Special Bulletin

As reported in our May 2004 Special Bulletin, the U.S. Department of Labor ("DOL") Wage and Hour Division's new overtime regulations took effect on August 23, 2004. The new regulations reflect multiple changes from the prior regulations. This summary is intended to highlight several of the key changes and should be read in conjunction with our May 2004 Special Bulletin.

Salary Basis Test. In order to be exempt from overtime requirements, an employee still must be paid on a salary basis at not less than certain minimum amounts. Generally speaking, employees are paid on a salary basis if they regularly receive a predetermined amount that is not subject to reduction because of variations in the quality or quantity of the work performed. Thus, generally, exempt employees must receive their full salary for any week in which they perform any work without regard to the number of days worked or hours worked. The previous regulations set the minimum salary amount at $155 per week or $8,060 annually. Under the new regulations, exempt employees must be compensated at a salary level of at least $455 per week or $23,660 annually. Thus, workers earning less than $455 per week are now guaranteed overtime compensation.

Disciplinary Deductions. The new regulations continue to provide that employees can lose their exempt status if improper deductions are made from their salary. However, in one of the more significant changes, the new regulations now allow whole-day, partial-week unpaid disciplinary suspensions for exempt employees. Under the prior regulations, an exempt employee who engaged in workplace misconduct (other than a violation of a major safety rule) could not be suspended without pay for less than a whole week without losing exempt status. The new regulations allow employers to suspend exempt employees without pay for one or more full days for infractions of workplace conduct rules, such as sexual harassment or workplace violence. The suspension must be imposed "pursuant to a written policy applicable to all employees." Thus, employers should ensure that all workplace conduct rules are in writing and apply to all employees.

New "Safe Harbor" Rule. The new regulations also expand the "safe harbor" provision available under the old rules for improper deductions. Under the old rules, an improper deduction could result in an employer losing an exemption for an entire class of employees. However, the new "safe harbor" provision provides that an exemption is lost only if the employer has an "actual practice" of making improper deductions, and then only for employees in the same job classification working for the same manager responsible for the improper deduction. Additionally, the employer will not lose the exemption for any employees if it has a clearly communicated policy prohibiting improper deductions that includes an employee complaint mechanism, reimburses employees for any improper deductions, and makes a good faith commitment to comply in the future. This "safe harbor" is not available if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.

Highly Compensated Employees. The new rules also provide a special exemption for highly compensated employees. Employees performing office or non-manual work who are paid a total annual compensation of $100,000 or more are now exempt if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee. The employee's annual compensation must include at least $455 per week paid on a salary or fee basis and may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation. In addition, employers may use a "catch-up" payment if an employee's total annual compensation does not equal $100,000 by the last pay period of the year. Within one month after the end of the year, employers may make one final "catch-up" payment sufficient to bring the employee to the required level.

"Blue Collar" Workers. The new regulations are explicit in disclaiming application to "manual laborers or 'blue collar' workers who perform work involving repetitive operations with their hands, physical skill and energy." To this end, the "highly compensated employee" exemption only applies to individuals who perform office or non-manual work. Non-management production line, maintenance, and construction workers -- including carpenters, mechanics, iron workers, longshoremen, and others -- are not exempt, no matter how highly they are paid.

Job Duties Tests. The new regulations eliminate the separate "long" and "short" duties tests established under the prior rules. In their place, the DOL has adopted a single standard duties test for each exemption category. The new regulations also modify the duties tests to eliminate the 20 percent limitation (or 40 percent limitation for retail or service establishments) on the amount of time an employee devoted to nonexempt tasks, and to focus on an employee's "primary duty." An employee's "primary duty" is the principal, main, major, or most important duty that the employee performs. The amount of time spent performing exempt versus nonexempt work provides guidance in determining an employee's primary duty, but it is not determinative. Thus, although employees who spend more than 50 percent of their time performing exempt work likely will meet the primary duty requirement, employees who spend less than 50 percent of their time performing exempt duties also may meet the requirement if other factors support the conclusion that the performance of exempt work is the primary duty.

Executive Employee Exemption. The new regulations include an additional requirement for the executive employee exemption. Under the prior regulations, employees qualified for this exemption if their primary duty consisted of management of the enterprise (or a recognized department or subdivision) and if they customarily and regularly directed the work of two or more employees. The new test includes these requirements and adds to them a requirement that an executive employee must also have authority to hire or fire other employees, or that the employee's suggestions or recommendations regarding hiring, firing, advancement, or other status changes must be given "particular weight." This requirement was present under the old regulations, but only under the so-called "long" duties test, which had become obsolete because of the low salary threshold of $155 per week.

Administrative Employee Exemption. The new administrative exemption test remains similar to the prior regulations, except for the updated salary level of $455 per week, and the addition of the clarifying phrase "with respect to matters of significance" to the prior requirement that administrative employees exercise discretion and independent judgment. In addition, the DOL has updated the list of illustrative examples seeking to clarify the status of occupations that proved to be difficult to categorize under the prior rules, including insurance claims adjusters, financial services employees, "team leaders," executive assistants, human resource managers, and purchasing agents.

The new regulations continue to require that an exempt administrative employee must have a 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." The DOL has provided an illustrative list of the types of work in functional areas that meet this primary duty requirement, including tax, finance and accounting, budgeting, auditing, insurance, quality control, purchasing and procurement, advertising and marketing, safety and health, personnel management, public relations, and legal and regulatory compliance.

Professional Employee Exemption. This exemption remains similar to the prior regulations. As with the administrative exemption, the DOL provides a section which addresses specific occupations such as medical technologists, nurses, dental hygienists, physician assistants, accountants, chefs, athletic trainers, and funeral directors. According to the new rules, registered nurses generally are considered exempt learned professionals, while licensed practical nurses are not. Physician assistants generally satisfy the duties test for the learned professional exemption if they have graduated from an accredited program and are certified. Likewise, chefs who have attained a four-year specialized academic degree generally meet the duties requirements for the learned professional exemption, and may be considered exempt creative professionals if their primary duty requires "invention, imagination, originality or talent."

Practical Considerations. Now is an opportune time for employers to review their policies and practices to identify any necessary changes. In doing so, employers should consider the following steps in dealing with the new regulations:

• Consider the impact of the new salary levels. Employers should audit their payroll practices, checking for possible salary-basis test violations and identifying employees making less than $455 per week ($23,660 annually) or close to $100,000 per year. If these employees otherwise meet the exemption standards, a slight increase in compensation could result in exempt status.

• Update and distribute workplace conduct rules. To take advantage of the expanded rule for unpaid disciplinary suspensions, employers must ensure that all workplace conduct rules are in writing and apply to all employees. Under the new rules, whole-day, partial-week unpaid disciplinary suspensions are permissible only if imposed "pursuant to a written policy applicable to all employees."

• Review job descriptions and evaluate the job duties of your workforce. Employers should consult the DOL's examples and use its terminology in revising and updating job descriptions.

• Take advantage of the new "safe harbor" rule. To gain the benefit of this expanded provision, employers must put in place and distribute a "clearly communicated policy" that prohibits improper pay deductions and includes an employee complaint procedure.

• Ward and Smith, P.A. is the largest law firm based in eastern North Carolina, and serves as counsel for more mid- and large-sized businesses in the region than any other law firm. More than 60 attorneys comprise the firm and serve clients locally, regionally, nationally, and internationally from offices in Greenville, New Bern, Raleigh, and Wilmington. Honored with the distinction of being rated as one of America's Greatest Places to Work with a Law Degree by Harcourt Brace, Ward and Smith, P.A. is also home to 11 attorneys included in the publication The Best Lawyers in America and five attorneys selected as "Legal Elite" from a peer-review survey published in Business North Carolina.

For further information regarding the issues described above, please contact one of our section attorneys William Joseph Austin, Jr., Albert R. Bell, Jr., S. McKinley Gray, III, or Jeremy R. Sayre.

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This newsletter is not intended to give, and should not be relied upon for legal advice in any particular circumstance. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.