . . Are Any Deductions Permissible?

The regulations expressly permit deductions – in full day increments – from exempt employees’ weekly pay only under the following conditions:

The new regulations also provide for a new special form of deduction. In this regard, increasingly, employers desire to discipline white collar employees for inappropriate on-the-job conduct such as sexual harassment or workplace violence. Yet, until now, an exempt employee could not be suspended for less than a full workweek for such behavior. (In contrast, a non-exempt worker could be disciplined with a shorter suspension.) Under new section 541.602(a)(5) (which replaces old section 541.118), an employer may now impose on an exempt employee “unpaid disciplinary suspensions of one or more full days” for “infractions of workplace conduct rules.” According to DOL, such rules include those addressing sexual harassment, violence, alcohol and drug abuse, and violations of state and federal laws.

Generally, when improper deductions were made under the previous regulations, an employer could lose the exemption for its employees and be liable for overtime compensation at time and one-half for all hours over 40 for that employee – and perhaps all others – going back at least two years. Think about it. That could be a huge number! The new regulations both clarify and change the effect of making improper deductions, and give the employee a big break.

The old “window of correction” (now in section 541.603(c)) has been simplified to state that: “Improper deductions that are either isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions, if the employer reimburses the employees for such improper deductions.” In the preamble to the regulations, DOL explains that: “Inadvertent deductions are those taken unintentionally, for example, as a result of a clerical or time-keeping error.” However, DOL refused to define “isolated.”

Under the new subsections 541.603(b) and (d), an employer that has an “actual practice of making improper deductions” will lose the exemption only for “the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions.” And, under the new “safe harbor” provision, if the employer has a “clearly communicated policy” that prohibits improper pay deductions, and has a complaint mechanism, reimburses employees for improper deductions and makes a good faith commitment to comply in the future, the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. In light of this new rule, it would be prudent for employers to review their policies and promulgate a written policy prohibiting improper deductions from the salaries of exempt workers.

Defining the Law Firm White Collar Exemptions

1. The Executive Exemption

The exempt executive’s primary duty must consist of the management of your law firm or a recognized department or subdivision. Examples of management include training employees, setting salary, resolving grievances or imposing discipline, planning/controlling the budget, monitoring legal compliance, assigning work, scheduling work, and interviewing, hiring and firing workers. The executive must customarily and regularly direct the work of two or more full time or their equivalent employees. Under the new regulations, the executive exemption is narrowed slightly and clarified. In accordance with the new “standard test” contained in the regulations, exempt executives will be required to have the power to hire and fire or, at least, to have their recommendations regarding these subjects be given “particular weight.” This comes from the old “long test.” For the first time, the final regulations define “particular weight.” DOL also has clarified in the new regulations that managers need not be engaged in regular supervision of employees. Activities such as “planning and controlling the budget” noted above also are management functions. Also, executives may engage in other duties while simultaneously managing employees.

2. The Administrative Exemption

In the preamble to the regulations, the DOL notes that an administrative exempt employee need only have a primary duty that “includes” the exercise of discretion and independent judgment, not that the discretion and independent judgment be exercised “customarily and regularly.” Also, DOL discusses other factors relevant to assessing the degree to which an employee exercises discretion and independent judgment. DOL has made a modest effort to clarify the requirement of exercising discretion and independent judgment by adding a new section 541.704 entitled “Use of Manuals.” That provision makes clear that the use of manuals, guidelines or other established procedures containing or relating to highly technical, scientific, legal, financial or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills does not preclude an employee from being exempt.

Perhaps the most useful development relating to the administrative exemption is contained in new section 541.203. There, DOL discusses the exempt status of specific occupations that have been in doubt over the years. Among these of interest to law firms are executive assistants, human resources managers, and purchasing agents (who can bind the firm). While the regulations speak to the exempt status of “executive assistants,” caution is urged. The exemption will not generally apply, for example, to an individual designated as the executive assistant to a named partner of the firm, if the individual merely performs routine clerical tasks, secretarial functions, travel planning, and scheduling. Rather, for the exemption to apply, that employee, without specific instructions or procedures, must be delegated authority regarding “matters of significance” such as opening and replying to mail, making administrative decisions on behalf of the partner, acting as an office manager, attending meetings, assigning and distributing work to others, and other high-level functions.

3. The “Learned” Professional Exemption

Section 541.300 et seq. sets out the requirements to be used when determining whether an employee qualifies for the “learned” professional exemption. To come under this exemption, the employee must earn at least $455/week and have the primary duty of performance requiring knowledge of an advance type (defined as work which is primarily intellectual and varies in character and which includes work requiring the consistent exercise of discretion and independent judgment) in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. The “exemption is also available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as degreed employees but who attained the advanced knowledge through a combination of work experience and intellectual instruction.” Some states allow non-degreed lawyers to apprentice and qualify for the bar, for example.

As with the administrative exemption, the most useful development relating to the professional exemption may be new section 541.301(e) which discusses the exempt status of specific occupations. In the law firm realm, this includes a discussion of accountants and paralegals. As regards accountants, those who are Certified Public Accountants (and/or perform duties at that level even if not CPA’s) would be considered professionally exempt; however accountants performing clerical or bookkeeping functions would not.

NOW . . . for the $64,000 question: What do the new regulations say about all those paralegals that many law firms have treated as exempts? Don’t get your hopes up! In keeping with DOL’s consistent position espoused in DOL opinion letters over the last 15 or more years, paralegals will not be considered professionally exempt. Exceptions would apply to the true paralegal manager who would otherwise fit the executive exemption or where for example, the law firm hires someone who is otherwise a professional, such as a degreed and licensed engineer, to work in a paralegal capacity utilizing her professional engineering expertise. DOL is silent on the administrative exemption but in the past has said that paralegals are not licensed to practice law and cannot exercise discretion and judgment since they cannot give legal advice. Otherwise, if the firm continues to treat their cadre of paralegals as exempts, and those paralegals consistently work over 40 hours per week, the firm faces potential exposure going back at least two years under the FSLA and possibly much longer under applicable state law.

4. The Computer Employee Exemption

The amendments to the regulations relating to computer employees are intended solely to consolidate and clarify requirements. It is now clear that employers have a choice of paying on a salary basis (at least $455/week) or on an hourly basis (at least $27.63/hour). In addition, there is no requirement that these employees exercise discretion and independent judgment. Computer employees are also not eligible for “highly compensated” test noted below.

Special Rule for “Highly Compensated Employees”

Under the new rules, highly compensated individuals earning at least $100,000 per year could be exempt under a streamlined duties test. Such employees would qualify as exempt executive, administrative, or professional employees if they are paid at least $455/week on a salary or fee basis and “customarily and regularly” perform even one of the exempt duties of a white-collar employee. It is not necessary for such an employee to meet the full duties test for the claimed exemption. For example, a highly compensated manager can be an exempt executive employee, even if he or she does not have the power to hire and fire, if other executive duties are performed and the salary requirements are met. The new regulations provide that the “high level of compensation is a strong indication of an employee’s exempt status.”

What Should Employers Should Do?

We offer the following suggestions:

1. Audit Compliance with the Salary Basis Test
The first thing any employer should do is to review compliance with the new higher level salary requirement. A prudent employer should audit its payroll practices. Review a sample of a payroll run checking for salary levels, partial day salary deductions, and other salary basis test violations. Check your part-time workers and those in job sharing arrangements to make sure they individually are being paid a salary of at least $455 a week.

2. Train Your Payroll Department
The next step is to train your payroll department in salary basis issues. Make them aware of the wage deduction rules under the FLSA and pertinent state law. If necessary, use some outside trainers to do a short in-house presentation for your payroll department.

3. Reclassify Highly Compensated Workers
Look closely at employees who earn close to or over $100,000 a year. They may be eligible for the special highly-compensated employee test. Even DOL estimates that 107,000 workers who earn over $100,000 are eligible for the highly compensated test. Consider boosting payments or making an end of the year lump sum payment to highly paid nonexempt workers to put them over the dollar threshold.

4. Revise Job Descriptions
Review and revise job descriptions. Make sure they better reflect the actual duties of workers. Use the terminology of the DOL regulations in your job descriptions.

5. Check Occupations Subject To New Guidance
If you employ workers who are engaged in one of the occupations that the new regulations seek to “clarify,” now is a good time to re-examine those workers. DOL has offered new guidance for administrative jobs, such as paralegals. The professional regulations have been repackaged; there may be subtle differences under the new provisions, or as noted above, even less eligibility for exempt status for paralegals.

6. Document Exemptions
When you review a job description, create a paper record why the position is exempt. Weigh the primary duty and lay-out what it is. Document why the job is exempt and which exemption(s) apply.

7. Revise Policies and Handbooks
You need clear policies, preferably segregated by exempt and nonexempt categories, for wage deductions and salary basis issues. You can take advantage of clarifications in the new regulations allowing such exempt worker practices as: (1) deductions from leave accounts; (2) recording and tracking hours of work; (3) requiring specific work schedules; and (4) provision of some kind of overtime pay, but at less than 1.5 times the regular rate. Review your disciplinary policies for suspension of exempt employees and bring them into compliance with the new regulations.

8. Comply With the Safe Harbor Rule
As discussed above, DOL has offered a new safe harbor to insulate employers from salary basis errors. The safe harbor is available if an employer: (1) has a clearly communicated policy prohibiting deduction; (2) has a complaint mechanism; (3) reimburses employees for wrongful deductions; and (4) commits to future compliance. To avoid willful violations, employers should revise their policies and handbooks accordingly. But, of course, they must then follow through on complaints.

9. Correct the Errors of The Past
This moment presents a unique opportunity to right the FLSA ship and bring employers into compliance with the law. Nonexempt employees are generally entitled to overtime. Reclassify wrongfully-exempted workers and start paying them overtime. (However, consult your employment counsel, and do it carefully, to avoid the possibility of retroactive overtime for large groups of employees). Or, better yet, manage the workers better to avoid overtime. Institute new timekeeping procedures to keep track of hours worked.

10. Do a Self-Audit and Get Help
States such as New Jersey also have their own unique and often stricter laws on wage deductions. (See endnotes) If that means you need the assistance of outside consultants and/or counsel, then hire one. It is better to do so now rather than later, and certainly justifiable given the new rules.

Conclusion

It’s time to take a hard critical look at your exempt employees in order to review your firm’s classifications, assess potential risks and liabilities and evaluate the appropriateness of change. Good luck.

This article has been provided for informational purposes only, and has not been intended to offer specific legal advice from counsel. Please consult your labor and employment law attorneys in connection with any fact specific situation, including the effect of any state or local laws on that situation.

Dean L. Silverberg is a partner in the New York City office of Epstein Becker & Green, P.C., a national law firm which specializes in the representation of employers in connection with labor and employment law litigation, administrative proceedings, union management matters and human resources issues. He may be reached at 250 Park Avenue, New York, New York 10177, telephone number (212) 351-4642, facsimile number (212) 661-0989, and e-mail address DSilverberg@ebglaw.com. Co-authors, Mr. Silverberg’s partners, are Daniel B. Abrahams, a partner in the Washington, D.C. office of Epstein Becker & Green, a noted author and speaker on the FLSA. He can be reached at 1227 25th Street, NW, Suite 700, Washington, DC 20037, telephone number (202) 861-1854, facsimile number (202) 296-3554, and e-mail address Dabrahams@ebglaw.com, and Mitchell S. Allen, in the Atlanta office of Epstein Becker & Green, and can be reached at 945 East Paces Ferry Road, Suite 2700, Atlanta, GA 30326, telephone number (404) 923-9040, facsimile number (404) 923-9099 and e-mail address MAllen@ebglaw.com.

End Notes

Note that where a true exempt executive, administrative or professional employee is paid on a salary basis, the employer may make deductions from the employee’s salary for any hours taken as intermittent or reduced leave under the Federal Family Medical Leave Act (“FMLA”) within a workweek without affecting the exempt status of the employee. (29 CFR § 825.206(a).)

Factors used to determine whether an employee’s suggestions are given “particular weight,” include:
(1) Whether it is part of the employee’s job to make such suggestions; (2) the frequency with which such suggestions are made; and (3) the frequency with which the employee’s suggestions are followed.

Editor: Debra F. Goldman (DGoldman@GMLJ.com) (This publication is the property of the Atlanta Association of Legal Administrators. Reproduction or reprint without prior permission is strictly prohibited. Click here to request reprint permission.)

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