FLSA – WHITE COLLAR EXEMPTIONS
The Fair Labor Standards Acts (“FLSA”) guarantees most employees a minimum wage and time and a half for all hours worked over 40 hours in a work week. The FLSA exempts certain employees from the minimum wage and overtime coverage. Major changes occurred in 2004 when the Department of Labor modified regulations defining the exemption tests for bona fide executive, administrative, professional, outside sales, and computer employees, commonly called the “white-collar exemptions”.
Under President Obama, the DOL increased the salary level threshold for the white collar exemptions test to $47,476 per year ($913 per week). The Trump Administration elected not to enforce the Obama Administration’s salary level changes. For the time being, the earlier salary level of $23,660 per year ($455 per week) remains the law. (9/1/17)
White Collar Tests
For most white collar exemptions, the worker must be paid on a “salary basis” (see Salary Basis below). In 2004, the DOL issued regulations increasing the minimum salary level for an exempt employee from $155/week ($8,060 annually) to $455/week ($23,660 annually). The old “short” and “long” duties tests were been replaced with a standard test for each type of exemption.
The “primary” duties of an exempt executive must be “management of the enterprise” or a “recognized department or subdivision thereof” and the employee must “customarily and regularly” direct the work of two or more other full-time employees. In addition, the executive must have “the authority to hire or fire other employees,” or 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.”
The regulations also exempt any employee who owns at least a 20 percent equity interest in the business and who is actively engaged in its management, regardless of compensation level or basis.
An exempt administrative employee must have the 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 primary duty must include the “exercise of discretion and independent judgment with respect to matters of significance.” The 2004 regulations provided examples of work that qualify as an exempt executive – Tax, Finance, Accounting, Auditing, Advertising, Human resources, Labor relations, Marketing, Safety and health, Legal and regulatory compliance, Internet and database administration.
Since 2004, numerous courts have interpreted and modified the meaning of “administrative” work. To determine the applicability of the administrative exemption to a particular job requires reference to the current caselaw in the circuit where the work is performed.
The professional exemption consists of the “learned professional” and the “creative professional.” The “learned professional” is an employee whose primary duty is work requiring “advanced knowledge” (defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment) in a “field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” The regulations offer examples of positions that should qualify for the exemption:
- Registered nurse,
- Registered or certified medical technologist,
- Physician assistant (with a four-year academic degree),
- Dental hygienist (with a four-year academic degree),
- Executive chef or sous-chef (with a four-year academic degree),
- Athletic trainers certified by the Board of Certification of the National Athletic Trainers Association, and
- Funeral directors and embalmers who are licensed by and working in a state with a four-year academic study requirement.
The professional category includes the “creative professional”, an employee whose primary duty is work requiring “invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.” For example, exempt creative professional include: Actors, Musicians, Composers, Conductors, Soloists, Essayists, Novelists.
To qualify as an exempt computer employee, the primary duty must consist of:
- The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
- The design, development, documentation, analysis, creating, testing or modification of computer systems or programs, including prototypes based on and related to user or system design specifications;
- The design, documentation, testing, creation or modification of existing computer programs related to machine operating systems; or
- A combination of these duties, the performance of which requires the same level of skills.
Since 2004, the type and titles of work performed in computer science have changed and multiplied. To determine the applicability of the administrative exemption to a particular job requires reference to the current caselaw in the circuit where the work is performed.
Outside Sales Employees
The “primary duty” of an exempt, outside sales employee is making sales or “obtaining 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 are “customarily and regularly engaged away from the employer’s place or places of business”. This exemption does not apply to inside sales personnel; for example, persons who sell over the phone, by mail, or via the Internet.
Highly Compensated Employees
The 2004 regulations created an exemption for highly compensated employees. A highly compensated employee must:
- Earn at least $100,00 in total annual compensation (which must include at least $455/week paid on a salary or fee basis);
- Have a primary duty that includes performing office or non-manual work; and
- Customarily and regularly perform one or more of the exempt duties of an executive, administrative, or professional employee.
The total annual compensation may include commissions, nondiscretionary bonuses, and other nondiscretionary compensation earned during a 52-week period.
Under the Obama Administration, the DOL increased the salary threshold for a highly compensated employee to $134,000 per year. The Trump Administration did not enforce the regulation but retained the original $100,000 threshold.
Salary Basis Deductions
Most FLSA exemptions require payment on a salary basis, a predetermined amount of pay that may not be deducted on the basis of quantity or quality of work. (Note: simply paying an employee a salary does not, per se, create an exempt worker.) Except in limited circumstances, the exemption will be lost if an employer deducts compensation from an otherwise exempt employee when the employee is ready, willing and able to work and the employee performs works in the week. An exemption will not be lost for:
- A deduction of one or more full days for an absence due to personal reasons, other than sickness or disability;
- A deduction of one or more full days for an absence due to sickness or disability under a bona fide plan, policy, or practice of providing wage replacement benefits for such absences;
- A reduction in compensation equal to payment for jury fees, witness fees, or military pay;
- A financial penalty for violating safety rules of “major significance” (imposed in good faith);
- A deduction of one or more full days as a disciplinary suspension for violation of work conduct rules. A workplace violation should concern “serious workplace misconduct like sexual harassment, violence, drug or alcohol violations or violations of state or federal laws;”
- A pro-rated payment of the full salary for time not worked in the first and last weeks of employment; and
- Unpaid leave taken pursuant to the Family and Medical Leave Act.
Safe Harbor for Improper Deductions
Regulations provide a safe harbor for an employer who makes an improper deduction from an employee’s salary. Under the safe harbor regulations, an improper deduction will not destroy the employee’s exempt status if the employer:
- Has a clearly communicated policy prohibiting improper deductions and includes a complaint mechanism
- Reimburses the employee for any improper deductions; and
- Makes a good faith commitment to comply in the future.
The safe harbor remedy is not available if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.
Ray Stanford, Jr.
SIO Law Group LLC
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