New federal overtime rules issued: What is their real effect on employers?
June, 2004
Everyone has heard that new federal overtime regulations have been issued. They will take effect on August 23, 2004, unless Congress overturns them. Now you are wondering, "What does this really mean for employers?" What this means is that now is an opportune time to re-evaluate the classification of all your employees and make sure that each employee is appropriately classified as exempt or nonexempt. The new regulations purport to be clearer than those written in the 1940s and 1970s. However they are still overwhelming and now at odds with many states' rules, which remain unchanged. The following step-by-step process can help you take advantage of the changes and avoid violations of overtime laws.
Step one: identify each employee and the actual duties they performed
Analyze each employee's actual duties performed on a daily basis. For example, an employer may create an exempt position of Lead Technician to cover several employees. However, you must ensure that each employee actually performs exempt duties. It may vary by employee. If the employee is doing work classified as exempt from overtime, the first part of the test is met. But employers must also meet the salary requirements discussed in Step 2.
Step two: how much does the employee get paid?
The second test for all exempt positions is how much the employee earns. In order to be classified as exempt, an individual needs to make at least $455/wk. This translates into $23,660/yr or $11.50/hr. If the individual does not make this much, they are nonexempt–no matter the duties.
Highly compensated employees
If the employee makes an annual income of over $100,000 (and it is paid in increments of at least $455/wk) the new test to make them exempt just got a little easier if their primary duty is office or non-manual work. The need only perform one of the exempt duties and responsibilities of the white collar (professional, administrative or executive) exemptions.
Highly compensated production positions
If the person is a non-management production position (as opposed to office or non-manual work), it does not matter how much they make. They are non-exempt.
Step three: Is the employee paid on a salary basis?
This third step hasn't changed under the new regulations. Salaried employees must be paid per week, without deductions for absences. (Unless there is a bona fide vacation or sick leave policy in place and the deductions are part of their use of their accrued leave under these policies.) If you have an exempt employee who is suspended without pay for disciplinary reasons, you now can suspend the employee, and their pay, in full-day increments, instead of full-week increments. However, in order to take advantage of this change, you must have a written policy in place, which has been disseminated to all employees, which notifies the salaried personnel that discipline may be imposed in full-day increments.
Step four: what exemption applies?
The changes in the regulations are intended to make the exemptions easier to understand and apply. For example, "primary duty" now means "the principle, main or major duty." You no longer need to perform certain acts for a certain percentage of the time in the day in order to qualify for the exemption. Instead, the regulation focuses on all factors.
As you look at the exemptions, the biggest change is the elimination of the "short" test and the "long" test. Now elements of the previous individual tests are being combined into one test under each exemption. The highlights of changes are outlined below. These are not explanations of the entire test under each exemption; for a comprehensive explanation, please contact your legal counsel.
Executive
Old test
- Primary duty (generally more than 50% of work time) must be to manage a distinct unit or subdivision within the organization.
- Must customarily and regularly direct the work of two or more other full-time employees within the division or subdivision.
- Must have authority to hire or fire employees. If the employee does not have final authority, their recommendations must be effective, or given particular weight.
- Must customarily and regularly exercise independent judgment and discretionary powers.
- If not highly paid (less than $250/wk), must spend no more than 20 percent of their time performing nonexempt duties.
New test
- Elimination of the "sole charge" exemption: This means there is no longer an automatic qualification for the individual who is in sole charge of an independent establishment of a company or a physically separated branch of a company and otherwise meets the primary duties test.
- The primary duties test remains the same as the old test (without the percentage required to prove primary duty), except for definition of "particular weight" when considering recommendations given for hiring or firing.
- Now look at:
--How frequently such suggestions are made;
--How frequently they are relied upon;
--Are the suggestions about employees that are customarily supervised by the individual; and
--Is it a part of the individual's normal job to make such suggestions.
Administrative
Old test
- Primary duty (generally more than 50% of the work time) must be either performing office or non-manual work directly related to management policies or general operations of the business.
--Limited to employees who perform work of substantial importance to the management or operation of the business of the employer or the employer's customers.
--The work must be directly related to the running of the business and not merely the day-to-day carrying out of its affairs.
- Must regularly assist an executive, or perform work under only general supervision.
- Must, as a normal part of the employee's work, be called upon to make decisions of significance. Must regularly exercise independent judgment and discretionary power.
New test
- Primary duty (without the percentage requirement) must still be directly related to the management or general operation of the business.
--However, the employee no longer has to deal with the policies of the business.
- Must regularly and customarily exercise independent judgment and discretion–with respect to matters of significance.
Professional
Unchanged
- Must, as a primary duty, perform work requiring an advanced type of knowledge usually obtained through a prolonged course of study, or
- Must, as a primary duty, perform work that is original or creative in an artistic field, or
- Must, as a primary duty, work as a certified teacher or registered nurse, and
- Must regularly exercise independent judgment and discretion.
Computer
Old test
- Primary duty must consist of:
--The application of systems analysis techniques to determine hardware, software, or system functional specifications; or
--The design, development, documentation, analysis, creation, testing or modification of computer systems related to system design specification; or
--The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
--A combination of all the above duties.
- Must have attained a level of expertise that allows them to work independently and without close supervision.
- Must be paid at least $27.63/hr.
New test
- The requirement of independent judgment and working without close supervision has been removed, the other factors remain.
Outside sales
Old test
- Employed for the purposes of selling goods or services or intangible items such as insurance, stocks, bonds, or real estate, away from the employer's premises.
- Work performed on activities unrelated to the sales work does not exceed 20 percent of the hours worked in a week by nonexempt employees of the employer.
New test
- Percentage of work test has been eliminated.
- Primary duty (without percentage requirement) must be outside sales.
- Note: This section still does not exempt inside sales personnel.
Step five: Now what?
The new regulations are scheduled to go into effect on August 23, 2004. You should review all positions and classifications prior to that time. Remember, just because the federal regulations have changed, the state regulations have not. Employers must apply the ones that are most beneficial to the employee. The Department of Labor (DOL) has indicated it will increase enforcement, which means DOL may audit you!
If you have questions, or would like assistance in making sure your employees are properly classified, contact your employment counsel.