Proposed Rule Changes that Govern Overtime Exemptions for

Executive, Administrative, Professional, Outside Sales and Computer Employees

Published by U.S. Department of Labor for Public Comment

 

Prepared for ANCOR

By Joni Fritz, Wage and Hour Specialist

 

Long awaited proposed minimum salary levels and rule changes for the “white collar” exemptions were published by the U.S. Department of Labor (DOL) on March 31, with public comments due by the close of business on June 30. Copies of the full document, along with a press release and a side-by-side comparison of current rules with the major proposed changes are available from the Wage and Hour Division’s web site at www.dol.gov/esa/whd/.

All in all, the proposed rule makes it clear—as have recent LINKS article—that the DOL expectations for exemption are stricter than the public generally believes. It is unfortunate that status is associated with exempt positions and many employees wish to be treated as though they are exempt, even when they clearly are not.

 

ANCOR must hear from private providers if you have comments about either the increased minimum salary proposed or proposed changes to the rules themselves.  Send your comments by May 30^th to Suellen Galbraith by email at sgalbraith@ancor.org or by fax at 703-535-7860.  The comments from providers will help form ANCOR’s response to the DOL by June 30^th.

 

Background

 

Exemptions from overtime requirements for executive, administrative and professional (EAP) employees and for outside sales persons were included in the original Fair Labor Standards Act passed in 1938. In 1990 Congress passed an additional exemption for computer professionals which included a minimum salary based on a wage of $27.63 an hour, $57,460 per year. Criteria for the EAP and outside sales exemptions were last published in the Code of Federal Regulations in 1954 as “interpretations.”

 

Current rules include duties tests and define the “salary basis” requirements. Salary levels for the EAP exemptions have not changed since 1975, when they were set at just $155 per week for executive and administrative employees and $170 per week for professionals – both now well below the minimum wage for a 40-hour workweek. A “short test” with a weekly salary of $250 per week was applied to all of the EAP exemptions in 1954.

 

Increases in the salary levels published in 1981 were soon withdrawn, but those remaining have been considered obsolete ever since. The outdated salary tests and complex, confusing duties tests in the current regulations and interpretations result in the erroneous classification of many employees as exempt, leading to orders for the payment of overtime when DOL investigations occur.

 

A report issued by the General Accounting Office (GAO) in 1999: “Fair Labor Standards Act: White Collar Exemptions in the Modern Work Place” (GAO/HEHA-99-164, September 30, 1999) identified the many complaints of employers, employees and their unions about the existing requirements for exemption. A Congressional hearing held in May 2000 revealed the differing views of the many affected and interested parties and the potential impact of possible changes. Since that time, DOL has collected nationwide data and spoken to many stakeholders to arrive at compromises that would result in approximately 20 percent of the current salaried exempt employees being paid less than the proposed $425 weekly ($22,100 per year) minimum salary level test, while a new special salary for “highly compensated employees” of $65,000 per year would place about 20 percent of all current salaried employees above that proposed amount.

 

Potential costs and benefits of proposed changes

 

The Department of Labor estimates that as many as 1.3 million low-wage workers will no longer be considered exempt salaried employees when the proposed rules go into effect, so their salaries will have to be increased to $425 per week, or they will have to be treated like hourly employees and receive overtime payments at one and one-half times their regular rate of pay when they work more than 40 hours in a workweek.

 

Not only will employees be removed from exempt status on the basis of the salary test, but clarification and strengthening of the duties tests are expected to eliminate about 110.7 million workers from the exempt status they currently hold.

 

There will be an obvious financial benefit to these employees, but a cost burden to employers. Unfortunately, the status associated with being an exempt salaried employee cannot be underestimated and there will be a negative psychological impact on employees who now find themselves categorized as hourly rather than exempt managers.

 

Cost estimates to implement the proposed rule changes range from $849.2 million to $1,532 million, including one-time implementation costs ranging from $621.4 million to $660.3 million, and recurring payroll costs ranging from $327.8 million to $871.6 million. Not surprisingly, the potential impact on areas of the economy in which the disability field is involved will be great. The largest total costs will be incurred by the Health Services industry ($85.3 million to $163.4 million), followed by Construction and Business Services, Personal Services ($38.1 million to $83.8 million), and then Real Estate. The largest total costs as a percentage of payroll are expected to be incurred by the Educational Services industry (0.37% to 0.53%), Agricultural Services, Personal Services (0.21% to 0.46%), Automotive Repair Services and Parking, and Transportation by Air. The 10 industries with the highest costs account for over 50.4 percent of the total private sector costs, according to DOL estimates.

 

 

Overview of Proposed Rule Changes

 

The proposed rules reorganize and attempt to simplify and clarify the requirements for employees to be considered exempt from federal overtime rules as executive, administrative, professional, outside sales and computer employees. The 20 percent work test would be eliminated from all sections of the regulations, as would language requiring the application of “discretion and independent judgment.” In addition, there would no longer be a “short test” for these exemptions based on a higher salary level. Substituted for the short test is a proposed “special rule for highly compensated employees.” Under this proposal, employees paid $65,000 or more annually who perform non-manual work would be exempt if they have an “identifiable executive, administrative or professional function as described in the standard duties test,” and “would not have to meet all the elements of the standard duties test to qualify for the exemption as a highly compensated employee.”

 

General Regulations – Subpart A

 

The first subpart of the proposed rule includes an introductory statement, defines the term “Administrator” (of the U.S. DOL Wage and Hour Division), and states that: “A job title alone is insufficient to establish the exempt status of an employee.”

 

Executive Employees – Subpart B

 

This subpart would establish the minimum salary for executive employees at $425 per week ($22,100 per year) exclusive of board, lodging or other facilities, and require payment on a “salary basis,” as defined elsewhere. The duties tests are similar to those in current regulations and require that the executive: (1) have a primary duty of the management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; (2) customarily and regularly direct the work of two or more other employees; and (3) have the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring firing, advancement, promotion or any other change of status of other employees will be given particular weight.

 

Employees who own at least a 20 percent equity interest in the enterprise are also considered exempt by statute.

 

The “sole charge exception” in current rules is retained and re-titled the “sole charge executive.” These exempt employees also must be paid a salary of at least $425 per week and be in charge of the company activities at the location where the employee is employed. He or she must have authority to make decisions regarding the day-to-day operations of the establishment and to direct the work of any other employees at the establishment or branch. Only one person in any establishment can qualify as a sole charge executive, and then only if that person is the top person in charge at that location. The “sole charge” status of an employee will not be considered lost because of an occasional visit to the establishment or branch office of a superior.”

 

The phrase “independent establishment or a physically separated branch establishment” means an establishment that has a fixed location and is geographically separated from other company property. The management of operations within one of several buildings located on single or adjoining tracts of company property does not qualify for the exemption under this section. In the case of a branch, there must be a true and complete physical separation from the main office. However, a leased department may qualify as an independent establishment when the lessee operates under a separate trade name, with its own separate employees and records, and in other respects conducts the lessee’s business independently of the lessor’s.

 

“Management of the enterprise” is defined to include activities such as: interviewing, selecting and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution, of materials or merchandise and supplies; and providing for the safety of the employees or the property.

 

The phrase “a customarily recognized department or subdivision” is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function. [I]t must have a permanent status and a continuing function. . . It need not be physically within the employer’s establishment and may move from place to place. . . and continuity of the same subordinate personnel is not essential to the existence of a recognized unit with a continuing function.   

 

The phrase “two or more other employees” is defined as two full-time employees or their equivalent, just as under current rules.

 

 “Working foremen” or “working supervisors” who have some supervisory functions, such as directing the work of other employees, but also perform work unrelated or only remotely related to the supervisory activities are not exempt executives if, instead of having management as their primary duty. . . their primary duty consists of either the same kind of work as that performed by their subordinates. . . or consists of ordinary production or sales work; or routine, recurrent or repetitive tasks. In contrast, sole-charge executives have management as a primary duty, despite the fact that many of their other duties may be the same kind of work that is performed by subordinates.

 

Administrative Employees – Subpart C

 

Bona fide administrative employees under the proposed rule also would be compensated on a salary or fee basis at a rate of not less than $425 per week, . . . with a primary duty of the performance of office or non-manual work related to the management or general business operations of the employer or the employer’s customers, . . . and hold a position of responsibility with the employer.  Current language regarding regularly exercising discretion and independent judgment; regularly and directly assisting a proprietor, or exempt executive or administrative employee; and the 20 percent duties test are deleted. The phrase “position of responsibility” would refer to the importance to the employer of the work performed or the high level of competence required by the work performed. . .which requires a high level of skill or training.

 

“Work related to management or general business operations” means work in areas such as tax, finance, accounting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations and similar activities.  Some of these activities may be performed by employees who also would qualify for another exemption, the DOL notes.

 

“Work of substantial importance” would be work that, by its nature or consequence, affects the employer’s general business operations or finances to a significant degree. [It] includes such activities as formulating, interpreting or implementing management policies; providing consultation or expert advice to management, etc. Positions meeting this definition might include a human resources manager, a management consultant, a purchasing agent or an executive or administrative assistant to a proprietor or chief executive of a business if such employee, without specific instructions or prescribed procedures, has been delegated authority to arrange meetings, handle callers and answer correspondence. DOL indicates that it does not include clerical or secretarial tasks, recording or tabulating data or performing other mechanical, repetitive, recurrent or routine work.

 

Work requiring a “high level of skill or training” means administrative work requiring specialized knowledge or abilities or advanced training, and would include that typically performed by financial advisors, tax consultants, insurance experts, credit managers, employee benefits experts, human resource consultants and the like. It would not include clerical or secretarial work, recording or tabulating data, or other mechanical repetitive, recurrent or routine work.

 

The term “employee employed in a bona fide administrative capacity,” as in current rules, would require a primary duty of performing administrative functions directly related to academic instruction or training in an educational establishment or department or subdivision thereof. The term “educational establishment would include an elementary or secondary school system, an institution of higher education,. . . a day or residential school that provides elementary or secondary education, as determined under state law. . . a nursery school program in elementary education and junior college curricula in secondary education, . . . special schools for mentally or physically disabled or gifted children. . . No distinction is drawn between public and private schools or those operated for profit or. . . not for profit.  To meet the exemption, work must be related to the academic operations and function in the school, rather than to administration along the lines of general business operations. Jobs related to building management and maintenance, to the health of the students and academic staff, such as social workers, psychologists, lunch room managers or dietitians do not meet the definition of academic administrative functions. However, some of these employees may qualify for exemption under other categories.

 

Professional Employees – Subpart D

 

Again, compensation would be on a salary or fee basis at a rate of not less than $425 per week, exclusive of board, lodging or other facilities. The primary duty of an exempt professional is the performance of office or non-manual work (1) requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, but (under the new language) which also may be acquired by alternative means such as an equivalent combination of intellectual instruction and work experience; or (2) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

 

The “learned professions” include law, medicine, theology, teaching, accounting, actuarial computation, engineering, architecture, various types of physical, chemical and biological sciences, pharmacy and other similar occupations that have a recognized professional status based on the acquirement of advanced knowledge and performance of work that is predominantly intellectual in character as opposed to routine, mental, manual, mechanical or physical work.

 

The phrase “knowledge of an advanced type” would mean knowledge that cannot be attained at the high school level. The phrase “field of science or learning,” DOL states, is included to distinguish the learned professions from the mechanical arts where in some instances the knowledge is of a fairly advanced type, but not in a field of science or learning. And the phrase “customarily acquired by a prolonged course of specialized intellectual instruction” generally restricts the exemption to professions where specialized academic training is a standard prerequisite for entrance into the profession. The best prima facie evidence that an employee meets this requirement, the proposal states, is possession of the appropriate academic degree. However, the statement continues, the word “customarily” means that the exemption is also available to employees in such professions who have substantially the same knowledge level as the degreed employees, but who attained such knowledge through a combination of work experience, training in the armed forces, attending a technical school, attending a community college or other intellectual instruction.

 

The proposed rule contains a list of professions that have been found generally to meet the primary duty requirement for learned professionals, each with some further description. These include: (1) registered or certified medical technologists; (2) registered nurses; (3) dental hygienists; (4) physician assistants; (5) accountants – CPAs or those who perform similar duties, but not accounting clerks and others who normally perform routine work; (6) chefs who have attained a college degree in a culinary arts program.

 

Professional occupations will not include those whose duties may be performed with knowledge acquired by through an apprenticeship program or from training in routine mental, manual or physical processes such as carpenters, electricians, craftsmen, operating engineers, longshoremen, construction workers, teamsters, etc. The proposed language also indicates that: The areas in which professional exemptions may be available are expanding. . .[a]s knowledge is developed, academic training is broadened and specialized degrees are offered.

 

Creative professionals” are those whose work requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor. . . in fields such as music, writing, acting and the graphic arts. Teachers considered exempt must be imparting knowledge. . .and be engaged in this activity as a teacher in an educational establishment, including those who spend a considerable amount of time in extracurricular activities such as coaching. While the possession of a teacher’s certificate is helpful in making this determination, not all private school teachers have such certificates, so such certification is not necessary.

 

Computer Employees – Subpart E

 

Under the general rule, computer systems analysts, computer programmers, software engineers or other similarly skilled workers in the computer field are eligible for exemption as professionals. . .because job titles vary widely and change quickly in the computer industry, job titles are not determinative of the applicability of this exemption. Once again, compensation must be on a salary or fee basis at a rate of not less than $425 per week, . . exclusive of board, lodging or other facilities, but also may be on an hourly basis at a rate of not less than $27.63 an hour, consistent with 1990 law. The primary duty of an exempt computer professional must fall into one of the following categories: (1) the application of systems analysis techniques and procedures; (2) the design, development, documentation, analysis, creation, testing or modification of computer systems or programs; (3) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (4) a combination of the first three. The proposed rule goes on to say that this exemption applies only to highly-skilled employees who have achieved a level of proficiency in the theoretical and practical application of highly-specialized knowledge. It does not include employees engaged in the operation of computers or in the manufacture, repair or maintenance of computer hardware and related equipment.

 

Outside Sales Employees – Subpart F

 

This section applies to employees who make sales. . . obtain orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and who is customarily and regularly engaged away from the employer’s place or places of business. “Sale” includes the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property. The term includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition. As is true for the other categories of exemption, proposed rules delete the 20% of duties test.

 

Compensation Requirements – Subpart G

 

This section restates the requirement that exempt employees be paid on a salary basis at a rate of at least $425 per week, which may be translated into equivalent amounts for periods longer than one week. This subpart also establishes a category of “highly compensated employees;” those who perform office or non-manual work and [are] guaranteed a total annual compensation of at least $65,000. This amount must exclude board, lodging and other facilities but may include base salary, commissions, non-discretionary bonuses and other non-discretionary compensation.

The term “salary basis” is also discussed in this subpart, and is generally consistent with current regulations. This term means that the employee must regularly receive on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. If improper deductions are made, the employer will lose the exemption and the employee(s) would have to be paid overtime for those hours worked over the prior two year period. With few exceptions, the employee must be paid the entire salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business.

The exceptions to the pay deductions are those found in current rules. Deductions for absences of a full day or more are permitted when: (1) an employee is absent from work for personal reasons, other than sickness or disability; (2) an employee is absent because of sickness or disability and the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. Deductions for such full day absences also may be made before the employee has qualified under the plan, policy or practice, and after the employee has exhausted the leave allowance thereunder. Deductions also can be (3) made for penalties imposed in good faith for infractions of safety rules of major significance, . . such as smoking in explosive plants; or (4) for unpaid disciplinary suspensions of a full day or more imposed in good faith for infractions of workplace conduct rules, such as the violation of a uniformly applied written policy prohibiting sexual harassment or . . . prohibiting workplace violence. While employers cannot make deductions from pay for absences of exempt employees who perform jury duty, appear as a witness or who are on temporary military leave, the employer can offset any amounts received by such an employee when computing the salary due.

Employers are also not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. In these cases, the employer may pay a proportionate part of the full salary for time actually worked.

Minimum guarantees plus extras

This proposed section provides miscellaneous information regarding additional payments or benefits that exempt employees may receive. This section states that an exempt employee may receive additional compensation, consistent with the exemption and the salary basis requirement. Examples given are of the guaranteed salary of at least $425 plus a one percent commission on sales; or an exempt employee who is guaranteed at least $425 each week paid on a salary basis [and] also receives additional compensation based on hours worked.

Payment of exempt employees under a “fee basis” is also discussed in this section, as is the phrase “exclusive of board, lodging or other facilities.” The latter phrase clarifies that the minimum salary must be “free and clear,” or independent of any claimed credit for non-cash items of value that an employer may provide to an employee. It goes on to state that: Such separate transactions are not prohibited between employers and their exempt employees, but the costs to employers associated with such transactions may not be considered when determining if an employee has received the full required minimum payment.

Definitions and Miscellaneous Provisions – Subpart H

This subpart defines such phrases as “primary duty,” “customarily and regularly,” “exempt and nonexempt work” (which merely refers to the sections of the rule in which this phrase is defined), and “directly and closely related.” The latter is defined as: tasks that are related to exempt duties and that contribute to or facilitate performance of exempt work, . .  including physical tasks and menial tasks that arise out of exempt duties, and the routine work without which the exempt employee’s more important work cannot be performed properly. Tasks such as recordkeeping, monitoring and adjusting machinery, taking notes, using the computer to create documents or presentations, opening the mail for the purpose of reading it and making decisions, and using a photocopier or fax machine are included in the description, as are other more specific detailed examples of the type of work that is not normally considered as directly and closely related to exempt work.

A section on “trainees” makes it clear that these employees do not meet criteria for exempt employees.

A section on “emergencies” addresses the legitimacy of having an otherwise exempt employee perform work of a normally nonexempt nature because of the existence of an emergency. Such work does not include occurrences that are not beyond control or for which the employer can reasonably provide in the normal course of business. Emergencies generally occur only rarely, and are events that the employer cannot reasonably anticipate.  A few examples follow that discussion. In the field of residential supports, this might include occasions requiring an exempt regional administrator to cover direct support work at a group home when an employee unexpectedly fails to report to work. A definition of the phrase “occasional tasks” makes it clear that these occurrences must be infrequent and would be included as an exempt duty only when the exempt employee has made a genuine effort to find another employee to cover the shift.

This subpart concludes with discussions of: combination exemptions, exemptions in the motion picture producing industry and for employees in public agencies.

Correction by conversion of a salary to an hourly rate of pay

If the proposed rules are finalized as published in March, agencies which determine that some salaried employees will no longer be exempt and must now have to be paid overtime should understand that it is legal to reduce an employee’s hourly rate of pay. Employers should determine how many hours the salaried employees are actually working on average per week. Reduce this to an hourly rate of pay (including overtime for hours over 40 worked in a workweek) and convert the salary to hourly pay as long as it equals at least the current minimum wage of $5.15 per hour.

While it is legal to pay hourly employees on a salary basis, the salary has to be designed to cover the base hourly wage for the maximum number of hours potentially worked, and overtime must be computed each workweek and paid at one-half the regular hourly rate of pay. This method guarantees the employee a pre-established wage and it results in different hourly rates from week to week, depending on the number of hours actually worked. (See 29 Code of Federal Regulations, §778.114 and pages 7 to 11 of the ANCOR Wage and Hour Handbook.) Employers who use this tell us that the “fluctuating workweek” method encourages employees to accomplish their work in the shortest possible period of time.

Conclusion, Cautions and Comments

All in all, the proposed rule makes it clear--as have recent LINKS article—that the DOL expectations for exemption are stricter than the public generally believes. It is unfortunate that status is associated with exempt positions and many employees wish to be treated as though they are exempt, even when they clearly are not.

ANCOR members should assure that employees who are currently treated as exempt are paid a minimum of $425 per week and meet the criteria published in the proposed rule.

ANCOR Seeking Provider Input:  If you have reason to believe that implementation of these proposals will create a burden on your agency, or if you have positions that you believe should be considered as exempt but do not appear to meet the descriptions outlined in this document, please contact Director for Public Policy Suellen Galbraith at 703-535-7850, or via e-mail at sgalbraith@ancor.org, and convey your concerns.

Individual Comments to DOL:  You may also wish to comment directly to the U.S. Department of Labor. In doing so, make sure that employees who are treated as exempt meet current rules and submit substantive comments to Tammy D. McCutchen, Administrator, Wage and Hour Division, Employment Standards Administration, U.S. Department of Labor, Room S-3502, 200 Constitution Avenue, NW, Washington, DC 20210. Federal offices are still experiencing delays in the receipt of mail, so those who wish to comment should mail their responses early or transmit them electronically. Comments may be emailed to: whd-reg@fenix2.dol-esa.gov; or if 20 pages or fewer, may be faxed to 202-693-1432. (Please note that this is not a toll-free number.)