Analysis of the Department of Labor's Proposed Changes Under the Fair Labor Standards Act

By Thomas J. Flaherty, Elizabeth A. Lalik and Blake M. Guy

Introduction and Overview

On March 31, 2003, the Department of Labor ("DOL") published proposed regulations that redefine the "white collar" exemptions under the Fair Labor Standards Act ("FLSA" or the "Act"). The proposed rules would substantially modify which employees are "exempt" from the minimum wage and overtime requirements of the FLSA, and would alter the tests employers use to classify their employees as "exempt" or "non-exempt" under the Act.

There are several key changes in the proposed rules:

1. Special rule for "highly compensated employees": if an employee makes $65,000 or more annually and he/she performs any one of certain "exempt" duties, that employee is classified as "exempt" even if they do not meet all of the criteria ordinarily required to qualify as an exempt executive, administrative, or professional employee;

2. Liberalization of the "safe harbor provision": currently, if an employer makes improper deductions from a single employee's salary, the employer risks losing the exemption for an entire class of employees (subject to the FLSA's "window of correction" for inadvertent mistakes). Under the proposed rules, the exemption is only lost if there is a pattern and practice of improper deductions, in which case the lost exemption applies only to employees in the same job classification and working for the same manager who is responsible for the impermissible deductions. Moreover, the rules contain a new "safe harbor" provision: if the employer has a written policy prohibiting improper deductions which it publishes to employees, and it reimburses employees for any improper deductions, then the employer would not lose the exemption for any employees unless the policy is repeatedly and willfully violated;

3. Authorization of full-day deductions from pay for disciplinary reasons: currently an employer risks losing the exemption if it docks an employee's pay for disciplinary reasons other than a violation of a significant safety rule. The proposed rules would permit an employer to discipline an employee who has violated workplace conduct rules (such as sexual harassment or workplace violence policies), by docking the employee's salary for one or more full days without risking the exemption;

4. Elimination of "short" and "long" tests and increase in the minimum salary level: the current regulations contain two tests - a "short" test and a "long" test - for each of the three white-collar exemptions (executive, administrative, or professional). The proposed rules contain only one set of criteria for each exemption. The proposed rules also increase the minimum salary level to qualify as exempt from $250/week (under the current "long" tests) to $425/week ($22,100 annually);

5. Liberalization of "outside sales employees" exemption: the proposed rule eliminates the current requirement that to qualify for the outside sales exemption, a sales employee must not spend more than 20% of his/her time on activities "unrelated to their own outside sales or solicitations;"

6. Modification of "computer employees" exemption: the proposed rule eliminates the requirement that an employee must "consistently exercise discretion and judgment" in order to qualify as an exempt computer professional.

   DOL has requested comments from the public regarding certain specific issues under the proposed rules, including: 1) the ease of application of the "computer employee" exemption, 2) whether the new, higher minimum salary requirement is appropriate, and 3) whether certain of the duties requirements related to the administrative, executive, and professional exemptions should be retained or discarded.

   At the conclusion of the comment period, which is drawing to a close, DOL is likely to issue some form of the proposed rules in final form. Employers then will need to re-evaluate their workforces to ensure compliance under the new FLSA standards.

   DOL's Estimated Cost to Employers

   DOL estimates that the proposed rules will raise the number of non-exempt employees (who are entitled to overtime pay) by approximately 12 million, and will cost some industry sectors as much as $163 million in implementation and payroll costs (such as the health services sector). DOL further predicts that certain industry sectors will incur costs that substantially exceed any benefits derived from the proposed rules (for example, manufacturing (including electronics), transportation, and communications). On the other hand, DOL estimates that the proposed rules will result in overall savings to private industry of $354.6 million.

   Brief Overview of FLSA Exemptions

   Employees subject to the FLSA are entitled to be paid at least the federal minimum wage, as well as overtime pay (of time and one-half) for all hours worked over 40 in a work week.1 Not all employees are subject to the FLSA, however. Any employee engaged in an "executive," "administrative," or "professional" capacity, or in the capacity of an "outside salesman," is exempt from minimum wage and overtime requirements. These exemptions are collectively referred to as the "white-collar" exemptions. The Act itself does not define these exemption terms.

   Instead, the Department of Labor has issued regulations which define the scope of the...