Salaried of Hourly? 
Proposed Regulations Affect Overtime for 1.3 Million
By Mark A. DiAntonio

Under proposed federal regulations, today’s workaholic salaried professional may be tomorrow’s hourly employee entitled to a boatload of overtime. The eligibility for overtime pay of more than 1.3 million workers will be affected by regulations proposed by the Wage and Hour Division of the U.S. Department of Labor (DOL), according to a DOL estimate. Attorneys for employers and workers alike should take note of the potential changes to the regulations governing who qualifies as a salaried employee and who needs to be paid overtime.

The regulations were released in March 2003. They represent the first major overhaul in decades of the federal rules used to determine whether various types of employees are entitled to overtime pay or can be considered exempt based on their status as executive, administrative, professional, outside sales or computer professionals. The comment period for the proposed regulations ends on June 30, 2003, and the DOL projects that a final version will be in place by late 2003 or early 2004.

The federal Fair Labor Standards Act (FLSA) requires that workers be paid at least the minimum wage for a 40-hour work week and 1.5 times their hourly wage for any additional hours worked. Under current regulations implementing this law, an employee may be considered exempt from these requirements if the employee meets certain income requirements and falls into one of various categories based generally on the type of work performed. The proposed regulations streamline and in some instances redefine the rules used to determine how an employee is to be compensated.

Changes to the Salary Requirement

Under the current regulations, a salaried executive, administrative or professional employee is not to be considered exempt from FLSA unless the employee makes at least $155 per week and meets the requirements of the so-called “short test” or “long test” depending upon the employee’s weekly salary ($155 to $170 per week for the long test and more than $250 per week for the short test).

The proposed regulations update the income level for all salaried executive, administrative or professional employees to $425 per week. For computer professionals, the salary requirement is $425 per week or $27.63 per hour. The hourly rate continues the test used for computer professionals under the current regulations. Outside sales employees would continue to not have a minimum salary requirement.

The proposed regulations would also consider as exempt an employee who makes $65,000 per year, performs nonmanual labor and meets at least one of the functions under the executive, administrative or professional categories described in the “duties test” outlined below. In general, the $65,000 includes base salary, commissions and nondiscretionary compensation paid at least on a monthly basis.

Changes to the “Duties Test”

After determining that an employee meets the minimum salary requirement, the next step in verifying exempt status is applying the duties test. To be exempt, an employee’s duties may be considered executive, administrative or professional, or the employee may be classified as a computer professional or outside salesperson.

Under the current regulations, an employee’s status as an executive, administrator or professional is determined by using the “long test” or “short test” depending on the employee’s weekly salary, as discussed above. Under the proposed regulations, if the employee meets the $425 weekly pay requirement, one “standard test” will be applied. This test borrows some criteria from the current tests and deletes others. The duties tests for the respective categories of exempt employees are as follows:

• Executive – To be an exempt executive, an employee must: 1) have as his/her primary duty the management of the business or a recognized department or subdivision; 2) regularly direct the work of two or more employees; and 3) have authority to hire and fire or have his/her recommendations on personnel matters given particular weight.

The major change would be the addition of the hiring/firing requirement. Also, the proposed regulations recognize as an exempt executive any employee who owns at least a 20 percent equity interest in the business. The exemption would continue for an employee who is in “sole charge” of an establishment, i.e., a senior employee with authority to make daily operational decisions and direct the work of others.

• Administrative - To be an exempt administrator, an employee must: 1) have as his/her primary duty the performance of office or nonmanual work directly related to managing the general business of the employer or its customers; and 2) hold a “position of responsibility,” defined as either work of substantial importance or work requiring a high level of skill or training.

The proposed regulations offer illustrations of work areas meeting the first requirement. Employees in accounting, purchasing, advertising and human relations positions, for instance, would likely be considered administrative. The “position of responsibility” requirement would replace the current requirement that the employee customarily and regularly exercise discretion and independent judgment, which led to varied interpretations by the courts. While the proposed language may seem equally as vague, the DOL identified activities that will likely fall within the rubric of an administrative employee: formulating or interpreting management policies, making or recommending decisions having a substantial impact on the business, performing strategic planning or handling complaints and grievances.

• Professional – Exemptions exist for “learned” or “creative” professionals. The learned professional must have a primary duty of performing office or non-manual work requiring advanced knowledge acquired by a prolonged course of study or through a combination of instruction and work experience. A creative professional must have a primary duty of performing work requiring invention, imagination, originality or talent in a recognized field or artistic or creative endeavor.

Eliminating the diploma requirement for learned professionals is the most significant proposed change. This may allow employers to treat employees with some college and on-the-job training as exempt; however, the threshold amounts of formal training and experience are not specified. The creative professional requirements remain relatively unchanged.

• Outside Sales Employees – Under the proposed regulations, the exemption would apply to employees who regularly work away from the employer’s business and have a primary duty of obtaining orders. The major change involves eliminating the confusing calculation of time devoted by an outside salesperson to “non-sales” activities.
• Computer Professionals – These regulations would remain the same but would be gathered into one section.

How to Prepare for the Proposed Regulations

The proposed regulations may change slightly or drastically between now and the projected effective date later this year or early 2004. Therefore, there is little reason or necessity for an employer to change its policies or behavior now. However, employers may want to consider how the proposed changes may adversely or favorably impact their payroll, particularly if they have a large group of employees who could shift from salaried to hourly or vice versa. Also, the proposed regulations provide a safe-harbor provision for employers making good-faith reductions from exempt employees’ pay. This requires prior written notice to employees for the employer to avail itself of the protection. Employers may want to consider adding to their employee handbooks a written policy giving that notice to employees.

Finally, it should be kept in mind that Maryland has an equivalent statute in the Labor and Employment Article which mirrors the current federal regulatory scheme. Assuming the new federal regulations go into effect, any stricter standards contained in the Maryland law will remain in force.

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Publications : Bar Bulletin: June, 2003