Completing a journey worthy of Odysseus, the Department of Labor's on-again, off-
again, much-debated and long-awaited revisions to the overtime pay regulations under
the Fair Labor Standards Act take effect on August 23, 2004. Delayed by partisan
wrangling for over a year and at various times thought to be near a political death, the
changes are the first significant overhaul of the overtime pay rules in more than 50 years.
These DOL regulations determine which employees are eligible for "time and a half"
premium pay for hours worked in excess of 40 in a workweek, and which employees are
"exempt" from the overtime pay requirements.
Organized labor has viewed the regulations as significantly weakening overtime pay
protections for many workers, and even the publication of the DOL's final rule in April
has not stopped Congressional efforts -- as recently as last month -- to scuttle the
changes. But with the deadline for implementation now only weeks away, employers
must quickly move beyond the role of spectators to a big-picture political saga, and
grapple with the practical effects of the changes on their workforces.
While most employers have already taken substantial steps to ensure compliance with the
new regulations, a number of industry surveys have shown many employers still
struggling to come up to speed. Complicating the compliance effort is the fact that for
many employers, implementing the new regulations will entail their first comprehensive
review of company pay practices in decades.
The first step for an employer in dealing with the new overtime regulations is to
understand what has changed, and what has not. Typically, employees are eligible for
overtime premium pay (as "non-exempt employees") unless they hold positions falling
within one of three "white collar" exemptions. To fit within these three exemptions --
executive, administrative, and professional -- a position must both:
- Require the performance of particular, and typically discretionary, duties; and
- Be paid on a salaried, rather than hourly, basis, though there are several notable
exceptions to the "salary basis" requirement, including doctors, lawyers,
teachers, certain skilled computer professionals, outside salesmen, and
managers who own at least 20% of a business.
The new regulations loosen some of the standards on both prongs of this analysis. The
new rules broaden in important ways the white collar "duties" tests. They also relax
some of the criteria for determining whether a position is truly paid on a "salary basis"
(generally, payment of a predetermined amount for a workweek, which does not vary
based on the quality or quantity of work performed) or is instead, effectively,
compensated by the hour.
The duties tests
Executive Employees - As under the current regulations, an "executive" employee
must have as her "primary duty" the management of an enterprise, or a customarily
recognized department or subdivision of the enterprise. The "primary duty" test,
however, has been made significantly more flexible, both for "executive" positions
and for "administrative" and "professional" employees. First, while duties that
involve more than half an employee's time will still generally be considered
"primary," the new regulations provide greater leeway for a finding of exempt status
even where less than 50% of the employee's time is taken up with exempt functions.
Second, under the new regulations, non-exempt tasks that are "directly and closely
related" to an employee's exempt responsibilities may now be counted as exempt
work, in determining the employee's "primary duties." The standard for what
constitutes "management" duties has also been expanded, as has the definition of a
customarily recognized "department or subdivision" of an enterprise. As a result of
these changes, a number of employees who were previously just outside the
"executive employee" exemption should now be safely within it. Nonetheless, even
under the new regulations, not every "manager" or supervisor will necessarily be an
Administrative Employees - "Administrative" employees must have as their
primary duty 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 those primary duties must include the exercise of discretion and
independent judgment with respect to matters of significance (because of the
"discretion and independent judgment" requirement, there are many "administrative"
employees in every organization, including most "administrative assistants," who are
not covered by the "administrative" exemption, and who must be paid overtime
premium pay). While this duties test is largely unchanged under the new regulations,
the number of positions likely to meet the test has increased.
The new regulation's examples of the types of positions which may be treated as
"administrative," and of the kind of work properly viewed as involving "discretion
and independent judgment," both suggest a broader compass for this exemption. As
well, several existing criteria have been dropped under the new regulations. These
included the requirement that an administrative position must either directly assist
another exempt employee, or perform special projects under only general supervision,
and the requirement that "discretion and independent judgment" be exercised
"consistently" or "customarily and regularly."
Professional Employees - "Professional" employees must have as their primary
duties work requiring knowledge of an advanced type, work in a field of science or
learning, or work customarily acquired by a prolonged course of specialized
intellectual instruction. In addition to loosening the "primary duty" test (as discussed
above), the new regulations make clear that occupations whose educational
prerequisites involve three years of non-specialized college instruction and a fourth
year in an accredited specialized program will generally be exempt.
Highly Compensated Employees - The DOL regulations also create an entirely new
class of exempt employees: those with a total annual compensation of at least
$100,000. So long as these employees customarily and regularly perform at least one
of the exempt duties of an executive, administrative or professional employee (even if
that duty is not their primary duty), they may be treated as exempt. At least $455 per
week of this compensation, however, must be paid on a salary or fee basis; the
balance may be in the form of commissions, non-discretionary bonuses and other
Salary basis of payment
The new regulations maintain the current definition of a salary basis of payment (a fixed
amount not subject to reduction or increase based on quality or quantity of work
performed). The regulations also generally continue the current rules concerning the
deductions from salary that are permitted, and the deductions from salary that destroy a
"salary basis" of payment. But the regulations broaden the scope of permissible
deductions in a number of respects. These include partial day deductions for suspensions
for infractions of major safety rules (previously, only full day suspensions were
permitted). Also permitted for the first time are deductions for disciplinary suspensions
for one or more full days for infractions of workplace conduct rules (even ones not
involving safety issues), pursuant to a written policy applicable to all employees (under
the old rules, non-safety related suspensions had to be meted out in full week increments
to exempt employees, or not at all). The new rules provide a "safe harbor" to protect
employers against loss of exemption on account of impermissible reductions in salary
pay, if the employer has a clearly communicated policy prohibiting improper deductions,
reimburses employees for any improper deductions, and makes a good faith effort to
comply in the future after an improper deduction has occurred.
The new rules also confirm several practices for salaried employees which previously had
been viewed with some suspicion: deductions from accrued leave balances for partial day
absences will not destroy the salary basis of payment, nor will requiring employees to
record or track hours, or to work a specific schedule. Likewise, providing extra
compensation, in addition to a guaranteed minimum salary, will not remove exempt status.
The minimum salary necessary to support exempt status is increased, from $250 under
the old regulations to $455 per week under the new rules. For most employers in
Massachusetts, however, this change (to a new annualized minimum salary of $23,660)
will not often impact the treatment of positions otherwise meeting the standards for
What employers should do
In light of the new regulations, each employer should take the following steps:
- Review your classification of all exempt and non-exempt employees - if every
employee in your organization is treated as exempt, or if an overwhelming majority
of them are, this may be a red flag; just because your employees act very
professionally, that does not mean they are all "professionals" under the FLSA;
- Revise or adjust formal job designations as appropriate - job descriptions that have
the characters "Rev. 7/73" at the bottom, or that include as a duty "provides routine
maintenance for mimeograph machine," probably needed to be revised anyway, and
this would be a good time to do it;
- Adjust compensation of lower-paid employees, if necessary and advisable, to bring
them within the scope of the revised exemptions (but make sure that the size of a
salary increase is not more than what you would have paid in overtime premium pay
to begin with);
- Adjust compensation of higher-paid employees, if necessary and advisable, to come
within the scope of the new exemption for highly compensated employees (but again,
only if it makes economic sense to do so);
- Consider the adoption of written workplace conduct rules applicable to all
employees, in order to be able to suspend exempt employees for non-safety related
- Consider adopting a policy concerning improper deductions from the salary of
- Talk to your attorney for specific guidance particular to your organization, especially
before changing a formerly "non-exempt" position to exempt status. And remember
that state law can provide greater protections than does the FLSA; for example,
workers providing certain home-based "companionship" services have long been
treated as exempt by the Department of Labor under federal law, but (according to the
Massachusetts Attorney General's office) still must be paid overtime premium pay
under the Massachusetts wage and hour statutes.
- And, while you're at it, Take a look at your existing pay practices in light of FLSA
"traps for the unwary" which the new regulations have left unchanged. The most
common of these -- failing to pay for covered travel time, providing "compensatory
time off" instead of required overtime premium pay, failing to aggregate hours
worked for two or more related employers, counting only base pay in calculating the
"time and one-half" overtime premium, paying non-exempt employees with a flat rate
or lump sum payment instead of the "time and one-half" rate, ignoring "small
amounts" of overtime and other time card inaccuracies, and failing to pay for time
worked by employees who start early, stay late or work through lunch -- all continue
to pose significant risks to employers, even under the new regulations.
Remember, the overtime law changes take effect immediately -- today! Those
organizations that are mindful of these revisions, and take the necessary steps outlined
above to ensure compliance with the amended regulations, will be well-prepared to cope
with the FLSA changes and the new overtime environment.
Peter Ebb is a partner in the Boston office of Ropes & Gray LLP, practicing in the firm's
Labor & Employment Department, and is also a NEHRA member. Peter can be reached
at or at (617) 951-7457.