The Fair Pay Initiative

New Federal Rules for Determining Exempt Status
Ronald F. Smedley
This article provided by the Engstrom Institute

The purpose of the Fair Labor Standards Act (FLSA) is to give employers specific tests to determine whether a job is nonexempt or exempt from its provisions. An employee salaried under an FLSA exemption is paid a full salary for the work week, regardless of the actual number of hours worked during the week. The FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional, outside sales (not covered in this article) and certain computer employees.

In April 2004, the Department of Labor (DOL) published the final changes to the white-collar overtime exemption rules under the FLSA, entitled the "Fair Pay Initiative." Currently the new regulations are scheduled to take effect for all employers on August 23, 2004, barring any attempts by the U. S. Senate to overturn and again revise the overtime regulations. Most professionals agree that the current regulations will indeed move forward due to the fact that Senate approved revisions would need ratification by both the House of Representatives and the President before becoming law, and this is very unlikely.

When qualifying for an overtime exemption, employees generally must meet certain tests regarding their job duties and, under the new regulations, be paid on a salary basis at not less than $455 per week, or $23,660 per year. Job titles do not determine exempt status. In order for an exemption to apply, an employee's specific job duties and salary must meet all the requirements of the new DOL regulations.

Religious nonprofit employers in California will experience little if any impact from the changes because California's overtime exemption rules provide greater protection to employees and will continue to govern overtime pay practices. However, for employees in other states, covered only by the FLSA (and California ministries with employees outside the state of California), the new rules may trigger the need to update existing job descriptions and pay practices. You will need to check with your state to determine if there are sections of your exemption rules that provide more protection for exempt employees. States that have no overtime laws except FLSA are Alabama, Arizona, Delaware, Georgia, Idaho, Iowa, Louisiana, Mississippi, Nebraska, Oklahoma, South Carolina, South Dakota, Tennessee, Utah, Virginia and Wyoming.

Below is a general overview of the new overtime exemption rules that both simplify and dramatically augment the exempt overtime playing field for most employers outside of California, including churches and Christian organizations.

Executive Exemption

The executive exemption rule applies only if all the following requirements are met:

• Has the duty of management of the enterprise or of a customarily recognized department or subdivision.
• Customarily and regularly
• Has the authority to hire or fire, or recommend hiring or firing, or has recommendations on these and other actions affecting employees.
• Customarily and regularly exercises discretionary power.
• Devotes no more than 20 percent (less than 40 percent if employed by a retail or service establishment) of his/her hours worked to activities not directly related to managerial duties.
• Is paid on a salary basis and at the rate of at least $455/week, exclusive of board, lodging or other facilities.

Administrative Exemption

The administrative exemption rule applies only if all the following requirements are met:

• The employee must have a job that is characterized as one of the following:
• Responsible office or non-manual work directly related to the management policies or general business operations of the employer or the employer's customers.
• Responsible work that is directly related to teaching or training carried on in the administration of a school system or educational establishment.
• Customarily and regularly exercises discretion and independent judgment, as distinguished from using skills and following procedures, and must have the authority to make important decisions.
• Regularly assists a proprietor or a bona fide executive or administrative employee.
• Performs work under only general supervision along specialized or technical lines requiring special training, experience or knowledge.
• Executes special assignments under only general supervision.
• Devotes no more than 20 percent of the time worked in a work week (less than 40 percent if employed by a retail or service establishment) on nonexempt work—that is, work not directly and closely related to administrative duties.
• Is paid on a salary basis and at the rate of at least $455/week exclusive of board, lodging or other facilities.

Professional Exemption

For the professional exemption rule to apply, the employee must meet the following qualifications:

• The employee must have as the primary job duty one of the following:
• Work requiring knowledge of an advanced type in the field of science or learning, customarily by a prolonged course of specialized instruction or study.
• Work that is original and creative in character in a recognized field of artistic endeavor and the result of which depends primarily on the employee's invention, imagination or talent.
• Work as a teacher certified or recognized as such in the school system or educational institution by which the person is employed.
• Customarily exercises discretion and independent judgment.
• Does work that is predominantly intellectual and varied, as distinguished from routine or mechanical in nature.
• Devotes no more than 20 percent of the work week on activities not essentially a part of and necessarily incident to the professional duties.
• Is paid on a salary basis and at the rate of at least $455/week, exclusive of board, lodging or other facilities.

The salary requirement does not apply for a professional employee in the following cases:

• An employee who is a holder of a valid license or certificate permitting the practice of law or medicine and is actually engaged in such practice.
• An employee who is the holder of the requisite academic degree for the general practice of medicine and is engaged in an internship or resident program.
• An employee who is employed and engaged as a teacher in a school system or educational institution.

It should be noted that earning a college degree does not automatically qualify an employee as a professional.

Computer Professional Exemption

In 1990, Congress amended FLSA to allow for the exemption for computer professionals. This special exemption was incorporated into the professional exemption test.

• The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week, or on an hourly basis at a rate not less than $27.63 an hour.
• The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below:
• The application of systems analysis techniques and procedures, including consulting with users to determine hardware, software or system functional specifications.
• 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.
• The design, documentation, testing, creation or modification of computer programs related to machine operating systems.
• A combination of the aforementioned duties, the performance of which requires the same level of skills.

Highly Compensated Employees Exemption

Under the new regulations, highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include a salary or fee based on a rate of at least $455 per week) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption (see qualifications above).

Note that this new exemption does not apply to manual laborers or other "blue collar" workers who perform work involving repetitive operations with their hands, physical skill and energy, no matter how highly they're paid.

Other Information Regarding Exempt Employees

Circumstances in which the employer may make deductions from an employee's pay:Under the Fair Pay Initiative, deductions from an exempt employee's pay are permissible for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. In addition, deductions are permitted under FLSA when an exempt employee:

• is absent from work for one or more full days for personal reasons other than sickness or disability;
• is absent for one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
• is partially paid to offset amounts employees receive as jury or witness fees, or for military pay;
• is absent for penalties imposed in good faith for infractions of major safety rules.

An employer is also not required to pay the full salary of an employee in the initial or terminal week of employment, or for weeks in which an exempt employee takes an unpaid leave under the Family and Medical Leave Act, or other state related family leave laws.

Improper docking of an exempt employee's pay: The new regulations also address the improper docking of pay. Excluding the situations described above that do not jeopardize the exempt status, an employer may not partially dock the pay of an exempt employee who works anytime during a given workweek. If the employer decides to dock an otherwise exempt employee for an amount of one day or more, then that employee is not exempt for that given workweek with the situation possibly eroding the use of the Safe Harbor argument if challenged on one's actual practice. If the employer docks the exempt employee for any amount of pay that is less than one day, the position is to be reclassified as non-exempt and the employee is eligible for overtime.

Safe Harbor and the effect of improper deduction from a salary:An employer will lose the exemption status of an employee if it's determined by the DOL that the employer has an "actual practice" of making improper deductions from an exempt employee's salary. However, inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions under the new Safe Harbor section of the initiative. Safe Harbor can be established by an employer in advance, when the organization:

• clearly communicates the policy prohibiting improper deductions, including providing a complaint mechanism;
• reimburses employees for any improper deductions; and
• makes a good faith commitment to comply with the DOL regulations.

If these requirements are being met in good faith and an improper deduction issue does arise, the employer should not lose the exemption for any employee.

Summary

The purpose of this article has been to provide a general overview of the upcoming overtime exemption rules under the new Fair Pay Initiative as they apply to Christian organizations (other regulations have been omitted).

For more detailed information regarding the Fair Pay Initiative, speak with your wage and hour expert and read the regulations on the Department of Labor website (www.dol.gov and click on "Overtime Security").

Ron Smedley is president of Synergistic Resource Associates (SRA), a full service human resource/development consulting firm located in Placentia, Calif. As a human resource specialist, Ron is considered an authority on labor law interpretation and policy and procedure writing. He teaches in the graduate and undergraduate Organizational Leadership degree programs at Biola University