Employee Benefits Alert Issue No. 13 HR Partner April 2004 Benefits Brokerage & Consulting Services Rx Purchasing Coalition HR Consulting Data Analysis Benefits Administration Retirement Services Predictive Modeling Call Center Services Voluntary Benefits Consumer Driven Healthcare Legislative & Compliance International Benefits On April 20, 2004, the U.S. Department of Labor, Wage and Hour Division ( DOL ), issued the new exempt status rules for white collar employees under the Fair Labor Standards Act ( FLSA ). The revised regulations have modernized the standard to determine whether executive, administrative, professional, outside sales, and computer employees are exempt from the overtime requirements of the FLSA. Background The FLSA requires covered employers to pay their employees at least federal minimum wage and overtime pay of time-and-one-half the regular rate of pay for all hours worked over 40 in a workweek. There are numerous exemptions from the minimum wage and overtime requirements. For example, the FLSA states that any employee employed in a bona fide executive, administrative, or professional capacity or in a capacity of outside salesman is exempt from the minimum wage and overtime requirements. The FLSA, however, fails to define the terms executive, administrative, or professional. Accordingly, the DOL had previously developed several tests to define these exemptions. The new regulations modify these tests, as well as significantly raise the minimum salary under which employees cannot be defined as exempt. The New Regulations The new regulations significantly modify the FLSA for the first time in over 50 years. The following are some of the highlights of the new regulations: Revised Salary Minimum: Workers earning less than $23,660 per year ($455 per week) will automatically be eligible for overtime pay. This amount is up from $8,060. The previous rules included a short test and a long test for determining exempt status, but the new regulations do away with these tests. Instead, the minimum salary requirement is referred to as the standard test. Highly Compensated Professionals: Under the new regulations, if an employee earns a total annual compensation of $100,000 or more, which includes at least $455 per week paid on a salary basis, and performs one or more of the exempt duties of an exempt executive, administrative, or professional employee, that employee is considered a highly compensated employee and is therefore exempt from the requirement for overtime pay. Public Safety Employees: The new regulations state that police officers, firefighters, paramedics, and other similar public safety employees are entitled to overtime pay. Willis Employee Benefits Alert is produced by Willis Legal & Research Group. The information contained in this publication is not intended to represent legal advice and has been prepared solely for educational purposes. You may wish to consult your attorney regarding issues raised in this publication. Willis publications appear on the internet at: www.focusonbenefits.com Copyright 2004
Page 2 Manual Laborers: The new exemptions do not apply to manual laborers or other blue collar workers performing repetitive work, such as non-management production workers, maintenance, and construction workers. Disciplinary Deductions: The new regulations permit an employer to suspend an exempt employee without pay for serious conduct violations such as sexual harassment or workplace violence. Additionally, partial-week suspensions are permissible under the new regulations in response to serious misconduct. Formerly, payroll deductions could only be made as penalties imposed for infractions of safety rules of major significance for one or more full workweeks. Safe Harbor: The new regulations include a safe harbor that will preserve an employee s exempt status in the event impermissible deductions are accidentally made. An exempt employee s salary basis will not be defeated if the employer: (a) has a clearly communicated policy prohibiting improper deductions, including a complaint mechanism; (b) reimburses employees for any improper deductions; and (c) makes a good faith commitment to comply in the future. This safe harbor is not available, however, if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. This test replaces the so-called window of correction for improper deductions. Final Job Duties Tests: In determining whether an employee is an exempt executive, administrative, or professional employee, a final job duties test is applied. To qualify as an exempt executive employee, the following test must be met: 1. The employee must have a primary duty of managing the enterprise in which the employee is employed or one of its customarily recognized departments or subdivisions; 2. The employee must customarily and regularly direct the work of two or more other employees; and 3. The employee must have the authority to hire or fire other employees or make recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees which are given particular weight. In determining whether an employee s suggestions and recommendations are given particular weight, various factors will be considered, such as whether it is part of the employee s job duties to make suggestions and recommendations; how often such recommendations are made or requested; and how often those recommendations are relied upon. The FLSA provides a different test for equity owners. The FLSA states that an employee who owns at least 20% equity interest in the enterprise that employs him/her and is actively engaged in the enterprise s management is exempt. These equity owners do not have to meet the tests set forth above.
Page 3 To qualify as an exempt administrative employee, the following test must be met: 1. The employee s primary duty must consist of the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer s customers; and 2. The employee s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. The term primary duty means the principal, main, major, or most important duty that the employee performs. A primary duty determination is a factspecific test based on the situation. Employees who spend greater than 50% of their time performing exempt work will generally satisfy the primary duty requirement. To qualify as an exempt professional employee, the following test must be met: 1. The employee s primary duty must require advanced knowledge of an advanced type (defined as work which is predominately 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; or 2. The employee s primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. What to do to Bring Your Company into Compliance Identify white collar employees earning less than $23,660. One option available to employers is to raise salaries to $455 per week/$23,660 per year, which would make the employees exempt from overtime. Analyze jobs/review job descriptions. Analyze jobs to determine which employees perform administrative, professional, and executive duties that would make them exempt from overtime. Additionally, job descriptions should be reviewed to ensure that they accurately state the work performed and skills required. Payroll. Ensure that payroll systems are updated to take into account the new overtime regulations.
Page 4 Unionized employers are still governed by any collective bargaining agreements in place. The new regulations do not affect any overtime provisions set forth in the union contract if the contract provides for overtime beyond what is required by the new regulations. Review discipline policies. The new regulations permit an employer to suspend an exempt employee without pay for serious conduct violations such as sexual harassment or workplace violence. Partial-week suspensions are permissible under the new regulations in response to serious misconduct. The new rules take effect 120 days from April 23, 2004, when the regulations were published in the Federal Register. Accordingly, the Department of Labor has stated that employers have until August 23, 2004 to bring their companies into compliance with the new regulations. The FLSA rules are the minimum standards that must be followed. Therefore, employers should consult applicable state law, which may provide additional coverage. Additional information on the new overtime exemption regulations can be found on the Department of Labor s website, located at: http://www.dol.gov/esa/regs/compliance/whd/fairpay/main.htm This article was prepared by Willis HR Partner Department. If your company is seeking Human Resource expertise, please contact your local Willis office and ask what HR Partner can do for you.
Page 5 U.S. Benefit Office Locations Benefits Brokerage & Consulting Services Rx Purchasing Coalition HR Consulting Data Analysis Benefits Administration Retirement Services Predictive Modeling Call Center Services Voluntary Benefits Consumer Driven Healthcare Legislative & Compliance International Benefits Anchorage, AK (907) 562-2266 Eugene, OR (541) 687-2222 Minneapolis, MN (763) 302-7100 Raleigh, NC (919) 459-3000 Atlanta, GA (404) 224-5000 Florham Park, NJ (973) 410-1022 Mobile, AL (251) 433-0441 Rochester, NH (603) 332-5800 Baltimore, MD (410) 527-1200 Ft. Worth, TX (817) 335-2115 Montgomery, AL (334) 264-8282 Roswell, NM (505) 317-3397 Bethesda, MD (301) 530-5050 Greenville, SC (864) 232-9999 Mountain View, CA (650) 944-7000 St. Louis, MO (314) 721-8400 Birmingham, AL (205) 871-3871 Houston, TX (713) 625-1023 Naples, FL (239) 514-2542 San Diego, CA (858) 455-4888 Boston, MA (617) 437-6900 Jacksonville, FL (904) 355-4600 Nashville, TN (615) 872-3700 San Francisco, CA (415) 981-0600 Cary, NC (919) 459-3000 Knoxville, TN (865) 588-8101 New Orleans, LA (504) 581-6151 San Juan, PR (787) 756-5880 Charlotte, NC (704) 376-9161 Lake Mary, FL (407) 805-3005 New York, NY (212) 344-8888 Seattle, WA (206) 386-7400 Chicago, IL (312) 621-4700 Lexington, KY (859) 223-1925 Orange County, CA (714) 953-9521 Tampa, FL (813) 281-2095 Cleveland, OH (216) 861-9100 Los Angeles, CA (818) 548-7500 Philadelphia, PA (610) 964-8700 Washington, DC (301) 530-5050 Columbus, OH (614) 766-8900 Louisville, KY (502) 499-1891 Phoenix, AZ (602) 787-6000 Wilmington, DE (302) 477-9640 Dallas, TX (972) 385-9800 Miami, FL (305) 373-8761 Pittsburgh, PA (412) 928-8000 Detroit, MI (248) 735-7580 Milwaukee, WI (414) 271-9800 Portland, OR (503) 224-4155