Wage and Hour Law - New DOL Proposal to Revise 'White-Collar' Exemptions

Date: September 16, 2003

For decades, employers have struggled with classifying their employees as “exempt” or “unexempt” from federal overtime compensation requirements under the FLSA, which became law in 1938. The current federal regulations governing the overtime exemption for “white —collar” employees are badly out of date and confusing. The costly effect of mis-classification has been substantial back pay liability and, more recently, class-action lawsuits. On March 31, the U.S. Department of Labor (DOL) published a proposal to modernize its regulations defining overtime exemptions for “white collar” employees in the administrative, executive, and professional employee classifications. The DOL estimates that the regulations will cover 110 million employees in 6.5 million establishments. The 90-day public comment period expired on June 30, 2003, and the DOL hopes to have the final regulations in effect by December 2003.

Key Changes Proposed
The new Part 541 Regulations stand to make significant changes to the federal wage and hour law. First, the minimum salary level for overtime exempt status will increase from the current rate of $155 a week to $425 a week for administrative and executive employees and from $170 a week to $425 a week for “learned professional employees” and “creative productive employees.” This change increases the required annual salary level for purposes of qualifying for the overtime exemption from approximately $8,000 to $22,100. The DOL estimates that as a result of the new minimum salary level, approximately 1.3 million additional workers will be eligible for overtime pay. Second, the regulations will be clarified to allow employers to deduct from exempt employees' salary for full-day absences taken for disciplinary reasons without risk of losing their exempt status. Currently, only hourly workers' wages are subject to such deductions. The new regulations will retain the salary basis rule prohibiting deductions from exempt salary for partial-day absences, but they'll provide a “safe harbor” from loss of exempt status when an employer has a written policy that prohibits improper deductions. Third, the outdated, confusing, and complex duties tests that have been used to determine the “white collar” overtime exemption will be replaced. The new regulations will eliminate the current “long test” and propose a “primary duty” test that removes the restriction on exempt employees from devoting more than 20 percent of their time in a workweek to the completion of nonexempt work. The new “primary duty” tests are:

  • Executive duties: The test now has three requirements: managing the enterprise, directing the work of two or more employees, and having authority to hire or fire or having such recommendations given great weight.,
  • Administrative duties: The new regulations replace the “discretion and independent judgment” test, which has been the subject of confusion and litigation, with a new, more inclusive test that the exempt employee must simply hold a “position of responsibility.”
  • Professional duties: The new regulations supplement the current advanced learning requirements to include certain professionals who gain equivalent knowledge and skills through a combination of job experience, military training, and attending a technical school or community college.

Finally, and perhaps most significant, the new regulations propose to extend the “white-collar” overtime exemption to highly compensated employees who earn $65,000 annually, perform office or non-manual work, and satisfy one or more of the exempt duties outlined above.