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Department of Labor Proposes To Strengthen Overtime Protections Under the Fair Labor Standards Act

April 24, 2003

The Fair Labor Standards Act ("FLSA") is the federal law that establishes standards for minimum wages, overtime pay, and child labor. In particular, FLSA requires that employees who work in excess of 40 hours in a week be paid for those overtime hours at a rate of 1 1/2 times their regular rate of pay. Employees who fall into certain "exempt" categories - most notably, executive, administrative, and professional employees, and certain computer professionals - are not entitled to this overtime premium. On March 31, 2003 , the U.S. Department of Labor ("DOL") issued proposed regulations that would modify and update the standards for determining when these exemptions are applicable. If ultimately adopted, these proposed changes, according to the DOL, will "automatically guarantee overtime to 1.3 million additional low-wage workers" and will clarify the entitlement to overtime for some 10.7 million workers.

Under the current regulations, an employee is exempt from the FLSA's overtime requirements only if: (1) he/she is paid on a salaried (rather than hourly) basis, with a weekly salary exceeding specified thresholds; and (2) the employee's job duties meet certain tests applicable to the particular exemption in question, as set forth in the regulations. The DOL has proposed to both increase the minimum weekly salary and to modify the duties tests for each of the exemptions. The highlights of the proposed regulations are as follows.

I. Increase in Minimum Weekly Salary Levels

In order to qualify as exempt under the current regulations, executive and administrative employees must be paid a minimum of $155 per week, and professional employees must be paid a minimum of $170 per week. Employees who receive these minimum weekly salaries must also meet a duties test relating to the particular exemption, referred to as the "long test," to qualify as exempt.

Alternatively, under the current regulations, executive, administrative and professional employees who are paid a minimum of $250 per week must meet a shorter job duties test (the "short test") to qualify for an exemption.

Finally, computer professionals are exempt if they meet the salary test for other professionals set forth above. In addition, as an exception to the general rule that exempt employees must be paid on a salaried basis, FLSA stipulates that computer professionals paid on an hourly basis at a rate of at least $27.63 per hour can be exempt as well, provided they meet the applicable duties test.

In formulating the proposed regulations, the DOL recognized that the current weekly salary minimums, which have not been changed in 28 years, are so low as to have almost no application. Accordingly, under the proposed regulations, an employee must be paid a weekly salary of at least $425 per week ($22,100 annually) to qualify for any of the exemptions (except that a computer professional may be considered exempt if he/she earns either at least $425 per week or, if paid on an hourly basis, at least $27.63 per hour).

II. Revisions to the Definitions of Exempt Duties

In addition to being paid a minimum weekly salary, an individual qualifies for the executive, administrative, and professional employee exemptions only if his/her duties meet certain tests. The proposed regulations would use only one test, eliminating the distinction under current law between the "long" and "short" duties tests.

1. Executive

a. Current Test

To qualify as an exempt "executive" employee under the current "short test," an employee must be paid a minimum of $250 per week and the employee's "primary duty" must consist of the "management of an enterprise" or subdivision of an enterprise. In addition, the employee must customarily and regularly supervise two or more employees. In those rare instances where the "long test" is applicable, because the employee's weekly salary is at least $155 but not more than $250, the employee is not exempt if he/she devotes more than 20 percent of his/her time to "non-exempt" activities (i.e., activities not related to management of the operation).

b. Proposed Regulations:

The proposed regulations would impose a uniform minimum weekly salary of $425, and would also eliminate the "long test" rule restricting exempt executive employees from devoting more than 20% of the time in a workweek to performing non-exempt duties.

To qualify as exempt, a salaried executive employee's primary must still include: (1) managing the enterprise or one of its recognized departments or subdivisions, and (2) directing the work of two or more employees. The proposed regulations add a third requirement -- that the employee must have authority to hire or fire or have his/her recommendations as to hiring or firing be given particular weight.

In addition, the proposed regulations create a new category of exempt executive employees: individuals in "sole charge" of an establishment or who have at least a 20% equity interest in the employer (regardless of salary) would be exempt.

2. Administrative

a. Current Test

To be an exempt "administrative" employee under the current "short test," an employee must be paid a minimum of $250 per week and the employee's primary duty must consist of "office or non-manual work" which is "directly related to management policies or business operations." In other words, the employee must be engaged in administering the operation rather than in producing the end product of the business. In addition, the employee must customarily and regularly exercise "discretion and independent judgment." As with the executive exemption, where the employee is subject to the "long test" because he/she earns at least $155 but not more than $250 per week, the exemption is lost if the employee devotes more than 20 percent of the time in a workweek on the performance of non-exempt work (i.e., manual work, work that does not require discretion and independent judgment).

b. Proposed Regulations

The proposed regulations would use a uniform minimum weekly salary of $425, and would also eliminate the "long test" rule restricting exempt administrative employees from devoting more than 20% of the time in a workweek to performing non-exempt duties.

Under the proposed regulations, a salaried administrative employee's primary duty must still be the performance of office or non-manual work directly related to management policies or the employer's general business operations. Most significantly, however, the DOL's proposed regulations replace the "discretion and independent judgment" standard with a new test which requires that employees hold a "position of responsibility." The regulations define such a position as one which involves either: (1) performing work of "substantial importance," or (2) performing work requiring a "high level of skill or training."

According to the DOL, the current requirement that an exempt administrative employee exercise "discretion and independent judgment" is highly subjective and has resulted in considerable litigation. While the proposed "position of responsibility" test is intended to eliminate this problem, it would appear that the new standard, as well as the definitional phrases "work of substantial importance" and "high level of skill or training," are equally subjective. It therefore remains to be seen whether the proposed regulations, if adopted, will result in the intended reduction in the volume of litigation.

3. Learned or Artistic Professional

a. Current Test

To be an exempt "professional" employee under the current "short test," an employee must be paid a minimum of $250 per week. Different duties tests apply depending on whether the employee is considered to be a "learned professional" or an "artistic professional." A "learned professional" is one whose primary duty requires advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized instruction or study. An "artistic professional" is one whose primary duty is the performance of work that is original and creative in character and that requires invention, imagination, or talent in a recognized field of artistic endeavor.

Under the current "long test," which applies if the employee's minimum weekly salary is at least $170 but not more than $250, the employee also must customarily and regularly exercise "discretion and independent judgment," and the exemption is lost if the employee devotes more than 20 percent of his/her time to "non-exempt" activities.

b. Proposed Regulations

The proposed regulations for professional employees would also use only one test for employees earning $425 per week and would eliminate the "long test" rule restricting exempt professional employees from devoting more than 20% of time in a workweek to performing non-exempt duties.

With respect to learned professionals, the basic test under the proposed regulations would remain largely the same as the current "short test," i.e., the employee's primary duty must be the performance of office or non-manual work "requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction." However, the proposed regulations recognize that in addition to a "prolonged course of specialized intellectual instruction," the required "advanced knowledge" may also be acquired by alternative means, such as "combination of intellectual instruction and work experience." In this respect, the proposed regulations may broaden the availability of the exemption for learned professionals.

For creative professionals, the proposed regulations also largely mirror the current "short test" -- the employee's primary duty must be performing work requiring invention, imagination, or talent in a recognized field of artistic endeavor.

4. Computer Related Occupations

a. Current Test

To be exempt as a "computer operations professional" under the current "short test," the employee must be paid a minimum of $250 per week. In addition, the employee must engage in work that requires theoretical and practical application of higher specialized knowledge in computer systems analysis, programming and software engineering, and the employee must consistently exercise "discretion and independent judgment ." This exemption does not include a "help desk" troubleshooter or a data entry clerk, but does include certain computer programmers.

The current "long test" applies if the employee's minimum weekly salary is at least $170 per week, but not $250 or more. Under the "long test" an employee is not exempt unless he or she performs work that is "predominantly intellectual and varied in character and is of such character that the output produced or result accomplished cannot be standarized in relation to a given period of time." The employee also must consistently exercise "discretion and independent judgment " and must not devote more than 20 percent of his/her time to "non-exempt" activities.

The FLSA and the current regulations also include a specific exemption for highly skilled computer professionals who are paid on an hourly basis and earn at least $27.63 per hour. To be exempt, the employee must be e mployed as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer field. In addition, the primary duties of an hourly paid computer professional must be:

(A) the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional applications; or (B) 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; or (C) the design, documentation, testing, creation or modification of computer programs related to machine operating systems; or (D) a combination of duties described in (A), (B) and (C), the performance of which requires the same level of skills.

b. Proposed Regulations

The proposed regulations would use only one duties test for computer professionals with a minimum salary requirement of either $425 per week or $27.63 per hour, eliminating the distinction between the "long test" and the "short test." The duties test under the proposed regulation is the same as the current duties test for computer employees paid on an hourly basis, set out above.

The proposed regulations would eliminate several requirements under the current tests, including the requirement that the employee consistently exercise "discretion and independent judgment," that he/she may not devote more than 20% of time in a workweek to performing non-exempt duties, and that the work be "predominantly intellectual" and "cannot be standarized."

A period of public comment on the proposed regulations extends for 90 days from March 31, 2003 . The DOL has specifically invited comment upon the application of the overtime exemptions to pilots, athletic trainers, funeral directors, insurance salespersons, loan officers, stockbrokers, hotel sales and catering managers, and dietary managers in retirement homes. Final regulations, which require no congressional action, are expected from the DOL as early as late this year or early next year.