Department of Labor Implements Sweeping Changes to Federal Overtime Regulations

Recently, the Department of Labor issued new regulations containing extensive revisions to federal overtime eligibility guidelines under the Fair Labor Standards Act (FLSA). The new regulations take effect August 23, 2004 and simplify the criteria for determining when employees are exempt from eligibility to receive overtime pay. In our experience, employers most commonly violate the FLSA through poor record-keeping, misclassification of employees and by failing to properly compensate employees for all hours worked. The changes require that you review your current payroll practices and implement changes necessary to insure your company is compliant with the FLSA. To aid you in this endeavor, we provide a brief overview of the most significant changes to the regulations.

The new regulations modify the “salary test,” used to initially determine overtime eligibility, by raising the minimum salary from $155 per week to $455 per week. Thus, overtime must be paid to all employees earning less than $23,660 per year. The regulations also create a new exemption for employees regularly performing one or more of the exempt duties of an executive, administrative or professional employee, where the employee’s total annual compensation is at least $100,000. In addition, the confusing “short” and “long” tests, which consider the amount of time an employee spends on exempt and non-exempt duties, are replaced with one standard test that emphasizes the employee’s primary duties. The new “primary duties” test is summarized as follows:

  • Executive Employees. The changes refine the current duties test to require authority to hire or fire employees or recommend hiring, promoting or firing employees, in addition to the current requirements that the employee manage the enterprise (or a recognized department or subdivision of the enterprise) and regularly direct the work of two or more other employees.
  • Administrative Employees. The changes replace the confusing “discretion and independent judgment” test with the requirement that the employee hold a position of responsibility with the employer. A position of responsibility is defined as either performing work of substantial importance or performing work requiring a high level of skill or training. The revised rules retain the requirement that the employee’s primary duty must be performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.
  • Learned Professionals. The primary duties of a learned professional employee must involve performing work requiring knowledge of an advanced type of science or learning customarily acquired by a prolonged course of specialized intellectual instruction. This may also be acquired through a combination of work experience, specialized training in the armed forces, or other intellectual instruction.
  • Creative Professionals are exempt if the employee performs work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
  • Computer Employees, are now exempt if paid a salary of at least $455 per week, or, if paid on an hourly basis, at least $27.63 per hour.
  • Outside Sales Employees have no minimum weekly salary. The duties test has been revised to eliminate the requirement that employees not devote more than 20% of the hours worked by nonexempt employees to activities that are not incidental to and in conjunction with the employee’s own outside sales or solicitations. The duties test otherwise is essentially the same: The employee must be customarily and regularly engaged away from the employer’s place of business and his or her primary duty must be making sales or obtaining orders or contracts for services or the use of facilities for which the client or customer will pay consideration.

Overall, the new regulations bring clarity, flexibility and better guidance for employers in complying with this area of the FLSA. Please feel free to contact us for additional information, or to set up an appointment to discuss strategies for tailoring your employment practices to the mandates of the revised regulations.