AN OVERVIEW OF THE 2004 FEDERAL OVERTIME REGULATIONS

BACKGROUND

Where do these regulations come from?

A federal statute called the Fair Labor Standards Act ("FLSA) states that
most employees must receive overtime pay of one and one-half times their regular pay rate for all hours worked over 40 hours in a workweek. Certain employees are exempt from the overtime pay requirements. Such exempt employees are described in 29 Code of Federal Regulations Part 541. These regulations were recently amended so that the categories of employees who are exempt from overtime pay requirements have been changed.

When did the new regulations go into effect?

The changes to the overtime regulations went into effect on August 23, 2004.

Are additional amendments to the regulations expected?

Separate versions of changes to the current overtime rules passed the House and Senate, and are in the Joint Conference Committee as of October, 2004. President Bush has stated that he will veto any amendments. Congress probably has enough votes to override a veto. Stay tuned…

What if the federal overtime rules are different from state overtime rules?

Whichever rule (federal or state) is most beneficial to the employee must be applied. This fact sheet discusses only federal regulations.

What action is recommended for employers?

As with any time new regulations affecting employment go into effect, employers should consider conducting internal audits to make sure they are in full compliance with the rules.

OVERVIEW OF THE NEW RULES

In general, how have the overtime rules changed?

The new regulations have redefined several categories of workers who are exempt from overtime pay requirements. The new regulations most affect workers with minimal supervisory or "leadership" responsibilities, workers who perform minimal amounts of administrative work, workers with special skills, and some employees in the computer field. Many such workers were previously required to receive overtime, but are now exempt from overtime pay requirements.

What salary range is affected by the new rules?

Employees paid less than $455.00 per week ($23,660.00 annually) on "a salary basis" are non-exempt and eligible for overtime regardless of their job duties or how they are paid. This is an increase from the previous amount of $155.00 per week.

Conversely, to qualify for an exemption employees must be paid $455.00 or more per week ($23,660.00 annually) on a salary basis. Additionally, if the salary is less than $100,000.00, to meet any exemption the employee's "primary duty" must constitute exempt duties (described below). This is a change from previous regulations which put a percentage amount of time on non-exempt duties. This means, for example that a retail Assistant Supervisor who spends most of his or her time on customer service but also supervises other employees may no longer be required to receive overtime pay.

"Salary basis" means that the employee regularly receives a predetermined amount of compensation each pay period on a weekly or less frequent basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee's work. Thus, an hourly employee whose pay varies based on the amount of hours he or she works is not receiving pay on a salary basis.

Workers with an annual salary of at least $100,000.00 (referred to as "highly compensated employees") are exempt if they perform office or non-manual work, and "customarily and regularly" perform one of the duties of either an exempt executive, administrative, or professional employee (defined below). The $100,000.00 must include at least $455.00 per week paid on a salary basis. The rest may consist of commissions and/or nondiscretionary bonuses and other nondiscretionary compensation, but not fringe benefits. "Customarily and regularly" means greater than occasional but may be less than constant. It includes work normally and recurrently performed every workweek but does not include isolated or one-time tasks.

Thus, the definitions of exempt employees described below are always applicable to employees receiving between $23,660.00 and $100,000.00 per year (computed weekly) on a salary basis, and are sometimes applicable to employees receiving more than $100,000.00.

CATEGORIES OF NON-EXEMPT EMPLOYEES

The following categories of employees are not exempt from overtime pay requirements:

1. Blue collar workers
   Blue collar workers are non-exempt if they perform work involving repetitive operations with their hands, physical skill, and energy. They are not exempt no matter high how their salary is. However, they are exempt if they simultaneously qualify in an exempt category.
   
   
2. First responders
   Police officers, corrections officers, firefighters, paramedics, and other first responders are non-exempt regardless of rank or pay level.
   
   

CATEGORIES OF EXEMPT EMPLOYEES

The following categories of employees are exempt from overtime pay requirements:

1. Executive employees
   
   Employees who make between $23,660 and $100,000 per year are exempt as executives if:
   
   
   1. Their "primary duty" is the "management" of the enterprise in which the employee is employed, or of a customarily recognized subdivision thereof;
      
      
   2. They customarily and regularly direct the work of two or more employees or their equivalent; and
      
      
   3. They have the authority to hire or fire other employees, or if their suggestions regarding hiring, firing, promotion or other change in status must be given "particular weight". Factors defining "particular weight" include but are not limited to whether it is part of the employee's job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Generally, an executive's recommendations must pertain to employees who the executive customarily and regularly directs. It does not include occasional suggestions. An employee's recommendations may still be deemed to have "particular weight" even if a higher level manager's recommendations has more importance and even if the employee does not have authority to make the ultimate decision as to the employee's change in status.
      
      
   Practice tip: Authority on hiring and firing should be part of written job description.
   
   "Primary duty" means the principal, main, major or most important duty that the employee performs. Determination of an employee's primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee's job as a whole.
   
   "Management" includes, but is not limited to, activities such as interviewing, selecting, and training of employee; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees' productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees, determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.
   
   "A customarily recognized department or subdivision" is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function.
   
   "Customarily and regularly" means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.
   
   "Two or more employees" means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees. The supervision can be distributed among two, three or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent. For example, a department with four full-time non-exempt workers may have up to two exempt supervisors if each supervisor directs the work of two of those workers.
   
   
2. Business Owners
   
   An employee who owns at least a bona fide 20 percent equity interest in the enterprise in which he or she is employed, regardless of the type of business organization (e.g. corporation, partnership, or other) and who is actively engaged in its management, ins considered a bona fide exempt executive.
   
   
3. Administrative Employees
   
   "Administrative employees" are exempt if they:
   
   
   1. Make at least $455.00 per week on a salary basis;
      
      
   2. Have as their primary duty "the performance of office or non-manual work directly related to the management of the general business operations of the employer or [its] customers;" and
      
      
   3. Their primary duty also "includes work" that involves the "exercise of discretion and independent judgment with respect to matters of significance." Matters of significance is undefined.
      
      Some employees who are typically exempt under the administrative exemption include insurance claims adjusters, financial services employees, human resources managers who formulate and implement employment policies, and employees who lead a team of other employees in completing major projects.
      
      "Directly related to management or general business operations" means that the employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment. Such work includes but is not limited to work in functional areas such as tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, procurement, advertising, marketing, research, safety and health, personnel management, human resources, employee benefits, labor relations, public relations, government relations, computer networks, Internet and database administration, legal and regulatory compliance, and similar activities.
      
      "Employer's customers" means that an employee acting as advisor or consultant to the employer's clients or customers, as tax experts or financial consultants, for example, may be exempt.
      
      "Discretion and Independent Judgment" generally involves the comparison and evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term should be applied in light of all the facts involved in the employee's particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Factors to consider include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operation of the business; whether the employee performs work that affects business operations to a substantial degree; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval; and other factors. The fact that an employee's decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.
      
      "Matter of significance" refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee's duties may cause serious financial loss to the employer.
      
      
4. Administrative Functions In Educational Establishments
   
   The administrative exemption is available to employees paid at least $455.00 per week whose primary duty is performing administrative functions directly related to academic instruction or training in an education establishment.
   
   
5. Learned Professional Employees
   
   The "learned professional" exemption applies to employees who:
   
   
   1. Make at least $455.00 per week on a salary basis;
      
      
   2. Their primary duty is to perform work that requires advanced knowledge in a field of science or that generally requires a prolonged course of "specialized intellectual instruction;" and
      
      
   3. Their work includes "work requiring the consistent exercise of discretion and judgment."
      
      "Work requiring advance knowledge" means work that is predominantly intellectual in character. Advanced knowledge cannot be attained at the high school level.
      
      "Fields of Science or Learning" include law, medicine, theology, accounting, actuarial computation, engineering, architecture, teaching, various types of physical, chemical and biological sciences, pharmacy and other occupations that have a recognized professional status and are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in the field of science or learning.
      
      "Customarily acquired by a prolonged course of specialized intellectual instruction" customarily means having an appropriate advanced degree. However, the exemption may be available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction. The exemption does not apply to occupations in which most employees acquire their skill by experience rather than by advanced specialized intellectual instruction.
      
      Paralegals will generally not be considered learned professionals. Licensed practical nurses, bookkeepers, or clerks who perform accounting duties also generally do not fall into this exception. But registered nurses, physician's assistants who have completed four-year degrees, funeral directors and accountants would usually fall into this category.
      
      
6. Creative Professional Exemption
   
   The "Creative Professional Exemption" applies to employees who:
   
   
   1. Make at least $455.0 per week on a salary basis; and
      
      
   2. Their primary duty is the performance of work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.
      
      "Invention, Imagination, Originality, or Talent" distinguishes the creative professions from work that primarily depends on intelligence, diligence, and accuracy. The exemption for creative professional depends on the extent of the invention, imagination, originality or talent exercised by the employee. The requirements are generally met by actors, musicians, composers, and soloists, and sometimes by painters, writers, cartoonists, essayists, and novelists. Journalists may satisfy the requirements for the creative professional exemption if their primary duty is work requiring invention, imagination, originality or talent. Journalists are not exempt creative professionals if they only collect, organize, and record information that is routine or already public, or if they do not contribute a unique interpretation or analysis to a news product.
      
      "Recognized Field of Artistic Or Creative Endeavor" includes such fields as music, writing, acting and the graphic arts.
      
      
7. Teachers
   
   Teachers are exempt if:
   
   
   1. Their primary duty is teaching, tutoring, instructing or lecturing in the activity of imparting knowledge; and
      
      
   2. They are employed and engaged in this activity as a teacher in an education establishment.
      
      Exempt teachers include, but are not limited to, regular academic teachers, kindergarten or nursery school teachers, teachers of gifted or disabled children, teachers of skilled and semi-skilled trades and occupations, teachers engaged in automobile driving instruction, aircraft flight instructors, home economics teachers, and vocal or instrument teacher
      
      Note: The salary and salary basis requirements do not apply to bona fide teachers.
      
      
8. Employees practicing law or medicine
   
   An employee holding a valid license or certificate permitting the practice of law or medicine is exempt if:
   
   
   1. The employee is actually engaged in the practice of law or medicine; or
      
      
   2. An employee holding the requisite academic degree for the general practice of medicine is engaged in an internship or resident program for the profession.
      
      Note: The salary and salary basis requirements to do not apply to bona fide practitioners of law or medicine.
      
      
9. Computer employees
   
   Computer employees are exempt if:
   
   
   1. They earn $455.00 per week or, if paid hourly, $27.63 per hour;
      
      
   2. Their primary duty requires theoretical and practical application of highly-specialized knowledge in computer system analysis, programming, software engineering;
      
      
   3. They are employed and engaged in these activities as a computer systems analyst, computer programmer, software engineer, or other similarly skilled worker in the computer software field, which includes work requiring the consistent exercise of discretion and judgment;
      
      
   4. Their primary duty consists of one or more of the following:
      
      
      1. the application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;
         
         
      2. 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;
         
         
      3. The design, documentation, testing, creation or modification of computer programs related to machine operating systems, or
         
         
      4. A combination of these duties, the performance of which requires the same level of skills.
         
         
10. Outside sales employees
    
    Outside sales employees are exempt from overtime pay requirements if:
    
    
    1. Their primary duty is making sales or obtaining orders or contracts for services of for the use of facilities for which a consideration will be paid by the client or customer; and
       
       
    2. They are customarily and regularly engaged away from the employer's place or places of business in performing such primary duty.
       
       Note: The minimum salary requirement does not apply to outside sales employees.
       
       "Sales" includes any sale, exchange, contract to sell consignment for sales, shipment for sale, or other disposition. It includes the transfer of title to tangible property, and, in certain cases, of tangible and valuable evidence of intangible property.
       
       "Obtaining orders or contracts for services or for use of facilities" includes the selling of time on radio or television, the solicitation of advertising for newspapers and other periodicals, and the solicitation of freight for railroads and other transportation agencies. The word "services" extends the exemption to employees who sell or take orders for a service, which may be performed for the customer by someone other than the person taking the order.
       
       "Away from Employer's Place of Business" means that the employee makes sales at the customer's place of business, or, if selling door-to-door, at the customer's home. It does not include sales made by mail, telephone or the Internet unless such contact is used merely as an adjunct to personal calls. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer's places of business, even though the employer is not in any formal sense the owner or tenant of the property.

Current through October, 2004.

Sources:

United States Department of Labor's Website, www.dol.gov/esa, including numerous fact sheets prepared by the DOL.

AFL-CIO Website,www.aflcio.com, including "Fact Sheet: Bush Administration's New Overtime Pay Restrictions Hurt Working Families And The Economy," copyright 2004.

"Labor Department Overhauls Overtime Regulations," Lawyers Weekly USA, by Reni Gertner.