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Summary of New Department of Labor White Collar Exemption Regulations
Contents are for informational purposes only and are not intended as legal advice.
The United States Department of Labor (the “DOL”) issued its final regulations “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Computer and Outside Sales Employees” on April
20, 2004. These regulations were published in the April 23, 2004 Federal Register and become effective 120 days thereafter. These final regulations reflect several changes made by the DOL in response to over 75,000 comments it received
in response to its publication of a proposed regulation revising the so-called “white collar exemptions” from the Fair Labor Standard Act’s (the “FLSA”) minimum wage and overtime requirements.
Perhaps the most significant changes in the new regulations are the replacement of the short test and the long test by a “standard duties test” and the increase in the minimum required salary to qualify for the white collar exemption from
$250/week under the short test to $455/week ($23,660/year). The application of these new standard duties tests and the increase to the minimum salary requirement may require employers to change the status of some of their employees from exempt to nonexempt;
thus making those employees eligible for overtime compensation for time worked in excess of 40 hours in a workweek. Alternatively, because of the new regulations, employers may find that they are now better able to classify some employees as exempt.
Two amendments threaten to limit the reach of the new regulations. Specifically, on May 4, 2004, an amendment proposed by Senator Tom Harkin (D – Iowa) passed the Senate 52-47, and an amendment proposed by Senator Judd Gregg (R – N.H.) passed
the Senate unanimously with a vote of 99-0. The Harkin amendment would render void any portion of the new regulations that make a formerly nonexempt employee exempt; conversely, the amendment provides that any portion of the new regulations that make
formerly exempt employees nonexempt would remain in effect. The Gregg Amendment also preserves any portion of the new regulations that make formerly exempt employees nonexempt; however, the amendment lists 55 specific job categories, including teachers,
police officers, registered nurses, and all blue collar workers, and shields employees in the listed job categories from any portion of the new regulations that change their overtime pay rights. Both amendments maintain the new $23,660 per year minimum
salary level set forth in the new regulations. One or both amendments could be defeated by the House, revised or dropped, or vetoed by the President.
In a change from both the current and the previously proposed regulations, the new regulations also exclude from coverage several categories of employees. Specifically, the new regulations expressly state that they do not apply to manual laborers or other “blue
collar” workers who perform work involving repetitive operations with their hands, physical skill and energy. “First responders,” such as police officers, detectives, fire fighters, deputy sheriffs, state troopers, highway patrol officers,
correctional officers, parole or probation officers, paramedics, emergency medical technicians, ambulance personnel, rescue workers, and other public safety personnel also are not exempt from the FLSA’s overtime requirements. These employees who
are excluded from coverage under the new regulations are entitled to overtime pay regardless of how highly they might be paid.
EXECUTIVE EMPLOYEES
The DOL states that in order to qualify for the executive employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
- The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
- The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
- The employee 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 must be given particular
weight.
Definitions of Terms Used in the Executive Employee Standard Duties Test
The DOL provides the following definitions of the terms used in the Executive Employee Standard Duties Test:
Primary Duty means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s
job as a whole.
MHTL Practice Note: The DOL has further explained that “time spent performing exempt work has always been, and will continue to be, just one factor for determining primary duty. Spending more than 50 percent of the time performing exempt work has
been, and will continue to be, indicative of exempt status. Spending less than 50 percent of the time performing exempt work has never been, and will not be, dispositive of nonexempt status.” Thus, while performing exempt work less than 50% of the
time will not be a helpful factor in establishing exempt status, it is not necessarily a bar to classifying an employee as exempt.
Management generally includes, but is not limited to, 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 for the purpose of recommending promotions or other changes in status; 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, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials
or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.
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.
Customarily and Regularly means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.
MHTL Practice Note: The new regulations provide additional guidance on the scenario where an employee performs both exempt and nonexempt duties. The new regulations provide that an employee will not lose his/her exempt status merely because
s/he performs some nonexempt tasks so long as the employee otherwise meets the requirements of the exemption. In an effort to further distinguish between exempt executive employees and nonexempt employees, the regulations explain that “Generally, exempt executives
make the decision regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations under their management while performing the nonexempt work. In contrast, the nonexempt employee generally is directed
by a supervisor to perform the exempt work or performs the exempt work for defined time periods. An employee whose primary duty is ordinary production work or routine, recurrent or repetitive tasks cannot qualify for exemption as an executive.” Thus,
it appears that a key inquiry in determining the exempt status of an employee who performs both exempt and nonexempt work, such as retail or restaurant managers, is whether s/he performs the exempt functions at his/her own direction or at the direction
of someone else.
Two or More means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees. The supervision can be distributed among two, three or more employees, but each such employee
must customarily and regularly direct the work of two or more other full-time employees or the equivalent. For example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each supervisor directs the work of two
of those workers.
Factors to be considered in determining whether an employee’s recommendations as to hiring, firing, advancement, promotion or any other change of status are given Particular Weight include, but are not limited to, whether it is part of the employee’s
job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Generally, an executive’s recommendations must pertain to employees whom the executive customarily and regularly directs.
It does not include occasional suggestions. An employee’s recommendations may still be deemed to have “particular weight” even if a higher level manager’s recommendation has more importance and even if the employee does not have
authority to make the ultimate decision as to the employee’s change in status.
Exemption of Business Owners
The new regulations provide that an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which s/he is employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively
engaged in its management, is considered a bona fide exempt executive.
Sole Charge
The new regulations deleted in its entirety the section in the current regulations permitting employers to classify an employee in “sole charge” of an independent establishment or physically separated branch as an exempt executive employee.
Such employees still will be eligible for exempt status if they otherwise satisfy the salary requirement and standard duties test for executive employees.
ADMINISTRATIVE EMPLOYEES
The DOL states that in order to qualify for the administrative employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
- The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Definitions of Terms Used in the Administrative Employee Standard Duties Test
The DOL provides the following definitions of the terms used in the Administrative Employee Standard Duties Test:
Primary Duty has the same definition set forth above for Executive Employees.
Work Directly Related to Management or General Business Operations is work directly related to assisting with the running or servicing of the business, as distinguished, for example from working on a manufacturing production line or selling a product
in a retail or service establishment, and includes, but is not limited to, work in the following functional areas, as well as similar activities not set forth below:
| Tax |
Safety and Health |
| Finance |
Research |
| Accounting |
Personnel Management |
| Budgeting |
Human Resources |
| Auditing |
Employee Benefits |
| Insurance |
Labor Relations |
| Quality Control |
Public Relations |
| Purchasing |
Government Relations |
| Procurement |
Computer Network |
| Advertising |
Internet and Database Administration |
| Marketing |
Legal and Regulatory Compliance |
Work Directly Related to the Management or General Business Operations of the Employer’s Customers may include, but is not limited to, employees acting as advisors or consultants to their employer’s clients or customers as tax experts or financial
consultants.
MHTL Practice Note: The types of employees that fall within the administrative exemption have been a source of confusion for employers for several years. Therefore, the laundry list of functional areas set forth in the new regulations that, under certain
circumstances, generally will qualify for the administrative exemption should be useful to employers. The new regulations clarify, for instance, that (contrary to many court decisions) insurance claims adjusters and financial service employees may qualify
for the administrative exemption. However, the regulations also indicate that inside sales employees generally will not qualify for this exemption. Still, these determinations must be made on a case-by-case basis weighing all relevant factors and may
not be based only on job titles, but the guidance helps!
The Exercise of Discretion and Independent Judgment generally involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term must be applied
in the light of all the facts involved in the employee’s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Factors to consider include, but are
not limited to:
- Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices;
- Whether the employee carries out major assignments in conducting the operations of the business;
- Whether the employee performs work that affects business operations to a substantial degree;
- Whether the employee has authority to commit the employer in matters that have significant financial impact;
- Whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation.
The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill
in applying well-established techniques, procedures or specific standards described in manuals or other sources.
MHTL Practice Note: What does it really mean for an employee to “exercise discretion and independent judgment”? Can an employee be subject to company rules and still have independent judgment? What about the effects of following
pre-established manuals and procedures?
The DOL has provided some guidance on the effect of the use of manuals by employees on their eligibility for the administrative exemption. Employees who simply apply well-established techniques or procedures described in manuals or other sources within
closely prescribed limits to determine the correct response to an inquiry or set of circumstances generally will not be exempt. However, the use of a manual is not an automatic disqualification from the exemption. For example, exempt administrative employees
may use manuals, guidelines or other established procedures containing or relating to highly technical, scientific, legal, financial or other similarly complex matters that can be understood only by those with advanced or specialized knowledge or skills.
Matters of Significance refer to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial
losses if the employee fails to perform the job properly. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of
the employee’s duties may cause serious financial loss to the employer.
Educational Establishments and Administrative Functions
The administrative exemption is also available to employees compensated on a salary or fee basis at a rate not less than $455 a week and whose primary duty is performing administrative functions directly related to academic instruction or training in
an educational establishment. Academic administrative functions include operations directly in the field of education, and do not include jobs relating to areas outside the educational field. Employees engaged in academic administrative functions include:
- The superintendent or other head of an elementary or secondary school system, and any assistants responsible for administration of such matters as curriculum, quality and methods of instructing, measuring and testing the learning potential and achievement
of students, establishing and maintaining academic and grading standards, and other aspects of the teaching program;
- The principal and any vice-principals responsible for the operation of an elementary or secondary school;
- Department heads in institutions of higher education responsible for the various subject matter departments;
- Academic counselors and other employees with similar responsibilities.
MHTL Practice Note: The new regulations provide that jobs relating to building management and maintenance, jobs relating to the health of the students, and academic staff such as social workers, psychologists, lunch room managers or
dieticians do not perform academic administrative functions.
PROFESSIONAL EMPLOYEES
Employees may be exempt from the FLSA’s minimum wage and overtime requirements as either a “learned professional employee” or a “creative professional employee.”
Learned Professional Exemption
The DOL states that in order to qualify for the learned professional employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week;
- The employee’s primary duty must be the performance of 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;
- The advanced knowledge must be in a field of science or learning; and
- The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
MHTL Practice Note: The new regulations recognize that in today’s workplace, a person can gain the kind of advanced knowledge required to qualify as a professional in ways other than formal education. The regulations provide that an employee may
be classified as an exempt professional even if s/he does not possess an advanced degree so long as the employee has “substantially the same knowledge level and perform[s] substantially the same work as the degreed employees, but […] attained
the advanced knowledge through a combination of work experience and intellectual instruction.”
In its comments to the new regulations, the DOL states that “an employee with the same knowledge level and performing the same work in a professional field of science or learning as the degreed professionals should be classified and paid in the
same manner as those degreed professionals. This principle does not expand the learned professional exemption to new quasi-professional fields. Rather, it merely ensures, as in the current regulations, that employees performing the same work, and who
met the other requirements for exemption, are treated the same – a common theme in employment law today.”
Definitions of Terms Used in the Learned Professional Employee Standard Duties Test
The DOL provides the following definitions of the terms used in the Learned Professional Employee Standard Duties Test:
Primary Duty has the same definition set forth above for Executive Employees.
Work Requiring Advanced Knowledge means work which is predominantly intellectual in character, and which includes work requiring the consistent exercise of discretion and judgment. Professional work is therefore distinguished from work involving routine
mental, manual, mechanical or physical work. A professional employee generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level.
Fields of Science or Learning include law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other occupations that have a recognized professional
status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning.
MHTL Practice Note: The regulations indicate that licensed practical nurses, skilled tradespersons, beauticians and engineering technicians generally cannot qualify for the learned professional exemption.
Customarily Acquired by a Prolonged Course of Specialized Intellectual Instruction means specialized academic training that is a standard prerequisite for entrance into the employee’s profession. The best evidence of meeting this requirement is
having the appropriate academic degree. However, the word “customarily” means the exemption may be available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed
employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. This exemption does not apply to occupations in which most employees acquire their skill by experience rather than by advanced specialized
intellectual instruction.
MHTL Practice Note: The regulations indicate that the following employees in the following professions who meet certain educational and/or licensing requirements generally qualify for the learned professional exemption: registered or certified medical
technologists, registered nurses, dental hygienists, physician assistants, certified public accountants and certain other accountants, executive and sous chefs, athletic trainers, and funeral directors and embalmers. However, the regulations also indicate
that the following positions generally will not qualify for the learned professional exemption: accounting clerks, bookkeepers, paralegals, and cooks. Again, these determinations must be made on a case-by-case basis weighing all relevant factors and may
not be based only on job titles.
Creative Professional Exemption
The DOL states that in order to qualify for the creative professional employee exemption, all of the following tests must be met:
- The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; and
- The employee’s primary duty must be the performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.
Definitions of Terms Used in the Creative Professional Employee Standard Duties Test
The DOL provides the following definitions of the terms used in the Creative Professional Employee Standard Duties Test:
Primary Duty has the same definition set forth above for Executive Employees.
Invention, Imagination, Originality or Talent distinguishes the creative professions from work that primarily depends on intelligence, diligence and accuracy. Exemption as a creative professional depends on the extent of the invention, imagination, originality
or talent exercised by the employee. Whether the exemption applies, therefore, must be determined on a case-by-case basis. The requirements are generally met by the following professions, as well as others:
| actors |
musicians |
| composers |
soloists |
| certain painters |
writers |
| cartoonists |
essayists |
Journalists also may satisfy the duties requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality or talent. However, journalists are not exempt creative professionals if they only
collect, organize and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product.
Recognized Field of Artistic or Creative Endeavor includes such fields as, for example, music, writing, acting and the graphic arts.
Teachers
Teachers are exempt if their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge, and if they are employed and engaged in this activity as a teacher in an educational establishment. Exempt teachers include,
but are not limited to, regular academic teachers; kindergarten or nursery school teachers; teachers of gifted or disabled children; teachers of skilled and semi-skilled trades and occupations; teachers engaged in automobile driving instruction; aircraft
flight instructors; home economics teachers; and vocal or instrument music teachers. Salary is not a factor in determining whether teachers are exempt professionals as long as they meet this test.
Practice of Law or Medicine
An employee holding a valid license or certificate permitting the practice of law or medicine is exempt if the employee is actually engaged in such a practice. An employee who holds the requisite academic degree for the general practice of medicine is
also exempt if he or she is engaged in an internship or resident program for the profession. Salary is not a factor in determining whether lawyers or physicians are exempt professionals as long as they meet this test.
COMPUTER EMPLOYEES
The DOL states that in order to qualify for the computer employee exemption, the following tests must be met:
- The employee must be compensated either on a salary or fee basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
- The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; and
- The employee’s 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, creation, 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 computer programs related to machine operating systems; or
- A combination of the aforementioned duties, the performance of which requires the same level of skills.
The computer employee exemption does not include employees engaged in the manufacture or repair of computer hardware and related equipment. Employees whose work is highly dependent upon, or facilitated by, the use of computers and computer software programs
(e.g., engineers, drafters and others skilled in computer-aided design software), but who are not primarily engaged in computer systems analysis and programming or other similarly skilled computer-related occupations identified in the primary duties test
described above, are also not exempt under the computer employee exemption.
OUTSIDE SALES EMPLOYEES
The DOL states that to qualify for the outside sales employee exemption, all of the following tests must be met:
- The employee’s primary duty must be making sales (as defined in the FLSA), 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
- The employee must be customarily and regularly engaged away from the employer’s place or places of business.
Thesalary requirements of the regulations do not apply to the outside sales exemption. An employee who does not satisfy the requirements of the outside sales exemption may still qualify as an exempt employee under one of the other white collar exemptions
if all the criteria for one of the other exemptions are met.
Definitions of Terms Used in the Outside Sales Employee Standard Duties Test
The DOL provides the following definitions of the terms used in the Outside Sales Employee Standard Duties Test:
Primary Duty has the same definition set forth above for Executive Employees.
Making Sales includes any sale, exchange, contract to sell, consignment for sales, shipment for sale, or other disposition. It includes the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible
property.
Obtaining Orders or Contracts for Services or for the Use of Facilities includes the selling of time on radio or television, the solicitation of advertising for newspapers and other periodicals, and the solicitation of freight for railroads and other
transportation agencies. The word “services” extends the exemption to employees who sell or take orders for a service, which may be performed for the customer by someone other than the person taking the order.
Customarily and Regularly means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.
Away from Employer’s Place of Business means the employee makes sales at the customer’s place of business, or, if selling door-to-door, at the customer’s home. Outside sales does not include sales made by mail, telephone or the Internet
unless such contact is used merely as an adjunct to personal calls. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer’s places of business, even
though the employer is not in any formal sense the owner or tenant of the property.
Promotion Work may or may not be exempt outside sales work, depending upon the circumstances under which it is performed. Promotional work that is actually performed incidental to and in conjunction with an employee’s own outside sales or solicitations
is exempt work. However, promotion work that is incidental to sales made, or to be made, by someone else is not exempt outside sales work.
Drivers Who Deliver Products and Sell Such Products may qualify as exempt outside sales employees only if the employee has a primary duty of making sales. Several factors should be considered in determining whether a driver has a primary duty of making
sales, including a comparison of the driver’s duties with those of other employees engaged as drivers and as salespersons, the presence or absence of customary or contractual arrangements concerning amounts of products to be delivered, whether or
not the driver has a selling or solicitor’s license when required by law, the description of the employee’s occupation in collective bargaining agreements, and other factors set forth in the regulations.
HIGHLY COMPENSATED EMPLOYEES
Under the new regulations, highly compensated employees performing office or non-manual work and 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 FLSA 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 duties tests for exemption.
MHTL Practice Note: Under this highly compensated employee provision, an employee paid $100,000 or more per year may be classified as exempt even if his/her primary duty is not exempt work so long as s/he regularly performs one exempt duty. For purposes
of making this determination, the employer may utilize any 52-week period, but if the employer does not identify this 52-week period, the calendar year will apply. An employee who works less than a full year for an employer, either because s/he is newly
hired or his/her employment ends, may qualify for the exemption if s/he is paid a pro rata portion of the $100,000 based upon the number of weeks s/he has been or will be employed.
MHTL Practice Note: In order to qualify for the highly compensated employee exemption, an employee must receive total annual compensation of at least $100,000. While this total annual compensation must include at least $455 paid per week on a salary
or fee basis, total annual compensation also may include commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period. However, total annual compensation does not include board, lodging, payments for medical
insurance or life insurance, contributions to retirement plans or the cost of other fringe benefits. Thus, employees whose base salary is less than $100,000 may still be classified as exempt highly compensated employees if they are paid certain other
nondiscretionary compensation.
MHTL Practice Note: The regulations contain a “make-up” provision that permits employers to make one final payment during the last pay period of the 52-week period or within one month after the end of the 52-week period to achieve the $100,000
minimum if the employee’s compensation otherwise will for some reason fall short of that figure. For example, if an employee is paid a base salary of $80,000 and the employer anticipates s/he will earn an additional $20,000 in commissions, but due
to poor sales figures, the employee only earns $10,000 in commissions, the employer may make a “make-up” payment of $10,000 to the employee during the last pay period or within one month after the end of the 52-week period to maintain the
exemption. However, any such make-up payment made after the end of the 52-week period may only be applied to the prior year’s total annual compensation and may not be counted toward the total annual compensation in the year in which it is paid.
OTHER SIGNIFICANT CHANGES
Deductions from Salary for Disciplinary Suspensions
The current regulations only permit employers to deduct pay in connection with the discipline of an exempt employee for penalties imposed for infractions of safety rules of major significance and for unpaid suspensions for one or more full work weeks.
The new regulations allow employers to dock exempt employees’ pay in connection with disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. However, in order for the deduction from salary
to be permissible, such unpaid suspensions must be imposed pursuant to a written policy applicable to all employees.
Employers should note that in its comments to the new regulations, the DOL has limited this seemingly broad exception by stating that it does not intend that the term “‘workplace conduct’ to be construed expansively. As the term
indicates, it refers to conduct, not performance or attendance, issues. Moreover, consistent with the examples included in the regulatory provisions, it refers to serious workplace misconduct like sexual harassment, violence, drug or alcohol violations,
or violations of state or federal laws.” Thus, while employers may now impose short unpaid suspensions on exempt employees, they should be aware that the DOL approves of such disciplinary action in only narrowly prescribed circumstances.
MHTL Practice Note: Employers should review their workplace conduct and disciplinary policies to determine whether they are written in such a manner as to permit the employer to deduct pay in increments of less than one week from an exempt employee
placed on a disciplinary suspension.
Improper Salary Deductions and the Safe Harbor Provision
Under the current regulations, an employer can lose the exemption for an entire class of employees as a result of making improper pay deductions from one exempt employee. Generally, under both the current and the new regulations, and improper salary
deduction is a deduction made on the basis of the quantity or quality of work performed by the employee. The current regulations provide a “window of correction” where an employer who inadvertently makes impermissible deductions can, in
some circumstances, retain the exemption by reimbursing employees for the impermissible deduction. The new regulations have replaced that “window of correction” with a new “safe harbor” rule.
The new regulations contain seven exceptions to this salary basis, “no pay-docking” rule. Employers may make deductions from salary of exempt employees in the
following situations:
- An absence from work for one or more full days for personal reasons, other than sickness or disability;
- An absence from work for one or more full days due to sickness or disability if deductions made under a bona fide plan, policy or practice of providing wage replacement benefits for these types of absences;
- To offset any amounts received as payment for jury fees, witness fees, or military pay;
- Penalties imposed in good faith for violating safety rules of “major significance,” such as “no smoking” rules in explosive plants, oil refineries and coal mines;
- Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of workplace conduct rules, such as rules prohibiting sexual harassment or workplace violence;
- Proportionate part of an employee's full salary may be paid for time actually worked in the first and last weeks of employment; and
- Unpaid leave under the Family and Medical Leave Act.
The new regulations provide that an employer will lose the exemption if it has an “actual practice” of making improper deductions from salary, but also provide a “safe harbor” for employers who make improper deductions, but do
not have an “actual practice of doing so.” Factors the DOL will consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to:
- The number of improper deductions, particularly as compared to the number of employee infractions warranting deductions;
- The time period during which the employer made improper deductions;
- The number and geographic location of both the employees whose salary was improperly reduced and the managers responsible; and
- Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.
If an “actual practice” is found, the exemption is lost during the time period of the deductions for employees in the same job classification working for the same managers responsible for the improper deductions.
Isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
In addition, if an employer (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future,
the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints.
Extra Pay for Exempt Employees
The new regulations clarify the DOL’s position on two common questions raised by employers with respect to pay practice for exempt employees:
Additional Compensation: An employer may provide an employee with additional compensation without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of payment of at least $455 per
week paid on a salary basis.
Computing Earnings on an Hourly, Daily or Shift Basis: Employers may compute an exempt employee’s earnings on an hourly, daily or shift basis without losing the exemption or violating the salary basis requirement if the employment arrangement
also includes a guarantee of payment of at least $455 per week paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The new
regulations provide that the “reasonable relationship test” will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled
workweek.
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