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Global Hospitality Advisor: Politics Over, New ‘Overtime’ Law Takes Effect

In the wake of bruising partisan politics, the United States Department of Labor’s (DOL) much-anticipated overhaul of the federal white-collar employee overtime exemptions became effective on August 23, 2004. Depending upon who you ask, the regulations could deprive as many as six million or as few as 107,000 workers of federal overtime pay. However, there is no dispute that the new regulations provide significant employer-friendly changes to the DOL’s old white-collar exemption rules, but do not preempt higher state standards, such as those in effect in California. Here are some of the more significant changes:

New Highly Compensated Employee Exemption. The DOL regulations create a new exemption for “highly compensated employees.” The overtime exemption applies to employees who: (1) perform office or non-manual work; (2) are paid total annual compensation of at least $100,000 (including at least $455 per week on a salary or fee basis); and (3) customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.

New Remuneration Test. The new regulations significantly simplify the remuneration requirement of the exemptions while increasing the minimum salary required to meet the exemption. Under the new regulations, an employee must receive a minimum salary of $455 per week ($23,660 annually) to qualify for the executive, administrative or professional exemption. This “standard” remuneration test eliminates the confusing “short” and “long” tests with which employers have been burdened for years. Under the former regulations, the minimum weekly salary for the long test was $155, and the minimum weekly salary for the short test was $250.

New “Docking” Rules. The new regulations also expand an employer’s right to suspend exempt employees without pay. Under the old regulations, such a suspension could only occur in increments of a full workweek. Under the new regulations, suspensions in increments of one or more full days are permissible for violations of major safety rules or written workplace policies. This is a significant change as deductions in an amount less than a full workweek under the old regulations generally would ruin the employee’s exempt status.

Revised Duties Tests. The new regulations simplify the duties test for the executive exemption by eliminating the long and short tests and creating a standardized duties test. Under the new test, an exempt executive must be an employee: (1) whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; (2) who customarily and regularly directs the work of two or more other employees; and (3) who has the authority to hire or fire other employees or whose suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change in status of other employees are given particular weight.

Changes to the administrative exemption are more modest. The new administrative exemption applies to employees: (1) whose primary duty is 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 (2) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The new regulations also eliminate the old short and long duties test for the professional exemption. To meet the new professional exemption, the employee must have a primary duty of performing office or non-manual work: (1) requiring knowledge of an advanced type in a field of science or learning customarily required by a prolonged course of specialized intellectual instruction; or (2) requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor.

The computer employees exemption has been significantly revised by eliminating the requirement that the employee consistently exercise discretion and independent judgment. Under the new regulations, the exemption applies only to employees whose primary duty consists of: (1) the application of systems and analyst 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 systems or programs, including prototypes, based on and related to user or system design specifications; (3) the design, documentation, and testing, creation or modification of computer programs related to machine operating systems; or (4) a combination of the aforementioned duties, the performance of which requires the same level of skills. In addition, computer employees must earn at least $27.63 per hour (or receive more than $455.00 per week on a salary or fee basis) to qualify for the exemption.

No Preemption of State Law. When implementing the new regulations, employers should be mindful of more restrictive state law exemption requirements that may apply to their employees. For example, California’s minimum salary for its executive, administrative and professional exemptions is $540.00 per week. California employers who paid employees the lower federal minimum would lose the exemption. Employers must continue to comply with higher state law standards.

For more information, contact Scott Brink at 310.785.5365 or