Who’s Exempt from Overtime Pay?
Understanding The Revised White-Collar Exemptions

By Kevin White

With the number of claims for back overtime pay skyrocketing, labor and employment attorneys must understand the recently revised regu- lations implementing the white-collar exemptions under the Fair Labor Stan-dards Act (“FLSA”).1 The regulations took effect on August 23, 2004 and apply to claims accruing after that date.2 Because the revised regulations have been in effect only a short time, courts have had little opportunity to construe them. The Department of Labor’s (“DOL”) reinvigorated opinion letter program, however, has offered practitioners some interpretation of the new regulations. This article offers an overview of the regulations and the DOL’s recent opinion letters interpreting the regulations.

I. Basic Analytical Framework
The basic analytical framework for applying the white-collar exemptions remains the same under the new regulations. Generally, to qualify for an exemption, the employee must (1) receive compensation above a minimum salary level; (2) receive pay on a salary basis; and (3) perform specific primary job duties. The categories of white collar exemptions remain largely unchanged: administrative, executive, outside sales, professionals, and computer employees. One notable change from the old regulations is the creation of a separate provision for computer employees, who previously were covered under the professional and administrative exemptions.3

II. Salary Requirements
A. Minimum Salary Requirement
Previously, the regulations contained “short” and “long” tests and corresponding salary requirements under each test. The new regulations replace those with a simpler minimum salary requirement under which an employee’s compensation must equate to at least $455 per week, or $23,660 per year approximately, to qualify for the executive, administrative, or professional exemptions.4 Under a curious 1996 FLSA amendment, computer employees may be paid at least $455 per week or $27.63 per hour and remain eligible for exempt status.5 Outside sales employees, however, do not have to meet any minimum salary requirement to be exempt from overtime pay.6
The DOL plans to undertake a targeted initiative to enforce overtime regulations with respect to employees earning slightly more than $23,660 annually.7 Thus, practitioners who advise employers concerning the exemptions should pay particular attention to those employees at or near the minimum salary requirement.

B. Highly Compensated Employees
In addition to the minimum salary requirement, the new regulations add a special salary test that exempts “highly compensated employees.”8 To be a highly compensated employee, (1) an employee must receive total compensation of at least $100,000 annually, including commissions, nondiscretionary bonuses and other nondiscretionary compensation; (2) the employee’s compensation must include at least $455 per week paid on a salary or fee basis; (3) the employee must regularly perform one or more exempt duties or responsibilities of an executive, administrative, or professional employee; and (4) the employee must perform office or nonmanual work.9
If by year end an employee’s com-pensation does not equal $100,000, the employer may make a final payment to the employee to elevate the employee’s compensation to the $100,000 level.10 For employees who join an employer after the start of the year or leave before the end of the year, the $100,000 requirement may be pro-rated.11 Additionally, the employer can choose any 52-week period as the year to measure whether the employee’s pay reaches the $100,000 level.12

II. The Salary Basis Test
Under the new regulations, executive, administrative and some professional employees must continue to receive pay on a “salary basis” to be exempt.13 Payment on a salaried basis means employees must regularly receive each pay period a predetermined amount constituting all or part of the employee’s compensation, without regard to quality or quantity of work performed, on a weekly or less frequent basis. Further, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of hours or days worked.14 Thus, employers are limited in the deductions they can take from an employee’s pay to maintain the “salary basis.”

A. Permissible Deductions From Salary
Although prohibitions on deductions remain, the new regulations have relaxed their application and effect. The old regulations did not allow full-day disciplinary suspensions without pay unless the employee violated a major safety rule.15 To discipline an employee for any other misconduct, the employer had to suspend the employee for an entire workweek.16 Now, an employer can impose full-day suspensions without pay for violations of workplace conduct rules and still comply with the salary basis test. 17 Those workplace conduct rules must be contained in a written policy applicable to all employees, however.
The permissible deductions also include, but are not limited to, absences for one or more full days for personal reasons; absences for one or more full days for sickness or disability if deductions are made under a paid-leave plan or practice; offsets received for jury fees, witness fees, or military pay; unpaid leave under the Family and Medical Leave Act (“FMLA”); and safety infractions of major significance.18 In a recent opinion letter, the DOL concluded that an employee’s weather-related absence when the employer remained operational was a personal absence for which a full-day deduction could be taken.19

B. Impermissible Deductions
The new regulations continue to prohibit partial-day deductions, unless done for FMLA purposes.20 Similarly, an employer still cannot make deductions for absences caused by the employer or by the operating requirements of the business. Thus, if an employee is ready, willing and able to work, then the employer cannot deduct from the employee’s salary because work is not available.21

C. Consequences for Impermissible Deductions
The effect of improper deductions is also relaxed under the new regulations. Before, improper deductions could result in company-wide loss of exempt status for an entire classification of employees.22 Now, if an employer has an actual practice of making improper deductions, then the employer may lose the exemption only during the time period in which the improper deductions were made for employees in the same job classification and working for the same manager responsible for making the improper deduction.23 Gone is the draconian loss of an exemption for an entire class of employees company wide. Similarly, inadvertent or isolated improper deductions do not result in a complete loss of the exemption if the employer reimburses the employee for the improper deduction.24
Regardless of whether the deduction is inadvertent or routine, the new regulations create a broad safe harbor that allows employers to avoid loss of an exemption for improper deductions. To take advantage of the safe harbor, an employer must have a clearly communicated policy that (1) prohibits improper deductions; (2) includes a complaint mechanism; (3) reimburses employees for any improper deductions; and (4) makes a good faith commitment to comply with the regulations in the future. 25 The policy should be in writing and provided to employees at the time of hire, published in an employee handbook, or included on the employer’s Intranet.26

III. Duties Tests
The new regulations maintain descriptions of duties that may qualify for exempt status but eliminate the strict percentage of time requirements found in the old regulations. For example, under the old regulations, to qualify for the executive exemption an employee had to devote 80 percent of her time to exempt work.27 Instead of percentages of time, the new regulations now focus on whether an employee’s “primary duty” is exempt work. “Primary duty” means the employee’s main, principal, major, or most important duty. 28 It remains true that an employee who spends 50 percent of his or her time on exempt work will generally meet the primary duty requirement, but this is just a rule of thumb, not a strict requirement of the duties tests.29

A. Executive Exemption
The executive exemption may apply to an employee (1) whose primary duty is management of the enterprise or of a customarily recognized department or subdivision of the enterprise; (2) who customarily and regularly directs the work of two or more other employees; and (3) who has the authority to hire and fire other employees or whose suggestions or recommendations as to the change of another employee’s status, such as hiring, firing, advancement, or promotion, is given particular weight.30 To determine whether an employee’s recommendations are afforded particular weight, an employer must consider such factors as whether it is the employee’s job to make these recommendations, the frequency of such recommendations, and the frequency with which the employee’s suggestions are relied upon.31
The most significant change to the executive exemption is the third prong of the duties test, which will likely make the exemption more difficult for employers to apply. Practically speaking, many employers restrict the scope of employees who can actually change the status of another employee or make an effective recommendation regarding such a change. Because the universe of employees with the necessary authority to hire and fire is limited, the exemption’s applicability likely will be limited as well.
A common question under the old regulations was how to apply the executive exemption to employees who perform both exempt and nonexempt work. The regulations now specifically recognize that employees may remain exempt executive employees even if they concurrently perform exempt and nonexempt work. For employees to maintain the exemption, they must be able to decide when to perform the nonexempt duties (as opposed to being ordered to perform the duties) and must remain responsible for the success or failure of the business operations while performing the nonexempt work. 32

B. Administrative Exemption
Under the new regulations, the duties test for administrative employees remains largely the same as the test under the old regulations.33 The test remains twofold: first, the employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or its customers. Second, when performing the primary duty, the employee must exercise discretion and independent judgment with respect to matters of significance.34
The test preserves the idea that an administrative employee’s primary duty must relate to running or servicing the business as opposed to working on a production line or selling a product. Under the old regulations, parties analyzed this issue in terms of the administrative-production dichotomy, under which an employee involved directly in producing the employer’s product was not in an administrative position and therefore did not qualify for the exemption. 35 The comments to the new regulations state that the dichotomy remains a useful analytical tool but is not dispositive of the issue unless the analysis shows that the work “falls squarely on the production side of the line.”36 The new regulations provide examples of work that may be administrative in nature, including accounting, marketing, advertising, public and government relations, and purchasing.37
An administrative employee’s primary duty also must involve the exercise of discretion and independent judgment related to “matters of significance.” 38 Exercising discretion and independent judgment means that the employee independently analyzes possible courses of action and chooses a course based on that analysis. Unfortunately, the new regulations provide little guidance to determine whether an employee’s discretion and judgment impacts a “matter of significance,” but say only that the phrase refers to the level of importance or consequences of the work performed.39 Courts will have to further define what matters are significant, and practitioners should expect this element of the duties test to be a central facet of future litigation regarding the administrative exemption.
The regulations include examples of workers who may qualify for the administrative exemption, including insurance adjusters, employees in the financial services industry, team leaders for major projects, executive or administrative assistants to a business owner or senior executive of a large business, human resources managers, and purchasing agents that make significant purchases.40 Recent DOL opinion letters have analyzed applying the administrative exemption to background investigators (exemption does not apply), insurance claims adjusters (exemption applies in some cases but not others), and museum curators (exemption applies).41

C. Professional Exemption
Unlike the administrative exemption, the DOL substantially revised the professional exemption in the new regulations. The regulations now divide professional employees into four categories: learned professionals, creative professionals, teachers, and employees practicing law or medicine.

1. Learned Professionals
To qualify for the learned professional exemption, the employee’s primary duty must require advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.42 “Work requiring advanced knowledge” is generally intellectual in nature and requires consistent exercise of discretion and judgment. The regulations specifically state that advanced knowledge cannot be attained at the high school level.43
A “field of science or learning” includes law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, pharmacy, and physical, chemical and biological sciences. 44 Mechanical arts or skilled trades, in contrast, are not fields of science or learning.45
The “course of specialized instruction” requirement limits the exemption to only those occupations where specialized academic training is a condition for entering the profession. Thus, the DOL maintains that possessing an appropriate academic degree remains the best evidence that an employee qualifies as a learned professional.46 However, the regulations now recognize that the exemption is available to employees who do not have sufficient academic training but nevertheless acquire advanced knowledge through both work experience and intellectual instruction.47 These employees must have substantially the same knowledge as degreed employees and must perform substantially the same work as degreed employees.48 The exemption remains inapplicable to fields requiring only general knowledge acquired by an academic degree in any field. Examples of professions that may be exempt as learned professions are registered or certified medical technologists, nurses, dental hygienists, physician assistants, accountants, chefs, athletic trainers, and funeral directors and embalmers.49 In recent opinion letters, the DOL took the position that social workers with master’s degrees in their field may qualify for the learned professional exemption, but that paralegals may not.50

2. Creative Professionals
To be a creative professional, the employee’s primary duty must require invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. 51 Recognized fields include music, writing, acting, and graphic arts. The exemption does not apply to routine mental, manual, mechanical, or physical work. Nor does the exemption apply to work that can be produced by a person with general manual or intellectual ability and training.52 Generally, actors, musicians, composers, conductors, soloists, some painters, some cartoonists, essayists, novelists, short-story writers, some screen-play writers, and some writers in advertising agencies qualify for the exemption.53 In an opinion letter, the DOL concluded that graphic artists who create vinyl advertising wraps may be exempt, but those who install the wraps may not.54
The most significant change to the creative professional exemption pertains to journalists, whose representative organizations lobbied for revised regulations. Essentially, journalists may now qualify for the exemption if they contribute a unique or creative interpretation or analysis to a news product. The DOL states, however, that most journalists simply collect and organize information, and thus, do not qualify for the exemption.55

3. Teachers
Employees with the primary duty of teaching, tutoring, instructing or lecturing in the activity of imparting knowledge in an educational establishment may qualify for the professional exemption.56 Generally, an educational establishment means “an elementary or secondary school system, an institution of higher education or other educational institution.”57 The exemption also may apply to those employees who spend considerable time in extracurricular activities, such as coaching sports or academics teams. Similar to the learned professional exemption, possession of a teaching certificate is the best evidence that an employee is a teacher; however, such a certificate is not necessary.58
It is important to note that the minimum salary requirement and salary basis tests do not apply to teachers. Thus, as long as an employee’s primary duty is one of those listed above, then the employee qualifies for the exemption without regard to the amount or timing of compensation.59

4. Practice of Law or Medicine
The professional exemption extends to licensed or certified lawyers and doctors who actually practice either law or medicine.60 With respect to medicine, the exemption also includes residents and interns who hold the necessary academic degree for practicing medicine. The exemption may cover general medical practitioners and specialists, osteopathic physicians, podiatrists, dentists, and optometrists.61 Like teachers, the minimum salary requirement and salary basis tests do not apply to those employees who practice medicine or law.62

D. Computer Employees
Under the old regulations, computer employees could qualify for an exemption, but employers had to look to several different regulatory sections, 29 C.F.R. §§ 541.3(a)(4), 541.205(c)(7), and 541.303, to determine whether an exemption applied to a computer employee. The new regulations combine the portions of those three provisions relating to computer employees into a single regulation tailored specifically for employees in computer-related positions.63
The threshold is fairly high for computer employees to qualify for the exemption. Basically, the employee’s primary duty must involve systems analysis and procedures or the design and development of computer systems and programs.64 However, computer employees are no longer restricted to work only with software to qualify for the exemption.65 Employees can now work with hardware and systems generally to qualify for the exemption.66

E. Outside Sales Employees
An exempt outside sales employee’s primary duty must be to make sales or obtain orders or contracts for services or the use of facilities away from the employer’s place of business.67 Work an employee performs that is incidental or adjunct to outsides sales activities, such as deliveries and collections, is considered part of the primary duty. In addition, writing sales reports, updating or revising sales or display catalogues, planning itineraries, and attending sales conferences may all be exempt work if they further the employee’s sales efforts.68
Generally, an outside sales person works away from the employer’s place of business if he or she makes sales at the customer’s place of business or sells door-to-door at the customer’s home.69 Trade shows are not considered an employer’s place of business if the employee actually engages in selling rather than just promotion.70 On the other hand, outside sales work does not include sales made by mail, telephone, or Internet. Similarly, promotion work, if it is not incidental to and in conjunction with an employee’s own outside sales, is not exempt work.71 Promotion work can include putting
up displays and posters, removing damaged stock from a merchant’s shelves, or rearranging merchandise on store shelves.

IV. Conclusion
The new regulations streamline and eliminate some troubling aspects of the old regulations, such as the effect of improper deductions from pay and the percentage of time tests. However, considerable ambiguity and room for interpretation persist. Thus, practitioners in this area must monitor future wage and hour cases and administrative opinions carefully to ensure compliance with the new regulations.

Kevin White is an attorney in the Labor Section of Akin Gump Strauss Hauer & Feld LLP, and his practice focuses heavily on wage and hour matters.

Endnotes
1. The new regulations are revisions to 29 CFR Part 541, and the Fair Labor Standards Act is codified as 29 U.S.C. §§ 201 et seq. 2. See De Jesus-Rentas v. Baxter Pharmacy Servs. Corp., 400 F.3d 72, 74 n.2 (1st Cir. 1995). 3. 69 Fed. Reg. 22,160 (April 23, 2004) (commenting on the computer employee exemption). 4. 29 C.F.R. § 541.600 (2005). 5. 29 U.S.C. § 213(a)(17). 6. 29 C.F.R. § 541.500 (2005). 7. Chao Forms Task Force for Overtime Rules Compliance, 174 Labor Relations Reporter 327 (May 3, 2004). 8. 29 C.F.R. § 541.601 (2005). 9. Id. 10. Id. 11. Id. 12. Id. 13. As an alternative to pay on a salaried basis, administrative and professional employees may receive pay on a fee basis. 29 C.F.R. § 541.605 (2005). Because this method of compensation has limited application, it is not addressed in this article. 14. 29 C.F.R. § 541.602 (2005). 15. 29 C.F.R. § 541.118 (2004). 16. Id. (explaining that employees that do not perform any work in a workweek do not have to be paid for that week). 17. Id. 18. 29 C.F.R. § 541.602 (2005). 19. DOL, Wage and Hour Division, Opinion Letter FLSA2005-46, 10/28/05. 20. 69 29 C.F.R. § 541.602 (2005). 21. Id. 22. See Auer v. Robbins, 510 U.S. 452 (1997). 23. 29 C.F.R. § 541.603 (2005). 24. Id. 25. Id. 26. Id. 27. 29 C.F.R. § 541.112 (2004). 28. 29 C.F.R. § 541.700 (2005). 29. Id. 30. 29 C.F.R. § 541.100 (2005). 31. 29 C.F.R. § 541.105 (2005). 32. 29 C.F.R. § 541.106 (2005). 33. DOL, Wage and Hour Division, Opinion Letter FLSA2005-21, 08/19/05. 34. 29 C.F.R. § 541.200 (2005). 35. 69 Fed. Reg. 22,141 (April 23, 2004) (commenting on the administrative-production dichotomy); 29 C.F.R. § 541.201 (2005). 36. 29 C.F.R. § 541.201 (2005). 37. Id. 38. 29 C.F.R. § 541.202 (2005). 39. Id. 40. 29 C.F.R. § 541.203 (2005). 41. DOL, Wage and Hour Division, Opinion Letters FLSA2005-21, 08/19/05, FLSA2005-25, 08/26/05, FLSA2005-43, 10/24/05. 42. 29 C.F.R. § 541.301 (2005). 43. Id. 44. Id. 45. Id. 46. Id. 47. Id. 48. Id. 49. Id. 50. DOL, Wage and Hour Division, Opinion Letter FLSA2005-9, 01/07/05. 51. 29 C.F.R. § 541.302 (2005). 52. Id. 53. Id. 54. DOL, Wage and Hour Division, Opinion Letter FLSA2005-26, 08/26/05. 55. 69 Fed. Reg. 22,157-22,158 (April 23, 2004) (commenting on journalists); 29 C.F.R. § 541.302 (2005). 56. 29 C.F.R. § 541.303 (2005). 57. 29 C.F.R. § 541.204 (2005). 58. Id. 59. Id. 60. 29 C.F.R. § 541.304 (2005). 61. Id. 62. Id. 63. 29 C.F.R. §§ 541.400-541.402 (2005). 64. 29 C.F.R. § 541.400 (2005). 65. 69 Fed. Reg. 22,160 (April 23, 2004) (commenting on the computer employee exemption). 66. Id. 67. 29 C.F.R. § 541.500 (2005). 68. Id. 69. 29 C.F.R. § 541.502 (2005). 70. Id. 71. 29 C.F.R. § 541.503 (2005).

Text is punctuated without italics.

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