A Primer on White-Collar Exemptions to FLSA Overtime Obligations

-Although the Fair Labor Standards Act is more than six decades old, its provisions still leave many employers scratching their heads.

The Fair Labor Standards Act (FLSA) was enacted in 1938 as part of President Franklin Roosevelt''s New Deal. This remedial legislation has six major components: a minimum wage, overtime, child-labor protections, equal pay provisions, recordkeeping requirements, and enforcement mechanisms.

Although the law is more than six decades old, its provisions still leave many employers scratching their heads. That is especially true when it comes to employee compensation, particularly when classifying office workers as either "exempt" or "nonexempt" for overtime purposes. Many employers continue to categorize their "white-collar" employees as exempt without giving much thought to what the law requires. That approach carries significant potential liability for unpaid overtime, liquidated damages, attorneys'' fees, and civil money penalties. Thus, it pays to go back to the fundamentals to review whether your white- collar employees are truly exempt.

White-collar exemptions to overtime pay

The FLSA -- as well as the analogous provisions of the New York Labor Law -- generally requires you to pay employees at the rate of one and one-half their regular rate for all hours worked in excess of 40 per week. You may designate certain employees "exempt" from overtime requirements, however. In addition to exemptions for outside salespeople, certain commission salespeople, and drivers and others engaged in interstate transportation, the FLSA and the New York Labor Law contain a broad exemption for so-called white-collar employees.

The white-collar exemption to the FLSA applies to employees who work in bona fide executive, administrative, or professional capacities and are paid on a salary basis. In determining whether an employee is exempt, you must answer two questions:

1. Does the employee have executive, administrative, or professional duties?

2. Is the employee paid on a salary basis?

3. It''s important to remember that job titles are not controlling.

Determinations are based on an employee''s actual job duties. Also, exemptions tend to be narrowly construed because the FLSA and the New York Labor Law are remedial statutes designed to protect workers.

Is your employee a white-collar employee?

An employee is considered a white-collar employee if his position falls into one of three categories: executive, administrative, or professional. There are actually two tests -- a long test and a short one. The latter is available for so-called highly paid employees who earn a salary of at least $250 a week. Since the short test dollar threshold is so low, we''ll focus on that one.

The executive exemption is for employees whose primary duty is management of the business or a defined business unit. In addition, the employee must supervise the equivalent of at least two full-time employees. The U.S. Department of Labor (DOL) regulations define "management" as interviewing, hiring, and training employees; directing and evaluating the work of other employees; handling complaints and grievances; disciplining and firing employees; planning and assigning work; and determining how the work will be done.

Administrative employees are employees who perform "work of substantial importance to the management or operation" of the enterprise involving the exercise of independent judgment and discretion. This is the opposite of so-called "production work." Administrative operations may include activities such as advising management; planning, negotiating, and representing the entity; and purchasing, promoting sales, and doing research.

Professional employees include traditional professionals such as doctors, lawyers, accountants, and others in professions of a recognized status requiring the use of professional knowledge acquired through long study (the "learned profession category"). Also included in this category are people in certain artistic professions and computer software analysts and programmers as well as teachers and registered nurses (but not licensed practical nurses).

Is your employee paid on a salary basis?

To be an exempt executive, administrative, or professional employee, an employee must also be paid on a "salary basis." Employees are paid on a salary basis when they are paid a predetermined amount at regular intervals -- for example, weekly, biweekly, twice monthly -- without regard to variations in the quality or quantity of the work performed. Subject to the exceptions below, exempt employees must receive their full salary for any week in which they perform any work, despite the number of days or hours worked. They need not be paid for any workweek in which they perform no work, however.

The DOL regulations enacted under the FLSA set forth when deductions may and may not be made to an employee''s salary without jeopardizing his exempt status. Deductions from an employee''s salary are permitted:

Deductions from an otherwise exempt employee''s salary are not permitted:

The consequences of making a deduction that isn''t permitted under DOL regulations will depend on the facts in the particular case. If deductions are generally made when no work is available, that indicates you had no intention of paying the employee on a salary basis. In that case the exemption wouldn''t be applicable to him during the entire period when those deductions were being made. If an impermissible deduction is inadvertent or made for reasons other than lack of work, the exemption won''t be considered lost if you reimburse the employee for the impermissible deduction and promise to comply in the future. That is known as the "window of correction."

One question that has arisen repeatedly is whether the exemption is destroyed by the possibility of deductions being made or only after impermissible deductions are actually made. Some courts have held that even the possibility of deductions will destroy the exemption.

Common questions on white-collar exemption

Unfortunately, certain payroll practices are neither clearly permitted nor prohibited by the DOL regulations. You are left guessing about whether your payroll practices violate the salary- basis requirements and, ultimately, whether they jeopardize your classification of employees as exempt. Fortunately, the administrator of the Wage and Hour Division has approved many of those practices in official opinion letters. Under the Portal-to- Portal Act, employers that know of those opinion letters or DOL regulations before engaging in the practice(s) in question have an absolute defense for actions taken in reliance on them.

Here are some common topics covered by DOL regulations or the opinion letters:

The salary basis test will not be met, however, if the salary is divided into two parts to circumvent the requirement of paying the employee "on a salary basis." For example, a salary of $200 in each week in which any work is performed and an additional $50 that is subject to deductions is not permitted.

Bottom line

Complying with the federal and state wage and hour laws can be confusing, but it can be done. Employers designating their employees as either exempt or nonexempt must focus on actual job duties and compliance with the salary-basis test. Employees who don''t meet both the "duties" and the "salary basis" requirements are nonexempt.

Copyright 2001 M. Lee Smith Publishers. This newsletter does not attempt to offer solutions to individual problems but rather to provide information about current developments in employment law. Questions about individual problems should be addressed to the employment law attorney of your choice.

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