The New Federal Overtime Exemptions
1Employment Roundtable
By Stacey Mark
Chair, Labor & Employment Group and Chair, Sustainable Practice Advisory Group
June 17, 2004
On April 23, 2004, the U.S. Department of Labor (DoL) issued final revisions to the “white-collar” exemptions from overtime under the Fair Labor Standards Act (FLSA).2 The changes reflect the first increase in the minimum salary level since 1975 and the first major change in the duties tests since 1949. The new regulations, which go into effect on August 21, 2004, are intended to be easier to read, administer and enforce.3
Notwithstanding the goal of making employers’ lives simpler, that does not seem to be the case. While the new regulations eliminate the former “long” tests and percentage limitations on non-exempt work, these changes merely reflect the current reality that the long tests rarely applied because most employers pay a minimum salary that exceeds the amount necessary to avoid the long test. To the extent words have been added or deleted from the duties tests, the effect of these changes appears to be largely insignificant. Moreover, at the same time the DoL admonishes employers not to rely on titles when evaluating an employee’s exemption from overtime,4 the regulations specifically exclude certain job titles from coverage by any
exemption.5 The new regulations also perpetuate prior inconsistencies in exemption coverage (e.g., the production vs. staff dichotomy under the administrative exemption, which allows the same duties to be exempt and non-exempt, depending on the nature of the employer’s business). The new regulations do not relieve employers from the need to comply with state wage and hour laws, which may vary considerably from the new regulations. Oregon, Washington, and
California are among the states with tests for exemptions from overtime that differ from federal law.6 The Oregon Bureau of Labor and Industries (BOLI) recently announced7 that it is in the
1
This memorandum contains a summary of information obtained from laws, regulations, court cases, administrative rulings and legal publications, and should not be viewed or relied upon as legal advice. Ater Wynne LLP urges readers of this memorandum to consult legal counsel regarding specific legal issues and factual circumstances.
2
The regulations are set forth in 29 CFR Part 541; see also Final FLSA Rules, 69 Federal Register 22,122 (April 23, 2004).
3
69 FR 22122. The DOL acknowledged that some of their old tests were “so confusing, complex and outdated that often employment lawyers, and even Wage and Hour Division investigators, [had] difficulty.” Id. 4 29 CFR§ 541.2. 5 See, e.g., 29 CFR § 541.3. 6
Only the following states rely solely on the federal standard: Alabama, Arizona, Delaware, District of Columbia, Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan,
process of attempting to reconcile Oregon law with the new federal regulations.8 Additional guidance from BOLI is expected in July 2004.9 In the meantime, in the event of a conflict between applicable state and federal requirements, the standard most beneficial to the employee controls.10
The most significant changes in the federal regulations include the following:
1. an increase in the minimum weekly salary from $155 (or $8,060 per year) to $455 (or $23,660 per year) required to satisfy the “salary basis” test;11
2. a new exemption for “highly compensated” employees whose total annual compensation is $100,000 or more;12
3. a exception to the prohibition on pay “docking” when there is a clear violation of company policy;13
4. elimination of alternative the “long” tests for exemptions;
5. a blanket prohibition on exemptions from overtime for manual laborers or other “blue collar” workers;14 and
6. a new “safe harbor” for improper salary deductions.15
Although the DoL intended the regulations to go into effect 120 days from their publication, it is possible that the Congress will take action to negate the new regulations. The Senate approved such a bill, but it was rejected by the House of Representatives on May 12, 2004.16 Therefore,
Mississippi, Missouri, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Wyoming. Most other states will probably require a separate analysis of the overtime exemption under state law.
7
BOLI Overtime Information Memorandum – Issued 6.9.04; available at http://www.boli.state.or.us/new/overtimeinformation.pdf.
8
BOLI has prepared a comparison of the federal and Oregon regulations. See
http://www.boli.state.or.us/new/whitecollarexemption.pdf. 9 See Fn. 7. 10 Id.; 29 CFR § 541.4; OAR 839-020-0115(3); RCW 49.46.120. 11
29 CFR § 541.600. The minimum salary requirement does not apply to the outside sales exemption. It is also inapplicable to the computer programmer exemption if the employee is paid at least $27.63 per hour. 29 CFR § 541.400(b). Other limited exceptions to the salary requirement apply to certain teachers and employees practicing law or medicine. See 29 CFR §§ 541.303(d), 541.304(d).
12
29 CFR § 541.601. 13
29 CFR § 541.602(b). 14
29 CFR § 541.3(a). See also DOL Fact Sheet #17I: Blue-Collar Workers and the Part 541 Exemptions
Under the Fair Labor Standards Act (FLSA).
15
An employer may be able to avoid the loss of an exemption due to improper deductions if the employer (1) has a clearly communicated policy prohibiting improper pay deduction, including a complaint
procedure; (2) reimburses employees for any improper deductions; (3) and makes a good faith commitment to comply in the future. 29 CFR § 541.603(d).
16
although it is not certain whether the regulations will go into effect, employers should be prepared to comply by August 23, 2004.
I. Overview of Overtime Exemptions
The FLSA requires covered employers17 to pay all employees at least the federal minimum wage for all hours worked, plus overtime pay at the rate of time-and-one-half the regular rate of pay for all hours worked over 40 in a single workweek, unless the employees are covered by one of the FLSA’s exemptions. Section 13(a)(1) of the FLSA provides exemptions from both minimum wage and overtime pay for any employee employed in a bona fide executive, administrative, professional, or outside sales capacity.18 The regulations generally require each of three tests to be met for any of these exemptions to apply other than outside sales: (1) the employee must be paid a fixed salary that is not subject to reductions because of variations in the quality or quantity of work performed (the “salary basis test”); (2) the amount of salary paid must meet a minimum specified amount (the “salary level test”); and (3) the employee’s job duties must primarily involve executive, administrative or professional duties as defined by the regulations (the “duties test”).
Both Oregon and Washington follow overtime and exemption schemes similar, but not identical to, federal law.19 Both states require employers to pay one and one-half times the employee's regular rate of pay for each hour worked in excess of forty in a single workweek, unless the employee is exempt from the federal and state overtime laws.20 Both states exempt from overtime pay requirements executive, administrative and professional employees, and outside salespeople.21 However, neither Washington nor Oregon law is identical to federal law, and the differences are greater with the adoption of the new regulations. It is, therefore, important to evaluate each job separately under federal and state laws to insure that it qualifies for exemption under both.
The following sections provide a summary of the new federal regulations defining an employer's obligation to pay overtime and the four primary exemptions from overtime pay requirements. The corresponding Oregon and Washington regulations are set forth in the Appendix.
17
The FLSA applies to employers with an annual gross revenue of $500,000 or more. 29 USC § 203(s)(A)(ii).
18
29 USC § 213(a)(1). In addition, some employees may fall under a “combination” exemption, where they perform some combination of executive, administrative, professional, outside sales and/or computer work. “Tacking” different types of exempt work together for a combination exemption is permitted by 29 CFR § 541.708.
19
The prevailing view in Oregon is that “federal regulations and caselaw interpreting the same terms under the Fair Labor Standards Act, after which most of Oregon Chapter 653 is patterned, are
instructive.” Northwest Advancement v. State, 96 Or App 133, 772 P2d 934, review denied, 308 Or 315, 779 P2d 618 (1989), cert. denied, 495 US 932 (1990). Similarly, Washington courts consider the federal regulations pertaining to its exemptions persuasive, but not controlling. Tift v. Professional Nursing
Services, Inc., 76 Wash App 577, 886 P2d 1158, review denied, 127 Wash2d 1007, 898 P2d 309 (1995).
It is not clear whether this will still be true after the new regulations go into effect. 20
ORS 653.261; OAR 839-020-0030; RCW 49.46.130, Washington Employment Standard ES.A.8.1 (issued 1/2/2002).
21
ORS 653.020(3) and (6); RCW 49.46.010(5)(c), 49.46.130(2), Washington Employment Standard ES.A.9.1 (issued 12/2/02).
A. New Executive Exemption - 29 CFR § 541.6012223 The new regulations define an exempt executive employee as follows:
(a) The term “employee employed in a bona fide executive capacity” in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary basis at a rate of not less than $455 per week ***; (2) Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
(3) Who customarily and regularly directs the work of two or more other employees; and
(4) Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight.
1. Salary Basis Test24
An employee is paid on a “salary basis” if the employee is paid each pay period a predetermined amount that is not subject to reduction due to variations in the quality or quantity of the work performed. Except in limited, specified circumstances, the employee must receive the full salary for any week in which the employee performs any work, without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work.
An employee is not paid on a salary basis if deductions from the employee’s salary are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing, and able to work, pay docking is not permissible due to lack of work. Employers are not permitted to make deductions for absences occasioned by jury duty,
attendance as a witness or temporary military leave. However, the employer may offset any amounts received as jury fees, witness fees, or military pay for a particular week against the employee’s salary for that particular week without losing the exemption.25
Employers may dock an exempt employee’s pay without running afoul of the salary basis requirement in the following circumstances.
(a) Full-Day Absences for Personal Reasons Other Than Sickness
or Disability26
An employer may dock an exempt employee’s pay for full-day absences taken for personal reasons other than sickness or disability. The employer may not ordinarily make deductions from salary for partial day absences.27
22 See Appendix, ¶ 1*. 23 See Appendix, ¶ 2*. 24
29 CFR § 541.602. The same salary basis test applies to the executive, administrative, and professional exemptions from overtime.
25
29 CFR § 541.602(3). 26
(b) Full-Day Absences Due to Sickness or Disability Pursuant to an Established Sick Pay Plan or Policy28
When an exempt employee is absent from work for one or more full days due to sickness or disability (including work-related accidents), pay docking is permissible if the deduction is made in accordance with a bona fide sick leave or disability policy or practice that provides
compensation for loss of salary occasioned by sickness or disability. An employer is not required to pay any portion of the employee’s salary for full-day absences (1) for which the employee receives compensation under the policy or practice, (2) before the employee qualifies under the policy or practice, and (3) after the employee has exhausted the leave allowance. An employer may also make deductions from pay for full-day absences if salary replacement benefits are provided under a State disability insurance or State workers’ compensation law.
(c) As a Penalty for Violation of a Safety Rule of Major
Significance29
An employer may dock an employee’s pay in full-day increments as a penalty imposed in good faith for violation of a safety rule of major significance. Safety rules of “major significance” include those relating to the prevention of serious danger to employees in the workplace (e.g., rules prohibiting smoking in explosive plants, oil refineries, and coal mines). A deduction from pay as a penalty for violations of major safety rules may be made in any amount.
(d) Unpaid Disciplinary Suspensions For Violations of Workplace
Conduct Rules30
This exception represents a change from prior law. An employer may dock an employee’s pay in full-day increments for suspensions imposed in good faith for violations of workplace conduct rules pursuant to a written policy applicable to all employees (e.g., violation of a written policy prohibiting sexual harassment or violence).
(e) During the First or Terminal Week of Employment31
An employer is not required to pay an exempt employee’s full salary in the initial or terminal week of employment. For these weeks, an employer may pay a proportionate part of an employee’s full salary for the time actually worked. The payment of an hourly or daily
equivalent of the employee’s full salary for the time actually worked will meet the requirement.
27
However, under federal law, employers may make deductions from an employee’s accrued paid leave for partial-day absences. Deductions from salary are not permitted if the employee has no paid leave available. Barner v. City of Novato, 17 F3d 1256, 1259, 1262-1263 (9th Cir. 1994); cf. Auer v. Robbins, 117 SCt 905, 911 (1997) (exempt status lost when employer has practice of making unlawful deductions from salary, or an employment policy creates a “substantial likelihood” of such deductions). Although there is no state regulation or case addressing this issue, BOLI has indicated informally that it would not consider deductions for partial-day absences from an employee’s available accrued leave a violation of the salary basis test under state law.
28 29 CFR § 541.602(2). 29 29 CFR § 541.602(4). 30 29 CFR § 541.602(5). 31 29 CFR § 541.602(6).
(f) During Family Medical Leave32
An employer is not required to pay an exempt employee’s full salary for weeks in which the employee takes unpaid leave under the Family and Medical Leave Act. The employer may pay a proportionate part of the employee’s full salary for the time actually worked (e.g., if an employee who normally works 40 hours per week uses four hours of unpaid leave under the Family and Medical Leave Act, the employer could deduct ten percent of the employee’s normal salary that week). The employer may calculate the employee’s pay by using the hourly or daily equivalent of the employee’s full weekly salary or any other amount proportional to the time actually missed.
2. Primary Duty33
The term “primary duty” means the principal or most important duty that the employee performs, with the major emphasis on the character of the employee’s job as a whole. When determining the primary duty of an employee, factors to consider include the relative importance of the employee’s exempt duties as compared with other types of duties the employee performs, the amount of time the employee spends performing exempt work, the employee’s relative freedom from direct supervision, and the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.
The time spent performing exempt work is one factor to consider in determining the employee’s primary duty, but it is not controlling. Employees who spend more than fifty percent of their time performing exempt work will generally satisfy the primary duty requirement. However, employees who spend less than fifty percent of their time performing exempt work may meet the primary duty requirement if the other factors support such a conclusion.34
3. Customarily and Regularly35
The phrase “customarily and regularly” means a frequency that must be greater than occasional but may be less than constant. Performance of one-time tasks will not meet this requirement. Tasks performed “customarily and regularly” include work normally and recurrently performed every workweek. 32 29 CFR § 541.602(7). 33 29 CFR § 541.700. 34
For example, exempt executives generally decide when to perform non-exempt duties and remain responsible for the success or failure of business operations under their management while performing the non-exempt work. In contrast, a non-exempt employee is generally directed by a supervisor to perform exempt work or performs exempt work for defined time periods. A relief supervisor or working supervisor whose primary duty is performing non-exempt manufacturing work is not exempt merely because the employee occasionally has some responsibility for directing the work of other non-exempt employees (e.g., when the exempt supervisor is unavailable). 29 CFR § 541.106.
35
4. Customarily Recognized Department or Subdivision36
The phrase “a customarily recognized department or subdivision” refers to a department or subdivision with a permanent status and a continuing function, as opposed to a collection of employees assigned to work on a specific project.
5. Customary and Regular Direction of Two or More Employees37
An executive will satisfy the requirement of supervising of two or more other employees by having supervisory authority of two full-time employees or their equivalent (e.g., one full-time and two half-time employees or four half-time employees). The supervision can be distributed multiple employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or their equivalent. For example, a department with five full-time non-exempt workers may have up to two exempt supervisors, provided each supervisor customarily and regularly directs the work of two of those workers. An employee who assists the manager of a department and supervises two or more employees only in the actual manager’s absence will not meet this requirement.
The following is ordinarily considered exempt “management” work when performed in connection with the management of a department or the supervision of employees:
• Interviewing, selecting, and training employees
• Setting and adjusting pay rates and hours of work
• Directing the work of employees
• Maintaining production or sales records for use in supervision or control
• Appraising employee productivity and efficiency for the purpose of recommending promotions or other changes in status
• Handling complaints and grievances and disciplining employees when necessary
• Planning the work and apportioning work among employees
• Determining the techniques to be used
• Determining the type of materials, supplies, machinery 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 of the employees and the property
36
29 CFR § 541.103(a). 37
• Planning and controlling the budget
• Monitoring or implementing legal compliance measures38
6. Authority to Hire or Fire or Whose Recommendations as to Changes
in Status Are Given Particular Weight39
To qualify as an executive, an employee must either have the authority to hire or fire or the employee’s recommendations as to hiring, firing, or other changes in status must be afforded “particular weight.” Factors to consider in determining whether an employee’s
recommendations are given “particular weight” include whether the employee’s job duties include making such recommendations, the frequency with which such recommendations are made or requested, and the frequency with which the employee’s recommendations are relied upon. An executive’s recommendations must ordinarily pertain to employees the executive regularly supervises. An occasional suggestion with regard to the change in status of a co-worker is not sufficient. “Particular weight” may be afforded an employee’s recommendations even if the employee does not have the authority to make the ultimate decision as to a change in status.
7. Business Owner Exemption40
The new executive exemption has been expanded to include a “business owner” exemption. This new category covers employees who (1) own at least a bona fide 20 percent equity interest in the enterprise in which they are employed, regardless of the business form (i.e., business, sole proprietorship, etc.), and (2) are actively engaged in the management of the enterprise. If the employee meets the business owner exemption, the salary requirements do not apply.41
B. The New Administrative Exemption - 29 CFR § 541.2004243
The new regulations define an exempt administrative employee as follows:
(a) The term “employee employed in a bona fide administrative capacity” in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary or fee basis at a rate of not less than $455 per week***;
(2) Whose primary duty is 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
(3) Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
38 29 CFR § 541.102. 39 29 CFR § 541.105. 40 29 CFR § 541.101. 41
While this exemption is particularly meaningful to start-up companies, it is inapplicable in those states that have no similar exemption, which is currently the case in Oregon, Washington, and California.
42
See Appendix, ¶ 3*.
43
1. Salary or Fee Basis44
Administrative and professional employees may be paid on a salary45 or fee basis. Payment on a “fee basis” means the employee is paid an agreed sum for a single job regardless of the time required for its completion. Such payments resemble piecework payments. However, the important distinction between fee and piecework payments is that, generally, a “fee” is paid for a job that is unique rather than for a series of jobs repeated an indefinite number of times and for which payment on an identical basis is made over and over again. Payments based on the number of hours or days worked and not on the accomplishment of a given single task are not considered payments on a fee basis.46
To be sufficient to qualify for exemption under the regulations, the amount paid to the employee as a fee is evaluated by determining the equivalent hourly rate for the time worked on the job, and whether the fee payment is sufficient to compensate the employee at a salary of at least $455 per week if the employee worked 40 hours at the hourly rate.47
2. Office or Non-Manual Work Directly Related to the Management or
General Business Operations of the Employer or the Employer’s Customers
To qualify for exemption as an administrative employee, the employee's primary duty must be non-manual work directly related to the management or general business operations of the employer or the employer's customers.48 Such work is typically related to the employer’s infrastructure, as distinguished from revenue producing work accomplished through “production” or, in a retail or service establishment, “sales” work.49
For example, work directly related to management or general business operations may include work in the following areas:
• Tax, finance, accounting, budgeting, and auditing
• Insurance
• Quality control
• Purchasing and procurement
• Advertising, marketing and public relations
• Research 44 29 CFR § 541.605. 45 29 CFR § 541.602. 46 29 CFR § 541.605(a). 47
29 CFR § 541.605(b). For example, payment of a fee of $250 for a job that took 20 hours to complete meets the minimum requirement for exemption because earnings at this rate ($12.50 per hour) would yield $500 if the employee worked 40 hours.
48
29 CFR § 541.201(a). 49
• Safety and health
• Human resources, benefits and labor relations
• Computer network, internet and database administration
• Legal compliance50
3. Discretion and Independent Judgment51
The requirement with which employers tend to have the most difficulty is determining whether an employee regularly exercises “discretion and independent judgment with respect to matters of significance.” The exercise of discretion and independent judgment involves comparing and evaluating possible courses of conduct, and selecting a course of action after the various
possibilities have been considered. 52 While the term implies that the employee has the authority or power to make an independent choice, free from immediate direction or supervision,
employees may exercise discretion and independent judgment even if their decisions or
recommendations are reviewed at a higher level.53 The term “matters of significance” refers to the level of importance or consequence of the work performed.54
The use of independent judgment and discretion requires an individualized analysis of the particular situation.55 It does not include clerical or secretarial work or performing repetitive or routine work.56 The term must be applied in the light of
all the facts involved in the particular situation in which the question arises.
Some factors to consider when determining whether an employee exercises discretion and independent judgment with respect to matters of significance include:
50
29 CFR § 541.201(b). 51
29 CFR § 541.202. Under Oregon law, “independent judgment and discretion” means “the selection of a course of action from a number of possible alternatives after consideration of each, made freely without direction or supervision with respect to matters of significance. It does not include skill exercised in the application of prescribed procedures.” OAR 839-020-0005(5).
52
29 CFR § 541.202(a). 53
See 29 CFR 541.202(c) (“The fact that an employee’s decision may be subject to review and that upon occasion the decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. For example, the policies formulated by the credit manager of a large corporation may be subject to review by higher company officials who may approve or disapprove these policies. The management consultant who has made a study of the operations of a business and who has drawn a proposed change in organization may have the plan reviewed or revised by superiors before it is submitted to the client.”).
54
29 CFR § 541.202(a). An employee does not exercise discretion and independent judgment with respect to a “matters of significance” merely because the employer will experience a financial loss if the employee fails to perform the job properly. For example, an employee entrusted with making the bank deposits consisting of large sums of money does not exercise discretion and independent judgment with respect to matters of significance even though serious consequences may flow from the employee’s neglect. 29 CFR § 541.202(f).
55
29 CFR § 541.202(b). 56
• 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, even if the employee’s assignments are related to operation of a particular segment of the business
• 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
• Whether the employee has authority to negotiate and bind the company on significant matters
• Whether the employee provides consultation or expert advice to management
• Whether the employee is involved in planning long- or short-term business objectives
• Whether the employee investigates and resolves matters of significance on behalf of management
• Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances57
C. New Professional Exemption - 29 CFR § 541.300 5859
The new regulations define an exempt professional employee as follows:
57
29 CFR § 541.202(b). Some examples of positions that are usually within the administrative exemption are insurance claims adjusters, employees in the financial services industry who collect and analyze financial information, the lead employee of a team assigned to complete major projects for an employer, an executive assistant or administrative assistant to a business owner or senior executive if delegated authority over matters of significance; human resource managers (but not personnel clerks), and
purchasing agents with binding authority. In contrast, employees who perform ordinary inspection work, examiners or graders, comparison shoppers without authority to set prices, and public service
investigators or inspectors, generally do not fall within this exempt classification. 29 CFR § 541.203. Academic administration positions (superintendents, principals, vice-principals, academic counselors, heads of departments in an institute of higher education) are also administratively exempt. 29 CFR § 541.204.
58
See Appendix, ¶ 5*.
59
(a) The term “employee employed in a bona fide professional capacity” in section 13(a)(1) of the Act shall mean any employee:
(1) Compensated on a salary or fee basis at a rate of not less than $455 per week ***; and
(2) Whose primary duty is the performance of work:
(i) Requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction [“Learned Professional”]; or
(ii) Requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor [“Creative Professional”].
1. Learned Professionals
There are three elements to the primary duties test for learned professionals: (1) the employee must perform work requiring advance knowledge; (2) the advanced knowledge must be in a field of science or learning; and (3) the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.60 Work requiring “advanced knowledge” means work that is predominantly intellectual in character and requires the
consistent exercise of discretion and judgment, as distinguished from the performance of routine mental, manual, mechanical or physical work. “An employee who performs work requiring advanced knowledge 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.”61
Professions that meet the requirement for a prolonged course of specialized intellectual instruction and study traditionally include law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, and various types of physical, chemical, and biological sciences, and other similar occupations that have a recognized professional status.62 In addition, employees with the requisite specialized, prolonged education and accreditation who work as registered medical technologists, registered nurses, accredited dental hygienists,
accredited physicians assistants, certified public accountants, licensed funeral directors or embalmers, certified athletic trainers, and executive/sous chefs will generally qualify under the learned professional exemption.63 These positions must be distinguished from the mechanical arts or skilled trades where in some instances the knowledge required is of a fairly advanced type, but not in a field of science or learning.64 Paralegals generally do not qualify under this exemption.65
The requirement that knowledge in the field is “customarily acquired by a prolonged course of specialized intellectual instruction” restricts the exemption to professions in which specialized academic training is a standard prerequisite for entrance into the profession, as evidenced by possession of the appropriate academic degree. However, the word “customarily” means that the 60 29 CFR § 541.301(a). 61 29 CFR § 541.301(b). 62 29 CFR § 541.301(c). 63 29 CFR § 541.301(e). 64 29 CFR § 541.301(c). 65 29 CFR § 541.301(e)(7).
exemption is also available to employees in the requisite 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. In contrast, the learned professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, along with knowledge acquired through apprenticeship or training in the
performance of routine mental, manual, mechanical or physical processes. Nor does the
exemption apply to occupations in which most employees have acquired their skill by experience rather than by advanced specialized intellectual instruction.66
2. Creative Professionals
To qualify as a creative professional, 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.67 This includes fields such as music, writing, acting, and graphic arts.68 The work must be original and creative in nature, as opposed to routine mental, manual, mechanical, or physical work.69
“The requirement of ‘invention, imagination, originality or talent’ distinguishes the creative professions from work that primarily depends on intelligence, diligence and accuracy.” The creative professionals rely on their own creative ability to express a subject or concept. The creative professional exemption is generally met by actors, musicians, composers, conductors, soloists, painters (who, at most, are given the subject matter of their painting), cartoonists (who may be given the title or underlying concept, but rely on their own creative ability to express it), essayists, novelists, short-story writers and screen play writers who choose their own subjects and produce a finished piece of work. 70 Journalists may qualify for the creative professional exemption if their primary duty is work requiring invention, imagination, originality, or talent, as opposed to work which depends primarily on intelligence, diligence and accuracy. For example, employees who appear in radio, television, or other electronic media, conduct investigative interviews, analyze or interpret public events, write editorials, opinion, columns, or other commentary, or act as a narrator or commentator, may qualify. In contrast, media employees who merely collect, organize, and record information that is routine or already public or do not contribute a unique interpretation or analysis to a news product, are not creative professionals.71
D. New Computer Programmer Exemption7273
The FLSA specifically exempts from overtime pay requirements employees working as computer systems analysts, computer programmers, software engineers, and in other similarly
66 29 CFR § 541.301(d). 67 29 CFR § 541.302(a) 68 29 CFR § 541.302(b). 69 29 CFR § 541.302 (a). 70 29 CFR § 541.302 (c). 71 29 CFR § 541.302 (c). 72 See Appendix, ¶ 7*. 73 See Appendix, ¶ 8*.
skilled positions in the computer field, provided the employees are paid at least $27.63 per hour.74 Job titles are not determinative of the applicability of this exemption.75
To qualify for the computer programmer exemption, the employee’s primary duty must be: (1) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system functional specifications;
(2) 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;
(3) the design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
(4) a combination of duties described in subparagraphs (A), (B), and (C) the performance of which requires the same level of skills.76
The exemption does not apply to employees engaged in the manufacture or repair of computer hardware and related equipment.77 In addition, engineers, drafters, and CAD operators (those skilled in the use computer-aided design software) typically will not qualify under the computer programmer exemption because such work does not require computer system analysis or
programming.78 Such employees may, however, qualify for exemption as executive and/or administrative employees.79
E. New Outside Sales Exemption – 29 CFR § 541.5008081
The new regulations define an outside salesperson as follows:
(a) The term “employee employed in the capacity of outside salesman” in section 13(a)(1) of the Act shall mean any employee:
(1) Whose primary duty is:
(i) making sales within the meaning of section 3(k) of the Act, or
(ii) 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
(2) Who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.
(b) The term “primary duty” is defined at § 541.700. In determining the primary duty of an outside sales employee, work performed incidental to and in conjunction with the employee’s own outside sales or solicitations, including incidental deliveries and
collections, shall be regarded as exempt outside sales work. Other work that furthers the
74
29 USC 213(a)(17); 29 CFR § 541.400(b). The hourly pay requirement means that employers will have to track and maintain accurate records of the hours worked by computer professionals.
75 29 CFR § 541.400(a). 76 Id. 77 29 CFR § 541.401. 78 Id. 79
29 CFR § 541.402; see 29 USC 213(a)(1). Similarly, employees who meet the qualifications for the computer programmer exemption may also qualify under the executive or administrative exemptions.
80
See Appendix, ¶ 9*.
81
employee’s sales efforts also shall be regarded as exempt work including, for example, writing sales reports, updating or revising the employee’s sales or display catalogue, planning itineraries and attending sales conferences.
(c) The requirements of subpart G (salary requirements) of this part do not apply to the outside sales employees described in this section.
Sales personnel will satisfy this exemption only if they are customarily and regularly engaged away from the employer's place of business. The outside salesperson is characteristically one who makes sales at the customer's place of business, and not from a fixed location. A fixed site, such as a home or office used as a headquarters or for telephone solicitations of sales is
considered the employer's place of business.82 Outside sales do not include sales made by mail, telephone, or the internet unless such contact is made as an adjunct to personal calls.83
Promotional activities that are incidental to the employee's own outside sales solicitations will qualify as outside sales work, while promotional activities incidental to the sales of others will not (although it may qualify as administrative work).84 Drivers who deliver and sell products will qualify for the outside sales exemption only if their primary duty is making sales.85
F. New Exemption for Highly Compensated Employees
The new exemption for highly compensated employees applies to workers who are paid total annual compensation of $100,000 ore more. An employee qualifies for this exemption if:
1. The employee earns total annual compensation of $100,000 or more (including at least $455 a week paid on a salary basis) during a 52-week period;
2. The employee’s primary duty includes office or non-manual work; and 3. The employee customarily and regularly performs at least one of the exempt
duties or responsibilities of an exempt executive, administrative, or professional employee.86
Total compensation includes commissions, discretionary bonuses, and other non-discretionary compensation. It does not include board, lodging, contributions to retirement plans, and the cost of other fringe benefits.87 If the minimum compensation required for this exemption is not met by the last pay period of the end of the 52-week period, the employer may make up the difference by paying the employee an extra sum during the last period or within one month after the end of the annual period.88 If the employee works less than a full year, the employee may nevertheless qualify for exemption if the employee receives a pro rata portion of the required minimum compensation based upon the number of weeks that the employee will be
82
29 CFR 541.502. A “fixed site” is distinguished from a temporary location, such as a hotel room or trade show, where samples are actually displayed and sold.
83 29 CFR § 541.502. 84 29 CFR § 541.503. 85 29 CFR § 541.504. 86 29 CFR § 541.601(a). 87 29 CFR § 541.601(b)(1). 88 29 CFR § 541.601(b)(2).
or has been employed. Any extra payment necessary to satisfy this amount is payable within one month after the end of employment.89
The exemption for highly compensated employees applies only to employees whose primary duty includes performing office or non-manual work. Non-management “blue collar” workers engaged in maintenance, construction, and similar occupations, such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers and other employees who perform work involving repetitive operations with their hands, physical skill and energy, are not exempt no matter how highly paid they might be.90 The benefit of the exemption for highly compensated employees is that it reduces the need for a detailed analysis of an employee’s job duties for overtime purposes.91 However, there is no similar exemption under Oregon, Washington, or California law. Therefore, employers in these states must still determine whether a highly compensated employee is exempt under some other state law exemption or comply with the overtime pay requirements.
II. Suggestions for Conducting a Self-Audit
• Determine whether you are subject to federal wage and hour law. You must comply with federal law if (i) your employees are engaged in commerce or in the production of goods for commerce, or employed in an enterprise engaged in commerce or in the production of goods for commerce,92 and (ii) generating gross revenues of $500,000 or more annually. If so, you will be subject to the new federal regulations.
• Confirm that your exempt employees are paid on a salary or fee basis.
¾ The new law requires most that executive, administrative, and professional employees receive a salary of at least $455 per week ($23,660 per year). The minimum salary must be paid even if the exempt employee works part time.
¾ Review your payroll practices to make sure you are not making improper deductions from pay under federal or state law (unlawful deductions are one of the top wage and hour mistakes made by employers).
• Conduct job analyses on all exempt positions to make sure they are consistent with exemptions under federal and state law.
¾ Not only is this a good time to make sure you are in compliance with the new regulations, it is also an opportunity to correct any past errors in classification. 89 29 CFR § 541.601(c). 90 29 CFR § 541.601(d). 91 29 CFR § 541.601(c). 92
Almost all businesses meet this definition because they consume goods that are transported in interstate commerce.
¾ Revise job descriptions to conform to the actual duties of the position.
¾ Document the reasons for your classifications. Good faith reliance on the advice of counsel or the administrative agencies that enforce wage and hour regulations may provide a defense to a claim that a misclassification was willful.
• Develop a communication strategy for advising employees who will be
reclassified under the new regulations. Employees who are exempt may consider a reclassification to non-exempt status a demotion.
• Review your disciplinary policy to make sure it does not violate the no-docking rule.93
• Comply with the new “Safe Harbor” Rule
¾ Adopt written policies prohibiting improper deductions
¾ Establish a complaint mechanism for employees to address improper deductions from pay
¾ Reimburse employees for any wrongful deductions94
93
Existing federal regulations prohibit unpaid suspensions for disciplinary infractions except for
violations of safety rules of major significance or when the suspension is for one or more full workweeks. The new federal regulations permit disciplinary suspensions for serious conduct violations without losing exempt status. 29 CFR § 541.602(b). However, Oregon, Washington, and California have not similarly expended the scope of the exception to pay-docking for disciplinary suspensions.
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APPENDIX
NOTE: BOLI is considering changes to the Oregon Administrative Rules and is
expected to provide additional guidance in July 2004.
1* Oregon law defines “executive” under OAR 839-20-0005(1) as an employee:
(a) Whose primary duty consists of the management of the enterprise in which he/she is employed or of a customarily recognized department or subdivision thereof. The foregoing language of this paragraph prescribing the primary duty shall not apply in the case of an
employee who is in sole charge of an independent establishment or a physically separated branch establishment or who owns at least 20 percent interest in the enterprise in which he/she is
employed; and
(b) Who customarily and regularly directs the work of two or more other employees therein; and
(c) Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion of any other change of status of other employees will be given particular weight; and
(d) Who customarily and regularly exercises discretionary powers; and
(e) Who earns a salary and is paid on a salary basis pursuant to ORS 653.025 [$282 per week] exclusive of board, lodging, or other facilities.
Note: The current Oregon rule is the same as the old federal “long” test.
2* Washington law defines “executive” under WAC 296-128-510 as an employee: (1) Whose primary duty consists of the management of the enterprise in which he is employed or of a customarily recognized department or subdivision thereof; and
(2) Who customarily and regularly directs the work of two or more other employees therein; and
(3) Who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status of other employees will be given particular weight; and
(4) Who customarily and regularly exercises discretionary powers; and
(5) Who does not devote more than 20 percent, or, in the case of an employee of a retail or service establishment who does not devote as much as 40 percent, of his hours worked in the work week to activities which are not directly and closely related to the performance of the work described in paragraphs (1) through (4) of this section: Provided, That this paragraph (5) shall not apply in the case of an employee who is in sole charge of an independent establishment or a physically separated branch establishment, or who owns at least a 20 percent interest in the enterprise in which he is employed; and
(6) Who is compensated for his services on a salary basis at a rate of not less than $155 per week exclusive of board, lodging, and other facilities: Provided, That an employee who is compensated on a salary rate of not less $250 per week (exclusive of board, lodging, or other facilities), and whose primary duty consists of the management of the enterprise in which he is employed or of a customarily recognized department or subdivision thereof, and includes the customary and regular direction of the work of two or more other employees therein, shall be deemed to meet all of the requirements of this section.
3* Oregon law defines “administrative” under OAR 839-20-0005(2) as an employee: (a) Whose primary duty consists of either:
(A) The performance of office or non-manual work directly related to management policies or general business operations of the employee's employer or the employer's customers; or
(B) The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and
(b) Who customarily and regularly exercises discretion and independent judgment; and (c) Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity; or
(A) Who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge, or;
(B) Who executes under only general supervision special assignments and tasks; and (d) Who earns a salary and is paid on a salary basis pursuant to ORS 653.025 exclusive of board, lodging, or other facilities.
4* Washington law defines “administrative” under WAC 296-128-520 as an employee: (1) Whose primary duty consists of the performance of office or non-manual field work directly related to management policies or general business operations of his employer or his employer's customers; or
(2) The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and
(3) Who customarily and regularly exercises discretion and independent judgment; and
(a) Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity (as such terms are defined in this regulation), or
(b) Who performs under only general supervision work along specialized or technical lines requiring special training, experience or knowledge, or
(c) Who executes under only general supervision special assignments and tasks; and (4) Who does not devote more than 20 percent, or, in the case of an employee of a retail or service establishment who does not devote as much as 40 percent of his hours worked in the work week to activities which are not directly and closely related to the performance of the work described in paragraphs (1) through (3) of this section; and
(a) Who is compensated for his services on a salary or fee basis at a rate of not less than $155 per week exclusive of board, lodging, or other facilities; or
(b) Who, in the case of academic administrative personnel is compensated for his services as required by paragraph (4)(a) of this section, or on a salary basis which is at least equal to the entrance salary for teachers in the school system, educational establishment, or institution by which he is employed: Provided, That an employee who is compensated on a salary or fee basis at a rate of not less than $250 per week (exclusive of board, lodging, or other facilities), and whose primary duty consists of the performance of office or non-manual work directly related to management policies or general business operations of his employer or his employer's
customers; which includes work requiring the exercise of discretion and independent judgment, shall be deemed to meet all of the requirements of this section.
5* Oregon law defines “professional” under OAR 839-20-005 as an employee: (a) Whose primary duty consists of the performance of:
(A) Work requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the performance of routine mental, manual, or physical processes; or
(B) Work that is original and creative in character in a recognized field of artistic
endeavor (as opposed to work which can be produced by a person endowed with general manual or intellectual ability and training), and the result of which depends primarily on the invention, imagination, or talent of the employee; or
(C) Teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge and who is employed and engaged in this activity as a teacher in the school system or
educational establishment or institution by which he/she is employed; and
(b) Whose work requires the consistent exercise of discretion and judgment in its performance; and
(c) Whose work is predominantly intellectual and varied in character (as opposed to routine mental, manual, mechanical, or physical work) and is of such character that the output produced or the result accomplished cannot be standardized in relation to a given period of time; and
(d) Who earns a salary and is paid on a salary basis pursuant to ORS 653,025 [$282 per week] exclusive of board, lodging, or other facilities.
6* Washington law defines “professional” under WAC 296-128-530 as an employee: (1) Whose primary duty consists of the performance of work:
(a) Requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study, as distinguished from a general academic education and from an apprenticeship, and from training in the
performance of routine mental, manual, or physical processes, or
(b) Original and creative in character in a recognized field of artistic endeavor (as opposed to work which can be produced by a person endowed with general manual or intellectual ability and training), and the result of which depends primarily on the intention, imagination, or talent of the employee; or
(c) Teaching, tutoring, instructing, or lecturing in the activity of imparting knowledge and who is employed and engaged in this activity as a teacher in the school system or educational establishment or institution by which he is employed; and
(2) Whose work requires the consistent exercise of discretion and judgment in its performance; and
(3) Whose work is predominantly intellectual and varied in character (as opposed to routine mental, manual, mechanical or physical work) and is of such a character that the output produced or the result accomplished cannot be standardized in relation to a given period of time; and
(4) Who does not devote more than 20 percent of his hours worked in the work week to activities which are not an essential part of and necessarily incident to the work described in paragraphs (1) through (3) of this section; and
(5) Who is compensated for his services on a salary or fee basis at a rate of not less than $170 per week exclusive of board, lodging, or facilities: Provided, That this paragraph (5) shall not apply in the case of an employee who is the holder of a valid license or certificate permitting the practice of law, medicine, or dentistry and who is actually engaged in the practice thereof: Provided, That an employee who is compensated on a salary or fee basis at a rate of not less than $250 per week (exclusive of board, lodging, or other facilities), and whose primary duty consists of the performance of work either requiring knowledge of an advanced type in a field of science or learning, which includes work requiring the consistent exercise of discretion and judgment, or requiring invention, imagination, or talent in a recognized field of artistic endeavor, shall be deemed to meet all of the requirements of this section.
7* Oregon law allows a computer employee exemption under OAR 839-020-0125 (h) when the employee:
***is compensated on an hourly basis at a rate of not less than $27.63 per hour and who is a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker, whose primary duty consists of the following:
(A) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software, or system specifications;
(B) 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;
(C) The design, documentation, testing, creation, or modification of computer programs related to machine operating systems; or
(D) A combination of duties described in paragraphs (A), (B), and (C) of this paragraph the performance of which requires the same level of skills. (Reference: Sec. 13 (a) (17), FLSA) 8* Washington law allows a computer employee exemption under WAC 296-128-535:
Are professional computer employees exempt from the Washington Minimum Wage Act? (1) Any employee who is a computer system analyst, computer programmer, software engineer, software developer or other similarly skilled worker will be considered a "professional employee" and will be exempt from the minimum wage and overtime provisions of the
Washington Minimum Wage Act if:
(a) Their primary duty is of one of the following:
(i) Applying systems analysis techniques and procedures to determine hardware, software, or system functional specifications for any user of such services; or
(ii) Following user or system design specifications to design, develop, document, analyze, create, test or modify any computer system, application or program, including prototypes; or
(iii) Designing, documenting, testing, creating or modifying computer systems, applications or programs for machine operation systems; or
(iv) Any combination of the above primary duties whose performance requires the same skill level; and
(b) Their rate of pay is at least $27.63 per hour.
(2) This professional exemption only applies to highly skilled employees who:
(a) Possess a high degree of theoretical knowledge and understanding of computer system analysis, programming and software engineering; and
(b) Have the ability to practically apply that theoretical knowledge and understanding to highly specialized computer fields; and
(c) Generally attain the necessary level of expertise and skill to qualify for an exemption through a combination of education and experience in the field; and
(d) Consistently exercise discretion and judgment in the application of their special knowledge as opposed to performing purely mechanical or routine tasks; and
(e) Engage in work that is predominantly intellectual and inherently varied in character as opposed to work that is routinely mental, manual, mechanical, or physical.
(3) While many employees who qualify for this exemption hold a bachelor's or higher degree, no degree is required for this exemption.
(4) This professional exemption does not apply to:
(a) Trainees or employees in entry level positions learning to become proficient in computer systems analysis, programming and software engineering; or
(b) Employees in computer systems analysis, programming and software engineering positions who have not attained a level of skill and expertise which allows them to generally work independently and without close supervision; or
(c) Employees engaged in the operation of computers; or
(d) Employees engaged in the manufacture, repair or maintenance of computer hardware and related equipment; or
(e) Employees covered by a collective bargaining agreement.
9* Oregon law defines “outside salesperson” under OAR 839-20-005 as an employee: (a) Who is employed for the purpose of and who is customarily and regularly engaged away from his/her employer's place or places of business in:
(A) Making sales; or
(B) 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
(b) Whose hours of work of a nature other than that described in paragraph (a)(A) or (B) of this section do not exceed 30 percent of the hours worked in the workweek by non-exempt employees of the employer: Provided, that work performed incidental to and in conjunction with the employee's own outside sales or solicitations, including incidental deliveries and collections, shall not be regarded as non-exempt work.
10* Washington law defines “outside salesman” under WAC 296-128-540 as an employee:
(1) Who is employed for the purpose of and who is customarily and regularly engaged away from his employer's place or places of business, as well as on the premises (where the
employee regulates his own hours and the employer has no control over the total number of hours worked) in the following alternative activities:
(a) In making sales; including any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition; or
(b) In obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; or
(c) In demonstrating products or equipment for sale; or
(d) In the sale of services and performance of the service sold when the compensation to the employee is computed on a commission basis; and
(2) Whose hours of work of a nature other than that described in (1)(a), (b), (c) and (d) of this section do not exceed 20 percent of the hours worked in the work week by nonexempt
employees of the employer: Provided, That work performed incidental to and in conjunction with the employee's own outside sales or solicitations, including incidental deliveries and collections, shall not be regarded as nonexempt work; and
(3) Who is compensated by the employer on a guaranteed salary, commission or fee basis and who is advised of his status as “outside salesman.”
