Special Bulletin

On April 20, 2004, the U.S. Department of Labor ("USDOL") released the final version of its long-awaited and controversial revisions to the "white-collar" exemption regulations for minimum wage and overtime pay under the federal Fair Labor Standards Act ("FLSA"). The USDOL originally proposed revisions to the regulations in March 2003. This proposal was met with a firestorm of opposition from Democratic leaders in Congress and various employee interest groups, which resulted in several attempts to block the USDOL from finishing work on the regulations. Those attempts failed, however, leading to the final revisions.

The minimum wage and overtime pay requirements of the FLSA do not apply to every employee. There are numerous exemptions, including those for certain "executive," "administrative," "professional," computer, and outside sales employees—the so-called "white-collar" exemptions. Generally, to qualify for a white-collar exemption, employees must satisfy certain tests regarding job duties and be paid on a salary basis at not less than a specified minimum weekly rate. Job titles do not determine exempt status.

Prior to the USDOL's rewrite, the FLSA regulations went substantially unchanged for over 50 years and became outdated. Under the old regulations, employers had to apply a "long" or a "short" duties test to determine if an employee was exempt. The long test required a salary of not less than $155 per week and the short test required a salary of not less than $250 per week. This resulted in some employees making as little as $8,000 per year possibly being considered exempt white-collar workers. These outdated figures and the often-confusing language in the regulations caused many employers to struggle with determining whether or not a particular group of employees was exempt from the minimum wage and overtime requirements.

The USDOL's final regulations, while not as sweeping as the March 2003 proposal, address several concerns about the application of the exemptions. Dubbed the "FairPay Overtime Initiatives," the final changes—

• Eliminate the "long test" for determining an exemption. Now all exemptions will be determined based on a single "short test."

• Raise the minimum salary for the salary basis test to $455 per week ($23,660 per year).

• Change the short test for the executive employee exemption to provide that an employee may qualify for the exemption if the employee has the authority to hire or fire other employees, or if the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees are given "particular weight" by an employer.

• Specifically include certain business owners under the executive exemption. An employee who owns at least a bona fide 20% equity interest in an enterprise in which the employee is employed, and who is actively engaged in management of the enterprise, is now considered a bona fide exempt executive.

• Provide specific examples of employees who qualify under the administrative employee exemption. These examples will assist employers in determining whether an employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance such that the employee qualifies for the administrative employee exemption.

• Create a "highly compensated" exemption test whereby employees who perform office or non-manual work and who are paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the minimum wage and overtime requirements if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard tests for the exemptions.

• Specifically exclude from the exemptions any manual laborers or other blue-collar workers who perform work involving repetitive operations with their hands, physical skill, and energy. The final regulations provide that FLSA-covered, non-management employees in production, maintenance, construction, and similar occupations are entitled to overtime premium pay under the FLSA and are not exempt under the regulations no matter how highly they may be paid.

• Specifically exclude various types of law enforcement, firefighting, and paramedic personnel from the exemptions.

• Modify the circumstances under which an employer may deduct from an exempt employee's pay to allow deductions for disciplinary suspensions of one or more full days.

Because of the scope of the revisions, the effects of the new regulations cannot be fully determined for some time. Also, the regulations will not be implemented for another three months, which gives opponents of the changes another opportunity to challenge the regulations, either in court or through congressional action. In fact, on May 4, 2004, the U.S. Senate attached an amendment to an unrelated bill that would prohibit the USDOL from adopting regulations that are not as protective of minimum wage and overtime pay rights of employees as the protections provided under USDOL regulations in effect on March 31, 2003. However, because the USDOL retreated from some of its more controversial proposals and given strong support for the revisions from employer groups and the Bush Administration, the majority of the changes likely will become effective. Employers should consider reevaluating how they classify their current workers under the FLSA and ensure that new employees are scrutinized according to the revised regulations.

The Labor and Employment Section of Ward and Smith, P.A. is planning a half-day seminar for interested employers on the changes to the regulations.

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 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.