Labor and Employment Legal Alert

The U.S. Department of Labor Proposes Revisions to the "White Collar" and Outside-Sales Exemptions

In a long-anticipated move, the U.S. Department of Labor has published a proposal to update its regulations defining the overtime and minimum wage exemptions under the Fair Labor Standards Act ("FLSA") for executive, administrative, professional, and outside-sales employees. The proposed changes, if implemented, are likely to have far-reaching consequences for many employers. This Legal Alertsummarizes some of the major changes to the "white collar" and outside-sales exemptions being considered by the Department of Labor.

One of the most significant revisions proposed by the new rules is an increase in the minimum weekly salary necessary to qualify for the executive, administrative, and professional exemptions. Under thecurrent rules, an employee earning as little as $155 per week can qualify as an exempt employee. Theproposed rules would increase this minimum salary to $425 per week - the largest increase since the FLSA was passed in 1938.

The increase in the minimum salary level is not the only change that the proposed regulations would make to the salary requirement applicable to the executive, administrative, and professional exemptions. The proposed rules would also eliminate some of the restrictions on salary deductions that currently apply to exempt salaried employees. Currently, exempt workers’ salaries are subject to deduction for violations of safety rules of major significance and for unpaid disciplinary suspensions for one or more full workweeks. Adding to these disciplinary deductions, the proposed rules would subject exempt workers’ salaries to deductions for disciplinary suspensions of one or more full days for violations of any workplace conduct rule, such as one prohibiting sexual harassment.

In addition to changing the salary requirement for exempt status, the proposed regulations would modify the tests for the duties that exempt white-collar and outside-sales employees must perform. Under the current regulations, two alternative tests are used to determine whether an employee can be classified as an exempt executive, administrative, or professional employee. The "long" test applies to lower salaried employees and has a greater number of requirements that must be met for exempt status to apply. The "short" test applies to higher salaried employees and imposes fewer requirements. The proposed rules would eliminate the "short" and "long" test dichotomy in favor of one standard test for each category of exempt white-collar employees.

For example, the proposed "duties" test for executive employees has three requirements: 1) the employee’s primary duty must be managing the enterprise or a recognized department or subdivision thereof; 2) the employee must direct the work of two or more employees; and 3) the employee must have authority to hireor fire, or the employee’s recommendations regarding hiring, firing, and other employment-status changes must be given particular weight. This standard test contains elements of both the current "long" and "short" tests, and it is possible that some currently exempt executive employees may not qualify for exemption under the proposed rule.

The "long" and "short" tests for administrative employees have traditionally been the most difficult to understand and apply. The proposed rule attempts to clarify the administrative-employee exemption by replacing the current requirement that the employee exercise "discretion and independent judgment" with a new test requiring that the employee "hold a position of responsibility." This proposed revision, however, is still quite vague and likely to lead to considerable confusion in its application.

The proposed regulations also revise the "duties" tests applicable to exempt professional employees, including computer professionals. The proposed revisions expand the concept of exempt "learned professionals" to include employees who gain specialized knowledge and skills through a combination of work experience and intellectual instruction. Under the current regulations, only those learned professionals who acquire their knowledge and skills though prolonged and specialized courses of academic study are eligible for the exemption.

Perhaps the most significant revision to the "duties" tests applies to the exemption for outside-sales employees. Under the proposed regulations, sales would have to be the primary duty of an outside-sales employee. This is a substantially more onerous standard than the current regulations’ requirement that an outside-sales employee "customarily and regularly" engage in sales work. The proposed revision to the outside-sales exemption would also remove the current limitation on the performance of "nonexempt" work, but would continue to permit exempt outside-sales employees to be paid on an hourly or commission basis rather than a salary basis.

If adopted in their current form, the proposed regulations would make significant changes to the standards defining exempt status for white-collar and outside-sales employees. To assess the potential impact of these changes, employers would be wise to reevaluate the status of their currently exempt employees to determine whether they would remain exempt under the proposed rules. The Department of Labor estimates that the increase of the minimum salary level for the executive, administrative, and professional exemptions would alone disqualify 1.3 million employees from minimum wage and overtime exemptions, thereby entitling those employees to time and a half for hours worked in excess of forty per week. Despite the potential economic impact, the proposed regulations may offer some benefits to employers by better reflecting modern workplace realities and clarifying, to some extent, the often complicated requirements for exempt status.

The Department of Labor has invited the public to submit comments on the proposed regulations by June 30, 2003.

© Kilpatrick Stockton LLP.