Answers to Frequently Asked Questions About the Final DOL Regulations on the White Collar Exemptions

Saturday, May 1, 2004
by Jackson Lewis

To assist employers in their compliance efforts with the new Department of Labor regulations on overtime exemptions, the Wage and Hour Practice Group of Jackson Lewis has prepared a list of questions and answers.

Are the final regulations effective immediately?
No. The regulations will take effect on August 23, 2004 unless Congress takes action that successfully blocks the implementation of the regulations.

How much time do I have to review the new rules and implement any changes?
Employers will have until August 23, 2004, to review the final regulations and implement any changes.

Why has the DOL changed its regulations?
The DOL believes the current White Collar regulations are outdated, confusing, unnecessarily complex and difficult for employees, employers and the DOL to understand and apply. Most employees and employers agree. The DOL also believes the current salary level of $8,060 per year is outdated and eroded the overtime protection intended by Congress. Again, most employees and employers agree. The final regulations are the DOL's attempt to clarify and simplify the White Collar regulations so employees, employers and DOL investigators can readily understand and apply the new rules.

I've heard Congress may try and block these regulations. Is that true?
Yes. Several members of Congress have suggested they will try and block the implementation of the final regulations. At this time, it is difficult to predict whether Congress will actually move to block the regulations. We will be monitoring the situation closely and will keep you advised of any developments.

What is the likelihood that Congress can successfully block implementation by the DOL?
Within the past year, both Houses of Congress have attempted to block the March 2003 proposed regulations. Certain members of Congress have suggested they intend to challenge the new rules. Organized labor also has suggested they will challenge the new rules if they conclude their members will lose overtime protections. No action has been taken at this time. We will post updates on the status of the new regulations on our website as the situation develops.

If there is a chance Congress will block the final regulations, shouldn't I hold off doing anything until it is clears?
We do not recommend that employers adopt a "wait and see" approach to the final regulations. Instead, we recommend employers carefully evaluate how the regulations will impact their businesses and develop a detailed implementation plan to be followed in the event the regulations take effect on August 23, 2004.

Why has there been so much controversy surrounding issuance of the final regulations?
The DOL has made attempts dating back as early as 1954 to update these regulations, unfortunately, however, the regulations have remained virtually unchanged during the past 50 years. As a result, the regulations are outdated and are no longer very effective in the 21st Century workplace. When the DOL announced its proposed rules in March 2003, an enormous public relations campaign was implemented by organized labor, and certain members of Congress to stop the proposed changes. Of the 75,280 comments DOL received on the proposed revisions, organized labor's direct or web-site contribution to these was approximately 90% of the total of all comments received. Additionally, it is an election year and it now appears the changes to the regulations have become enmeshed in partisan election politics.

What should I tell my employees?
The DOL's release of the final regulations has been well publicized. As a result, we believe many of your employees may be aware of the new rules and be concerned about how these changes may impact them. We do not recommend that you independently notify employees of the new rules before you have investigated and determined how your business will be impacted. If, however, you are approached by employees and asked if the new rules will impact them, we recommend you advise these employees that it is unclear at this time and you are reviewing the new rules and will let them know as soon as possible if they will be impacted.

Are the requirements in the final regulations different than those presented by the DOL in its release of the proposed regulations back in March 2003?
Yes. There are a number of important differences. The most substantial changes involve the minimum salary levels and some tweaking of the duties tests.

The March 2003 proposed rule included a salary level of $425 per week. The new rule has a salary level of $455.

Further, the so-called "super salary" test, originally announced at $65,000 annual compensation, has risen to $100,000 per year. Under this super salary test an employee need only meet one of the duty tests, so long as the exempt duty(ies) are performed "on a regular and recurring basis" — not simply something done occasionally or once a month. No pro-rata deductions may be made from the annual salary of the "highly compensated" employee for leave under the family medical leave act. However, part year employees need only be paid commensurate with the actual number of weeks worked, not necessarily the full $100,000 compensation. Salaries, commissions and non-discretionary bonuses count toward total compensation; discretionary bonuses do not.

Deductions permitted from the basic salary test, the $455 per week, are still limited and a new provision, discussed in the proposed rule for a "safe harbor" has been retained. Under the safe harbor provision the employer must have a written policy prohibiting impermissible deductions; this policy must be provided all employees; the employer must reimburse any money inadvertently withheld; and the employer must not continue an improper practice once an employee has complained and made the error known to the employer. If the employer does not follow these rules there is no "safe harbor" and the employer will be subject to potential back wage liability resulting from the loss of the exemption due to the improper deductions.

Essentially employees' duties will be measured against their "primary duty," not against a 20% or 40% tolerance as previously existed under so-called "long" and "short" duties tests. There continues to be the "independent judgment and discretion" test for the administrative exemption. The new rules also make direct statements that certain non-management, production-line types of workers, will not qualify for exemption — have not been and will not be seen as exempt under these rules. Again, this response by DOL was as a result of significant critical comments concerning the proposed rules.

Do the final regulations differ from the current regulations?
Yes. There are a number of important changes. The minimum salary levels have been increased to $455 per week. The duties tests for the executive, administrative, professional and outside sales employee have been changed.

The DOL has also revised the rules that govern the types of deductions that can be taken from an exempt employee's salary, as well as the possible consequences to an employer if an improper deduction is made.

The final regulations also include a "highly compensated employee" test, which is a revised version of the "super salary test" proposed in March 2003. Under the new rule, if an employee earns more than $100,000 per year and regularly performs one or more exempt duties, that employee will qualify as an exempt white collar employee. This special exception does not apply to manual laborers or other "blue collar" employees.

Has the DOL begun providing its own insights or materials relating to the new regulations?
Yes. The DOL has posted some very useful information on their web site. At this site you can link to "FairPay" and obtain copies of the new rules as well as fact sheets addressing each of the exemption categories as well as some specific fact sheets addressing occupational titles. The site also includes a power point presentation employers can use to train their key employees. The website also provides contact information for DOL representatives.

What is Jackson Lewis doing to provide information and guidance on the new rules?
Analysis of the rules is being made and detailed summaries have been posted on the Jackson Lewis website. More information and updates will be posted in the future. Our offices across the country also will be conducting seminars for employers about the new changes. Additionally, the members of our firm's Wage and Hour Practice Group will be happy to assist you in reviewing the new rules and determining how the changes will impact your business.

What should I be doing?
We recommend the following ten step response:
  1. Consult with human resources and in-house or outside legal counsel to develop an implementation strategy for response to the final regulations.
  2. Review salary levels and identify any current exempt employees who fall below minimum.
  3. Review any non-exempt employees whose annual earnings exceed $100,000 to determine whether they would qualify under the Highly Compensated Employee Test.
  4. Review payroll practices to ensure no improper deductions are taken from exempt employees' salaries.
  5. Develop, implement and publicize a Safe-Harbor Deduction Policy. The policy should state the employees' salaries are intended to cover all hours worked, the employer intends to pay the employees on a salary basis and will not make deductions from salary that are prohibited under the FLSA, and include a mechanism for employees to report improper deductions.
  6. Institute and publicize a reporting mechanism employees can use to report payroll errors including salary deductions and incorrect paychecks.
  7. Train personnel responsible for processing payroll regarding deduction policy and limitations on permissible deductions.
  8. Conduct a review of non-exempt and exempt positions to determine whether any positions should be reclassified as a result of the new regulations.
  9. Ensure manual laborers or other Blue Collar employees are not treated as exempt employees. The types of occupations that are considered under the final regulations to be non-exempt include, for example, personnel clerks, inspectors, comparison shoppers, licensed practical nurses, accounting clerks, bookkeepers, paralegals, and inside salespersons.
  10. Review non-exempt pay practices. We also recommend you delay actual implementation of any changes until the effective date of August 23, 2004. We believe employers should delay implementation of any changes until the effective date to allow the maximum time period in which to determine whether the regulations will in fact take effect.
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