Introduction
When the United States Department of Labor (DOL) issued its proposed modifications to its white collar exemption regulations in 2003, the regulations were widely seen as a victory for management interests.  The victory was short lived, however, as the final regulations issued on April 20, 2004 rescinded many of the employer-friendly provisions and added provisions that favored employees.  As a result, the new regulations are essentially unchanged in many respects relevant to public employment.  However, there are five significant changes in the final regulations that will impact the public sector.

History of Regulations
The Fair Labor Standards Act (FLSA) was enacted in 1938 to remedy poor working conditions in factories and to encourage additional employment by requiring employers to pay overtime to employees who were required to work more than 40 hours in a workweek.¹  However, Congress exempted executive, administrative and professional employees – commonly known as white collar employees - from the FLSA’s minimum wage and overtime requirements, without defining the terms executive, administrative and professional.²  The United States Department of Labor (DOL) was authorized to issue regulations to define those terms and clarify other aspects of the FLSA.³  The DOL’s white collar regulations are contained in Part 541 of Title 29 of the Code of Federal Regulations.

Since, the white collar regulations were first issued by the DOL in 1938, the regulations focused primarily on industrial jobs.  There was no mention of public agencies in the regulations, nor was it contemplated that the regulations would apply to public agencies.  The examples given were typically of factory workers at a manufacturing company that had a clear demarcation between line workers and management.⁴  However, as the U.S. economy evolved into a modern service oriented economy, the regulations remained unchanged, causing increasing difficulties for employers and courts who attempted to apply the regulations.⁵  Prior to this year, the last significant substantive update of the DOL’s white collar exemption regulations occurred in 1954.⁶

The DOL proposed sweeping changes to the regulations on March 31, 2003.⁷  Although there were legislative efforts to block the new regulations, those efforts ultimately failed.⁸  However, the 75,280 public comments that the DOL received regarding the proposed regulations were successful in drastically modifying the proposed regulations.  The final regulations which go into effect on August 23, 2004 bear less resemblance to the regulations proposed on March 31, 2003 than the regulations from 1954.

Legal Force of the DOL Regulations
Not all DOL regulations have equal legal significance.  Some of the DOL’s “regulations” contained in Title 29 of the Code of Federal Regulations, such as Parts 778 (Overtime) and 785 (Hours Worked), are not even regulations – they are interpretative bulletins that were not adopted pursuant to formal rulemaking procedures.  Those interpretative bulletins, as well as the DOL’s opinion letters and enforcement policies, are not legally binding on courts, although they may provide an employer with a good faith defense for mistakenly following the DOL’s advice.⁹

For the regulations adopted pursuant to formal rulemaking requirements, such as the public sector regulations in Part 553, their legal effect depends upon whether the relevant portion of the FLSA is clear or is ambiguous.  For example, recent court decisions regarding the compensatory time off provisions of the regulations have ignored the DOL’s regulations and opinions on the usage of compensatory time off after finding that the FLSA language is clear on requirements for the use of compensatory time off.¹⁰  However, if an administrative agency is specifically delegated authority to issue regulations to implement a statute, like the FLSA, the regulations enacted pursuant to that delegation of authority have the force of law.¹¹  Since the DOL was given authority by Congress to enact regulations regarding the executive, administrative and professional exemptions, those regulations have the force of law, unlike its other regulations.

Although private employers in California are covered by the FLSA, they generally follow the IWC overtime wage orders to determine the exempt status of their employees, as the IWC exemption tests are more stringent than the FLSA tests.  California courts have been inundated with overtime exemption lawsuits in the wake of a 90 million dollar verdict against Farmers Insurance Exchange Company in July 2001 for misclassifying insurance adjusters as overtime exempt employees.¹²  However, the IWC wage order provisions on overtime do not apply to public employers in California, with the possible exception of agricultural employees.¹³  Therefore, public employers need only follow the FLSA regulations to determine which employees are entitled to overtime.  Additionally, state agencies and arms of the state, such as school districts and community colleges, enjoy Eleventh Amendment immunity from suits by private individuals for FLSA violations, although the DOL could still bring suit against them.¹⁴

Use of Regulations in Public Sector
The FLSA did not fully and finally apply to the public sector until 1986.¹⁵  Prior to that time, there was no reference to the public sector in the white collar regulations.  When the DOL created a separate section of the regulations for public agencies, Part 553, the DOL did not include any regulations regarding overtime exemptions.  The only time, prior to this year, that the FLSA white collar regulations were amended specifically for public employers was in 1992, when the DOL amended its controversial regulation on docking of pay for partial day absences of exempt employees in response to Abshire v. County of Kern.¹⁶

The salary test for exemption was either $155 for the long test or $250 per week for the short test, both of which were less than California’s minimum wage ($270 for a 40 hour week.)  The duties required to be exempt under the short and the long tests were frequently confused and misapplied, even by appellate courts.  The administrative exemption in particular was not well suited to today’s service oriented economy.¹⁷  Finally, the salary basis test resulted in significant and very costly litigation over such seemingly arcane issues as whether an employee was exempt if she was suspended for five workdays but non-exempt if she was suspended for four or six workdays.¹⁸  The DOL finally fulfilled its oft-repeated promise to revise the regulations on March 31, 2003.

The DOL’s Proposed Regulations
The regulations proposed on March 31, 2003 contained sweeping changes to the salary and the duties required for exempt employees.¹⁹  The proposed regulations were widely viewed as a significant victory for management interests, as they expanded the coverage of the administrative and professional exemptions, although they arguably toughened the standards for the executive exemption.  The proposed regulations also replaced the long and short salary tests with a single salary test of $425 per week.

The most controversial aspect of the proposed regulations was a new highly compensated employee exemption.  That exemption would have allowed employers to treat virtually any employee who performed office or non-manual work and earned at least $65,000 annually as exempt.

The DOL’s Final Regulations
The DOL refers to the final regulations as its “overtime security” rules.  The DOL received 75,280 public comments during the 90 day comment period.²⁰  While only a small fraction of these comments were from public agencies, the DOL heard the complaints of public employees loud and clear.²¹  The final regulations contain a new provision specifying that the first responders to a crime, accident, fire or rescue –primarily police officers and firefighters – are non-exempt.  This provision was in response to comments that the proposed highly compensated employee exemption contained a salary level - $65,000 annually – that would result in a significant number of safety employees losing their overtime.

There are five provisions in the new regulations that will significantly affect public employers.  In addition to the new first responder rule, the regulations specify that public safety inspectors cannot meet the administrative duties test, which clarifies a previously confusing area of the regulations.  The  revised salary basis test permits daily suspensions of exempt employees, which should eliminate most of the salary basis lawsuits against public agencies.  The limitations on employer liability for salary basis violations, including the new safe harbor rule, should significantly reduce the number of salary basis lawsuits.  Finally, the executive exemption requires that an employee have the ability to hire and fire other employees or make decisions that result in a tangible change in job status of employees.

The changes to the administrative and professional regulations are very minor.  The raise in the salary required to be exempt as a highly compensated employee from $65,000 to $100,000 annually will largely eliminate the impact of that regulation in the public sector.  The DOL also significantly modified the outside sales exemption, which will similarly have minimal impact in the public sector.

Salary Basis Test
The final regulations eliminate the former long and short tests and provide for a single salary minimum of $455 per week.  Payment on a salary basis requires a predetermined amount of pay on a weekly or less frequent basis, that is not “subject to reduction because of variations in the quality or quantity of the work performed."²²  Thus, if the employee performs any work in a work period, the employee must receive his or her full salary regardless of the number of days or hours worked, unless one of the exceptions listed below is met.²³  However, if the employee does not provide any work in that work period, the employee generally does not need to be paid for that work period.²⁴  Doctors, teachers, attorneys, and computer programmers are the only exempt employees who do not have to be paid on a salary basis.²⁵

 Permissible Deductions From the Salary of An Exempt Employee
The most significant difference between public and private sector employees in the DOL white collar regulations is the ability of public employers to deduct pay for partial day absences.  The new regulations do not alter this rule, which was established by the DOL in 1992 in response to the Ninth Circuit decision in Abshire v. County of Kern.  Partial day deductions are permitted when an employee is paid pursuant to a pay system established by statute, ordinance, or regulation, or by a policy or practice established pursuant to principles of public accountability, under which the employee accrues personal leave and sick leave and which requires the public employee’s pay to be reduced or such employee to be placed on leave without pay for absences of personal reasons or because of illness or injury of less than one workday when accrued leave is not used by an employee because:

• permission for its use has note been sought or has been sought and denied;

• accrued leave has been exhausted; or

• the employee chooses to use leave without pay.²⁶

The regulations also expressly allow public entities to deduct for absences due to a budget‑required furlough.²⁷   However, employees not paid on a salary basis because of such budget reductions will lose the exemption for the workweek in which the furlough occurs and for which the employee’s pay is accordingly reduced.²⁸ 

The new regulations, like the old regulations, permit deductions for absences of one or more days due to personal reasons, or if the employer offers sick leave and the employee has exhausted his available sick leave.²⁹  The final regulations also include a regulation that was previously buried in the Family and Medical Leave Act (FMLA) regulations that permits employers to deduct salary for exempt employees who use FMLA leave intermittently without losing the exemption.³⁰  The DOL rejected requests by employers to add a regulation providing that payroll deductions due to computer payroll system errors were not impermissible dockings.³¹  The regulations preclude deductions for absences of an employee caused by jury duty, attendance as a witness, or temporary military leave.³²

The regulations also specifically state that any form of compensation in addition to the guaranteed weekly salary is permitted for exempt employees, such as overtime on any basis (straight time, time and a half, double time, flat fee, etc.) or compensatory time off.³³  Additionally, the comments to the regulations specify that use of accrued leave is not a deduction in pay and is therefore permissible for any amount of time, which has been the consistent position of courts and the DOL.³⁴  The comments also note that an employer may require exempt employees to record and track their hours worked and to work a set schedule of hours.³⁵

The final regulations also contain a confusing provision that seems contrary to the well established principle that exempt employees are paid based upon a salary, not based upon an hourly rate.  The provision states that the compensation for an exempt employee may be calculated on an hourly, daily or shift basis if the employee receives a guaranteed weekly salary and a reasonable relationship exists between the guaranteed salary and the amount actually earned.³⁶  The reasonable relationship requirement only applies to instances where the actual salary will fluctuate, not commissions or additional payments based upon additional work.  This regulation could apply in the public sector to supervisors of twenty four hour operations, such as water or utility agencies, where the supervisor works a work varying number of shifts per week.

Daily Suspension Rule
By far the most significant change to the salary basis test for public employers is the elimination of the rule that only permitted full workweek disciplinary suspensions.  The rule resulted in extensive litigation in the public sector.  It also forced public employers to choose between issuing a five day suspension or a written reprimand for minor misconduct.  This had the effect of either weakening the employer’s progressive discipline policy or harshly punishing an employee for a relatively minor offense.

The final DOL regulations eliminate this misguided rule and permit daily suspensions for misconduct if:

1. The discipline is for a violation of a workplace conduct rule;

2. The discipline is imposed in good faith; and

3. The disciplinary suspension is imposed pursuant to a written policy that is applicable to all employees.³⁷

The DOL noted that this modification also conformed the regulations to employment laws, such as sexual harassment under Title VII, which impose strict liability upon employer for supervisory harassment if the employer does not take prompt remedial action.³⁸  The term “workplace conduct” is only intended by the DOL to refer to workplace misconduct, not performance or attendance issues.³⁹  The written policy does not have to list every possible ground for discipline, but rather put the exempt employee on notice that she could be subject to a full day suspension.⁴⁰

Additionally, the rule only permits full day suspensions.  Fines, reductions in pay, and other monetary penalties are still prohibited for exempt employees, except for infractions of safety rules of major significance.⁴¹  The DOL intends for the disciplinary suspension rule to be a narrow exception to the salary basis test.⁴²

Effect of Improper Deductions
The new regulations provides that an employee’s exempt status will only be lost if there is an “actual practice” of improper deductions by the employer.⁴³  The factors considered when determining whether the employer has an actual practice of improper deductions include, but are not limited to:

• The number of improper deductions, particularly as compared to the number of employee infractions warranting discipline;

• The time period during which the employee made improper deductions;

• The number and geographic location of employees whose salary was improperly deducted;

• The number and geographic location of managers responsible for taking the improper deductions; and

• Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.⁴⁴

1. Only for employees within the same job classification as the original affected employee and who work for the same manager(s) responsible for the improper deductions; and

2. Only during the time period in which the improper deductions were made.⁴⁵

• Maintaining a clearly communicated policy prohibiting improper pay deductions, including a complaint mechanism;

• Reimbursing its employees for any improper pay deductions; and

• Making a good faith commitment to comply in the future.⁴⁷

The safe harbor provision applies regardless of the reason for the improper deduction.  However, if an employer continues to violate its policy prohibiting improper deductions after receiving employee complaints, the employer will be barred from utilizing the safe harbor provision.⁴⁸  The DOL recognized in its comments to the final regulations that employers will need a reasonable amount of time to investigate employee complaints.⁴⁹  The DOL has indicated it will publish a model safe harbor policy for employers.⁵⁰

Duties Tests
Although the proposed regulations contained sweeping changes to the executive, administrative and professional exemptions, the final regulations largely reverted back to the existing outdated regulations.  The changes to the administrative and professional exemptions are cosmetic.  The executive exemption is the only exemption with substantive changes, and the effect of those changes will likely be to make additional public employees entitled to overtime.

For all of the exemptions, the regulations define an employee’s “primary duty” as “the principal, main, major or most important duty that the employee performs."⁵¹  A determination of what tasks constitute an employee’s primary duty must be made on a case-by-case basis.  The DOL places major emphasis on “the character of the employee’s job as a whole.”  The DOL regulations provide the following non-exclusive list of factors to consider to determine the primary duty of an employee:

• The relative importance of the exempt duties as compared with other types of duties;

• The amount of time spent performing exempt work;

• The employee's relative freedom from direct supervision; and

• The relationship between the employee's salary and the wages paid to other employees for the kind of nonexempt work performed by the employee.⁵²

An employee’s primary duty does not require that the employee spend over fifty percent of his or her time performing exempt work to qualify.⁵³  Moreover, only time that would be considered hours worked under the FLSA is considered in determining an employee’s primary duty.  Thus, standby or on-call time is not counted in determining how much time an employee spends in the performance of his or her duties.⁵⁴

Executive Exemption
The proposed regulations required that the executive employee have the authority to hire or fire other employees.  However, a large number of public sector employers complained that civil service systems frequently do not allow most managers to make hiring and firing decisions.⁵⁵  The DOL responded to the public sector comments by modifying the final regulation to require that an executive employee have either the authority to hire and fire other employees or have particular weight given to her suggestions and recommendations as to any change in the status of other employees, such as hiring, firing, promotion or other tangible employment actions.⁵⁶  The term particular weight considers whether the employee’s job duties include such recommendations, the frequency with which the employee makes or is requested to make recommendations, and the frequency with which the recommendations are relied upon by management.⁵⁷  Nevertheless, the DOL expects some public sector employees – particularly safety employees - to lose their exempt status due to the change in the executive duties test.⁵⁸

The other two requirements for the executive exemption are the same as in the former regulations.  The executive employee must also:

1. Have a primary duty of managing the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof; and

2. Customarily and regularly direct the work of the equivalent of at least two full time employees.

Administrative Exemption
One of the key reasons cited for the proposed changes to the regulations was the confusion and extensive litigation over the administrative exemption.⁵⁹  The proposed regulations replaced the requirement that an employee exercise “independent judgment and discretion” with the requirement that an employee “hold a position of responsibility with the employer."⁶⁰  The comments that the DOL received convinced it that although the old standard was vague and difficult to apply, a new standard would be even more ambiguous and could greatly expand the administrative exemption.⁶¹  Therefore, the DOL retained the standard of independent judgment and discretion that it admits has caused confusion, has “caused unnecessary litigation”, and has become “progressively more difficult to apply."⁶²

Under the final regulations, an administrative employee has a primary duty that:

1. consists of 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. includes the exercise of discretion and independent judgment with respect to matters of significance.⁶³

The only significant change to the administrative duties test was to specify that it could be satisfied by an employee who performed work relating to the management or general business operations of the employer’s customers.⁶⁴  Since the regulation has only minimally changed, much of the existing case law will still apply in interpreting this exemption.  One of the reasons given by the DOL for retaining the confusing standard was its desire to not “jettison” decades of court decisions on the administrative exemption.⁶⁵

For public agencies, the most significant revision is in the DOL’s analysis of sample positions.  The DOL specifically states that public sector inspectors or investigators of various types, such as fire prevention or safety, building or construction, health or sanitation, environmental or soils specialists, and similar employees cannot meet the administrative exemption.⁶⁶

 The DOL also added a regulation that permits employees who utilize manuals regarding complex matters to still satisfy any of the exemptions.⁶⁷  In particular, the DOL sought to repudiate the holding in Hashop v. Rockwell Space Operations Co., 867 F.Supp. 1287 (S.D.Tex. 1994), in which persons who had engineering degrees and trained Space Shuttle ground controllers on simulated Shuttle missions did not meet the professional exemption because they followed specific guidelines that dictated procedures to follow during simulated Shuttle missions.  (Id. at 1299.)

The administrative exemption also retains a separate exemption for education administrators.  There are two changes to this exemption.  First, the salary test for educational administrators is now either $455 per week, or the entrance salary for teachers at that institution.  Second, the regulations specify that academic counselors will meet the administrative exemption.⁶⁸  The DOL specifically declined to add admissions counselors to its examples of exempt administrative employees.⁶⁹

Professional Exemption
The proposed revisions to the professional regulation appeared to significantly expand the exemption to include positions where the requisite knowledge was obtained through work experience and intellectual instruction.  The DOL removed this proposed change, stating that it did not intend for the exemption to be interpreted in that manner.⁷⁰  The final regulation is essentially a restatement of the existing professional exemption with no substantive change, although the DOL did add a number of occupations to its list of examples of professionals.⁷¹

The regulations provide an exemption for professional employees whose primary duty is the performance of work:

1. requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction (i.e., the "learned" professional); or

2. requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor (i.e., the "creative" professional).⁷²

The teaching professional exemption includes any employee with a primary duty of “teaching, tutoring, instructing or lecturing in the activity of imparting knowledge and who is employed and engaged in this activity as a teacher in an educational establishment."⁷³

First Responder
The new regulations mandate that certain “first responders” are not eligible for the white collar exemptions.  Specifically, the new overtime exemptions “do not apply to police officers, detectives, deputy sheriffs, state troopers, highway patrol officers, investigators, inspectors, correctional officers, parole or probation officers, park rangers, fire fighters, paramedics . . . and [other] similar employees, regardless of rank or pay level, who perform work such as preventing, controlling or extinguishing fires of any type; rescuing fire, crime or accident victims; preventing or detective crimes . . .; pursuing, restraining and apprehending suspects . . .; preparing investigative reports; or other similar work."⁷⁴

The first responder regulation was intended to address concerns raised by members of the public that the revisions to the DOL regulations would deprive police officers and firefighters of the overtime that they previously earned.  The regulation does not affect the ability of an employer to adopt a work period between 7 and 28 days for its law enforcement and fire protection employees pursuant to section 7(k) of the FLSA.  However, supervisors who frequently respond to calls for service may become non-exempt, as the regulation applies “regardless of rank or pay level.”  The regulation does not alter the primary duty test for the white collar exemptions.  Rather, it indicates that the primary duty of a safety employee who fights fires, rescues victims, apprehends criminal suspects or investigates crimes or fires cannot be executive, administrative or professional in nature.

In the preamble to the regulations and in public speeches, the DOL has stated that police sergeants cannot be exempt from overtime.⁷⁵  However, the DOL also noted on the same page of the preamble that it “has no intention of departing from this established case law” (referring to court cases on the exempt status of police officers, firefighters, probation officers, etc.)  The DOL also noted that some police officers, firefighters, paramedics and EMT’s who are currently treated as exempt may now earn overtime because of the requirement in the executive exemption that an executive employee have authority to hire, fire or make recommendations on tangible employment actions.⁷⁶  This comment by the DOL, using the word “may be entitled” instead of “shall be entitled”, coupled with its long standing policy that exemptions are not determined by title or job class, suggests that sergeants, police officers and firefighters could still be exempt in the rare instances that their jobs do not require them to be “first responders.”

Highly Compensated Employee
The proposed regulations contained a new exemption for highly compensated employees who earned $65,000 annually.  The DOL received many comments indicating that the $65,000 threshold was too low and would deprive many employees, including deprive police officers and firefighters, of overtime.  The proposed regulation would have resulted in some public sector employees becoming exempt, particularly in larger agencies.  However, the final regulations raised the salary threshold to $100,000, effectively minimizing the impact of this regulation on the public sector.  The highly compensated employee exemption requires that the employee:

1. Perform office or non-manual work;

2. Be paid a 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 (as identified above).⁷⁷

Although the minimum annual compensation excludes board, lodging, use of other facilities or payments for fringe benefits, the amount does include base salary, commissions, non-discretionary bonuses and other non-discretionary compensation.⁷⁸  If an employee fails to earn more than $100,000 during the year, the employee will not qualify for the highly compensated employee exemption for the prior year.⁷⁹  An employer may “make up” a final payment within one month after the end of the year to bring the employee above the $100,000 threshold for the previous year.  Any such “make up” payments made after the end of the one-year period, only apply to the prior year and cannot be credited as compensation paid in the new year.⁸⁰

The new regulations define the one-year period as any 52-week period (e.g., fiscal year, calendar year, anniversary date).⁸¹  If the employer fails to designate the one-year period in advance, the calendar year serves as the default.  Additionally, if an employee is hired or fired before the one-year period matures, the employee’s “annual compensation” is determined on a pro rata share of the $100,000 threshold.⁸²  Since the vast majority of public employees earning over $100,000 already satisfy the duties test for one of the white collar exemptions (except for first responders), very few public employees are likely to become exempt due to this new exemption. 

Conclusion
The DOL estimates the cost to the public sector to be twenty one million dollars in the first year of the regulations, or an average of $250 per public agency in the United States.  Very few, if any, public employees will lose their exempt status under the new regulations.  Some first responders, public safety inspectors and executives who lack authority to make personnel decisions will likely gain overtime under the new regulations.  If just one employee per agency gains overtime as a result of the new regulations, the DOL’s estimated cost is probably too low.  However, that cost could be offset by the reduction in salary basis litigation against public agencies for improper discipline now that daily suspensions are permitted.  What still remains for public employers and employees, however, is a series of complicated regulations that will still be difficult for employers, employees and courts to interpret and apply to the public sector.