White-Collar Wrinkles

Dont let the new FLSA regulations leave you steamed.

By Jonathan A. Segal Dec 1, 2004

HR Magazine, December 2004

The U.S. Department of Labor’s (DOL) primary objective in revising the white-collar exemptions from the minimum wage and overtime rules under the Fair Labor Standards Act (FLSA) was to make it easier for employees and employers to understand their rights and obligations under the law. In many respects, the regulations—which went into effect on August 23—achieved that goal.

But the DOL’s yearlong rulemaking process did not smooth out all the wrinkles in the regulatory fabric. And, in some instances, it starched in new ones.

The white-collar exemptions include the executive, administrative and professional exemptions, as well as those for computer professionals and outside salespersons. The revised regulations also include a new exemption for highly compensated employees who regularly perform at least one of the duties of an exempt executive, administrator or professional.

Generally speaking, for an employee to fall within any one of these exemptions, the following three requirements must be met:

  • The employee must be paid at least the regulatory minimum salary. (Outside salespersons and certain professional employees, such as attorneys, are not subject to this requirement.)
  • The employee must be paid on a salary—rather than an hourly—basis, and the employer must make no deductions from that individual’s pay that are not consistent with being paid a salary.
  • The employee’s primary duties must be “exempt” in nature.

These fundamental principles—which did not change from the old rules—sound pretty straightforward. But now, as in the past, don’t expect their application to be smooth as silk. The purpose of this article is to review some of the basics, while paying particular attention to some of the most stubborn regulatory wrinkles.

This analysis assumes some knowledge of both the old and new regulations, and you should not rely on it as your only resource in making classification decisions. Think of it as an extra—the steam in your compliance iron.

Minimum Salary and The ‘Other’ Salary-Level Test

The new regulations threw out the old long and short duties tests and their respective minimum salary levels in favor of a single, higher minimum salary of $455 per week—$23,660 annually—subject to a few narrow exceptions. Accordingly, employees who earn less than $455 per week ordinarily cannot be exempt, regardless of the nature of their job responsibilities.

However, meeting the $455 salary threshold is not the only time the amount of the employee’s salary comes into play when determining if the employee is exempt or nonexempt. In fact, the amount of the employee’s salary also factors in the duties test. Here’s how: For all the white-collar exemptions, the key issue is whether an employee’s primary duties are of an exempt nature. The regulations recognize that most, if not all, exempt employees perform some nonexempt work. So the regulations provide four factors for an employer to consider in determining whether an employee’s primary duties are exempt:

  • The relative importance of the exempt duties as compared with other kinds of duties.
  • The amount of time spent on exempt duties.
  • The employee’s freedom from direct supervision.
  • The relationship between the employee’s salary and the wages paid to nonexempt employees performing the kind of nonexempt work performed by the salaried employee.

The last factor is the focus here. The following example illustrates the point: Assume you have a salaried employee whom you think falls within the administrative exemption. This employee’s nonexempt work involves inputting data into your computer system. So you need to compare this employee’s salary with the wages paid to the nonexempt employees whose primary responsibility is inputting data. If their wages average $450 per week, then paying the employee whom you wish to treat as exempt $455 per week may not be enough to classify the employee as exempt.

Of course, this is only one of the four factors to be considered in determining an employee’s primary duty. However, it is a factor that is often overlooked and could be the straw that breaks the camel’s back if the employee’s exempt status is otherwise questionable, so be sure to take it into account.

Executive: One Plus One Is Not Always Two

Three conditions must be satisfied for an employee to fall within the executive exemption:

  • The employee’s primary duty involves managing the enterprise in which the employee is engaged—or a customarily recognized department or subdivision.
  • The employee customarily and regularly directs the work of two or more other employees.
  • The employee has authority to hire or fire other employees, or the employee’s suggestions and recommendations are given particular weight regarding the hiring, firing, advancement, promotion or change of status of other employees.

The focus here is directing the work of at least two other employees. Believe it or not, there are a number of potential traps in counting to two.

First, these must be equivalent to two full-time employees; one full-time and one part-time employee is not enough. Four part-time employees might suffice if they are the equivalent of two full-time employees.

Next, you cannot count employees more than once in crediting another employee with their supervision. However, if an employee reports to more than one supervisor, you can divide credit between them (each getting proportionate credit for the responsibility they have in supervising the employee).

Finally, you can count only your company’s own employees. You cannot count employees of a temporary agency or contract employees (including subcontractors on a project).

Administrative: Independence Is, As Independence Does

There are two fundamental requirements for meeting the administrative exemption:

  • The employee’s primary duty must be the performance of office or nonmanual work that is directly related to the management or general business operations of the employer or the employer’s customers.
  • The primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

The professional exemption also requires judgment, but there is no requirement that a professional’s judgment be “independent.” Because the independent qualifier appears in the administrative exemption but not the professional exemption, it must be very important to the administrative exemption.

On the other hand, some level of independence is important for all of the exemptions. As noted above, one of the four factors in determining whether an employee’s primary duties are exempt is the employee’s relative freedom from supervision.

Thus, an employee’s relative degree of independence, especially with regard to the administrative exemption, creates substantial risk for employees whom you might want to treat as exempt but who report to micromanagers.

Here’s an example: Two employees have the same job description but report to different managers in different units. One manager allows the subordinate substantial independence in decision-making. The other manager needs to approve font changes in memos. Even if the first employee is exempt, the second employee may not be.

The point is not that employers must evaluate separately the management style of each individual who supervises exempt employees to determine whether those subordinates are exempt. That is neither practical nor desirable. What is important is that those who supervise exempt employees receive appropriate training so that they don’t micromanage their subordinates out of their exempt status.

Professional: Prolonged And Specialized Instruction

To be a learned professional, an employee’s primary duty must be the performance of work requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.

Lawyers acting as lawyers are easy: They are professionals. (At least in terms of training!) Other exempt employees include CPAs, engineers and registered nurses.

(The DOL also has said explicitly that embalmers may be exempt. How-ever, an employee is not an exempt embalmer solely because he drains the life from you. As with other professionals, he must have the requisite degree and licensure.)

But what about paralegals who have a paralegal certificate? And where do HR professionals fit in—especially those who have professional certifications? The key is the specific educational requirement. Keep in mind that it must be both “prolonged” and “specialized.”

Apply this to paralegals. Most paralegals have a college degree, but that’s not specialized. Most paralegals also have some specialized certificate, but the training to receive it is not prolonged. That’s why most paralegals will not fall within the professional exemption.

The same is true of most human resource professionals. Being a professional in the business sense does not automatically translate into being a “professional” in the legal sense.

Unfortunately, the regulations do not provide substantial guidance on what constitutes a “prolonged course” relative to specialized intellectual instruction. As a practical matter, anything less than a four-year specialized program is at risk.

However, just because these professionals don’t fall within the “professional” exemption does not mean that they are nonexempt. Depending on their job responsibilities, paralegals and HR professionals may fall within the administrative exemption.

Most paralegals will not fall within the administrative exemption because they will not have the requisite discretion and independent judgment—but some will.

Most human resource professionals will fall within the administrative (or executive) exemption, but some will not. For example, recruiters who simply screen applications for predetermined requirements, or benefits coordinators who generally only collect, submit and file data, are unlikely to be exempt.

Highly Compensated: When a Year Is Not a Year

In addition to the three traditional white-collar exemptions, the revised regulations include a new exemption for “highly compensated employees.” Highly compensated employees are not automatically exempt, but under the new regulations it will be easier to classify them as exempt. Instead of meeting all the requirements of the administrative, professional or executive exemption, highly compensated employees, as defined by the regulations, must customarily and regularly perform only one exempt duty.

Computer professionals who are paid on a salary rather than an hourly basis may fall within this exemption. Outside sales employees will not because they are not subject to any minimum salary requirement.

To qualify for the highly compensated exemption, an employee must earn $100,000 per year on a calendar, anniversary or fiscal year basis—employer’s choice. (If the employer doesn’t designate, the default is calendar year.)

But what happens if an individual is employed for less than a full year? The regulations provide that the minimum salary can be prorated so as to preserve the exemption, but they do not directly address what to do if an individual is employed for the entire year and then takes an extended unpaid leave of absence. Can the employer prorate the $100,000 requirement based on the period of time the employee is on unpaid leave?

Although the regulations are silent on this precise issue, the rationale allowing proration for employment of less than one year logically should apply to individuals who are employed but who are on leave. But things aren’t always what they should be. The DOL has stated in its regulatory preamble that its enforcement position will be that proration is not available for employees on unpaid leave for some portion of the qualifying year.

The DOL failed to anticipate the substantial problems its interpretation could create for employers. Assume that an employee who performs exempt duties is expected to earn $100,000 in salary for the year. Accordingly, you don’t pay her overtime. Unexpectedly, however, she goes out on a four-month leave and fails to meet the $100,000 standard by the end of the year. Under the DOL’s enforcement position, the employer may owe the employee overtime for the eight months she worked, unless the employer is able to establish that the employee satisfies all of the requirements of either the executive, administrative or professional exemption—in other words, if she performs all, not just one, of the duties for a particular exemption.

Accordingly, the less risky practice is to classify even highly compensated employees under one of the traditional exemptions, when possible, and to rely on the highly compensated exemption only when no other exemption clearly applies.

In addition, employers should have a mechanism in place to automatically reassess the exempt status of highly compensated employees who go out on Family and Medical Leave Act (FMLA) leave or other extended leave.

Outside Sales: Home Is Where the Business Is

For an employee to fall within the outside sales exemption:

  • The employee’s primary duty is making sales or obtaining orders for contracts or services for the use of facilities.
  • The employee is customarily and regularly away from the employer’s business in performing this primary duty.

But what does it mean to be “away from the employer’s business?” Does this cover sales employees who work out of their homes?

For purposes of the outside sales exemption, an employee’s home is considered the employer’s business. “Away” from the employer’s business generally means at customer or client sites.

What about promotional work designed to help facilitate outside sales? Can that count in determining whether the employee’s primary duty is outside sales? The regulations provide that promotional work can be considered only if it is designed to facilitate an employee’s own sales and not those of another employee. In short, it counts if the organization encourages selfish silos, but it doesn’t count if the organization or the employee works collaboratively.

Computer Professionals: Money Isn’t Everything

As a general rule, employees must be paid on a salary basis to be exempt. Employees paid on an hourly basis are nonexempt, even if they are nuclear chemists with multiple Ph.Ds. Computer professionals are an exception, however. They can be paid an hourly wage of at least $27.63, as established by the DOL’s regulations, and still be exempt. But computer professionals still have to pass the duties test. Being paid the requisite salary of at least $455 per week or the required hourly wage does not create an automatic exemption. Whether salaried or hourly, a computer employee will be exempt as a professional only if the employee’s primary duty is:

  • The application of systems analysis techniques and procedures, including consulting with users to determine hardware, software or system functional specifications.
  • 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 a computer program related to machine operating systems.
  • A combination of the aforementioned duties, the performance of which requires the same level of skills.

In many organizations, help desk operators and other troubleshooters are treated as exempt based on their hourly rate, even though their duties do not qualify for the professional exemption. It is possible that these employees still may fall within the administrative exemption. However, without diminishing their importance, many often lack the discretion and independent judgment necessary to meet the exemption.

While the requirements for the computer professional exemption have not changed, DOL officials characterize the new regulations as a “catalyst for compliance” and promise vigorous enforcement. It may be time for some housekeeping in the classification of computer employees.

Question Pending: Partial-Day Leave Deductions

To be exempt, employees ordinarily must be paid a salary that is not subject to deductions inconsistent with the salary basis requirement.

For example, an employer generally cannot make deductions from pay for partial days of absence due to illness or other personal reasons. Pay deductions for absences due to illness or other personal reasons must be in full-day increments only (unless the absence is covered by the FMLA).

Even though an employer cannot dock an employee’s pay for partial-day absences, can the employer require or allow the employee to take accrued leave benefits in less than full-day increments? In other words, does the FLSA prohibit the docking of benefits banks in partial-day increments?

The regulations are silent on this issue. However, in the preamble, citing its old Wage and Hour Opinion letters, the DOL generally has taken the position that an employer can dock an employee’s benefits bank in less than full-day increments, as long as the employee receives full pay for the day. This means, for example, that you can make an exempt employee use three hours of vacation time to cover a partial-day absence, but you cannot reduce that person’s pay.

The problem is that the DOL’s comments in the preamble are not legally binding. They simply indicate the DOL’s enforcement position, and a few courts have come out the other way. Accord-ingly, while the DOL’s enforcement position gives an employer a strong defense, the defense is not ironclad.

Suspension Suspense

Under the old rules, exempt employees could be suspended without pay in full-week increments only, subject only to one narrow exception for violations of major safety rules. The new regulations add a second, broader exception: An exempt employee can be suspended without pay in full-day increments for violating workplace conduct rules pursuant to written policies applicable to all employees.

However, the new exception is not as broad as it first may appear. The exception applies only if the suspension is for a violation of a “workplace conduct” policy, which should be interpreted narrowly to exclude performance and attendance problems, says the DOL’s commentary in the preamble.

Moreover, the suspension must be pursuant to a written policy applicable to all employees. It is not entirely clear whether the written policy required is the disciplinary policy or the workplace conduct policy pursuant to which the employee is being suspended.

To play it safe, the employer should address the issue in both. That is, an employer should reserve the right to suspend exempt employees without pay in full-day increments in its disciplinary policy. It also should add similar language to each specific workplace conduct policy to preserve the right to suspend exempt employees without pay in full-day increments.

Find It; Fix It

As you review your position classifications, keep in mind that, in most cases, your self-assessment probably will be discoverable. If you determine that a position probably is not exempt but you don’t change the classification, there is a greater likelihood that the violation would be found willful in litigation. A willful violation warrants a three-year rather than a two-year statute of limitations, and double (liquidated) damages apply.

Remember also that a job may be exempt under federal law but not exempt under state law. Employees are entitled to the protection of the more generous standard. If a state in which you operate does not automatically follow federal law, you need to review the state law in addition to the federal law.

Read the Instructions

As you know, if you don’t read the care instructions on an article of clothing, you end up washing it at your own peril. The same applies to classification of employees as exempt under the FLSA. Of course, the DOL’s regulations are a lot longer—and, in some cases, more inscrutable—than the tiny symbols on a garment label. But the admonition still applies: The way to avoid being taken to the cleaners is to follow the rules.

Author’s Note: This article should not be construed as legal advice or as pertaining to specific factual situations.

Jonathan A. Segal, Esq., a contributing editor of HR Magazine, is a partner in Philadelphia in the Employment Services Group of Wolf, Block, Schorr and Solis-Cohen LLP. His practice concentrates on counseling clients, developing policies and strategic plans, and training managers to avoid litigation and unionization.

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