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The new U.S. Department of Labor overtime regulations took effect Aug. 23. Pennsylvania, however, like several other states, has its own overtime law that is unaffected by the changes in the federal rules. Employees in Pennsylvania must meet the requirements of both the new federal rules and state law in order to qualify as exempt. Thus, Pennsylvania overtime may become a trap for the unwary, leading to significant liability for unpaid overtime. The new federal regulations revise the so-called “white collar” exemptions to the minimum wage and overtime rules of the Fair Labor Standards Act (FLSA). The regulations raise the minimum salary levels for exempt employees to $455 per week and provide new and reorganized duties tests for the executive, administrative, professional and computer professional exemptions, as well as a new and reorganized duties test for outside sales employees. The regulations also establish a new exemption for highly compensated employees who earn at least $100,000 annually. The regulations also make three significant changes to the rules governing the “salary basis” test for exempt employees. First, the regulations establish a “safe harbor” provision allowing employers to correct improper deductions from the salary of exempt employees without losing the employee’s exempt status. Second, the regulations permit employers to impose unpaid disciplinary suspensions on exempt employees in daily, rather than weekly, increments. Finally, the regulations clarify the DOL’s position that exempt employees may receive payments in addition to their salary, including overtime on an hour-for-hour basis, without losing their exempt status, as long as the employees satisfy the salary basis test. The Pennsylvania overtime statute follows the old federal short and long tests. Employees in Pennsylvania generally will be properly characterized as exempt under both state and federal law if they were exempt under the old federal short or long test; they satisfy the new FLSA test for an exempt executive, administrative, professional or outside sales employee; and they are paid on a salary basis, as that term is defined in the FLSA regulations. Employees who were not exempt under the old federal short or long duties test cannot be exempt in Pennsylvania, even if they would be exempt under the new federal rules. As a result, Pennsylvania employers are not permitted to take advantage of the new federal highly compensated employee exemption. Nor does Pennsylvania recognize an exemption for business owners. However, Pennsylvania employers will be permitted to take advantage of the changes to the federal salary basis test, including the new safe harbor provisions. Executive Employees To qualify for the executive exemption, Pennsylvania employees must be exempt under both the state and federal tests: Salary basis of $455 per week. Primary duty: management of the enterprise or a recognized department or subdivision. Customarily and regularly directs the work of two or more other employees. Has authority to hire or fire other employees (or recommendations as to hiring, firing, promotion or other change of status of other employees are given particular weight). The federal regulations make two other significant changes to the executive exemption. The “sole charge” exemption, which covered employees in sole charge of a recognized subdivision of the employer’s business, has been deleted. A new exemption has been added for employees who own at least a 20 percent equity interest in the business and who are actively engaged in its management. The salary test does not apply to this new exemption for business owners, so there is no minimum salary requirement. However, Pennsylvania has no corresponding exemption. Administrative Employees To qualify for the administrative exemption, Pennsylvania employees must be exempt under both the state and federal tests: Salary basis of $455 per week. Primary duty: performing office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers. Exercises discretion and independent judgment with respect to matters of significance. Learned Professionals To qualify for the learned professional exemption, Pennsylvania employees must be exempt under both the state and federal tests: Salary basis of $455 per week. Primary duty: performing 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. Consistently exercises discretion and judgment. Creative Professionals To qualify for the creative professional exemption, Pennsylvania employees must be exempt under both the state and federal tests: Salary basis of $455 per week. Primary duty: performing work requiring invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor. Computer Professionals Pennsylvania has no specific exemption for computer professionals. Therefore, computer professionals in Pennsylvania are exempt when they qualify under executive, administrative or learned professional exemptions. To qualify for the computer professional exemption employees in other states must satisfy the federal test: Salary basis at least $455 per week or paid on an hourly basis at least $27.63 per hour. Primary duty: (A) application of systems analysis techniques and procedures, including consulting with users to determine hardware, software or system functional specifications; or (B) 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) 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. Employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field. Outside Sales Employees To qualify for the outside sales exemption, Pennsylvania employees must be exempt under both the state and federal tests: Pennsylvania Test Salary basis not required. Employed for the purpose of and customarily and regularly engaged more than 80 percent of his or her work time away from the employer’s place of business in making sales; or in obtaining orders or contract for services or for use of facilities for which a consideration will be paid by the client or customer. Does not devote more than 20 percent of the hours worked to activities that are not incidental to and in conjunction with the employer’s own outside sales or solicitations. New Federal Test Salary basis not required. Primary duty: making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer. Customarily and regularly engaged away from the employer’s place or places of business. High Compensation Because Pennsylvania has no analogous exemption, Pennsylvania employees cannot qualify for this exemption. To qualify for the new exemption for highly compensated employees, employees in other states must satisfy the federal test: Salary basis at least $455 per week and receive total annual compensation of $100,000 or more (including non-discretionary bonuses and commissions). Perform office or non-manual work. Customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee. Permissible Pay Docking Under the new federal regulations, pay may be docked from an exempt employee, while maintaining the employee’s status as someone paid on a “salary basis,” only under the following circumstances: When an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability; For absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability; When an exempt employee violates safety rules of major significance; When an exempt employee is in good faith suspended for one or more full days for infractions of workplace conduct rules applicable to all employees; For initial and terminal weeks of employment; or When an exempt employee takes unpaid leave under the Family and Medical Leave Act. The Safe Harbor Provisions Under the new federal regulations, an employer that impermissibly deducts from the salary of an exempt employee will not lose the exemption if the employer does all of the following: Has a written policy prohibiting improper pay deductions including a complaint mechanism; Notifies employees of that policy; Reimburses employees for any improper deductions; and Does not repeatedly and willfully violate the policy or continue to make improper deductions after receiving employee complaints. An employer who fails to satisfy the requirements of the safe harbor provisions will lose the exemption for all employees who are in the same job classification as the employee whose salary was improperly docked and who are supervised by the managers responsible for the improper deduction for the entire time period when improper deductions were being made. Thus, in the absence of a safe harbor policy, improper deductions can prove extremely costly. Additional Payments The new regulations clarify DOL’s long-held position that exempt employees may receive payments in addition to their salary without losing their exempt status. The regulations permit exempt employees to have their salary computed on an hourly, daily or shift basis. So long as exempt employees receive a guaranteed minimum salary of at least $455 per week, their salary bears a reasonable relationship to their compensation earned, and no impermissible deductions are made from that salary, an otherwise exempt employee’s status will not be threatened if that employee receives additional compensation for work beyond the employee’s normal workweek. This additional compensation may be paid as a flat sum, a bonus or an hourly amount. It may also include additional paid time off. In short, under the new regulations, paying overtime (either straight time or time-and-a-half) to exempt employees or granting them compensatory time off (even on an hour-for-hour basis) will not threaten their exempt status. This clarification of the rules will allow employers to compensate their exempt employees for additional time worked without fear of losing the exemption. Other States No state overtime statute: Alabama, Arizona, Delaware, Georgia, Iowa, Louisiana, Mississippi, Nebraska, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah and Virginia. Statute applies only to state employees: Florida, Idaho and Wyoming. Statute does not apply to those subject to the FLSA: Arkansas, Indiana, Kansas, Michigan, Missouri and New Hampshire. State exempts employees exempt under the FLSA: New York State relies on the FLSA definitions of executive, administrative and professional exemptions: Maine, Massachusetts, North Carolina, Ohio, Rhode Island, Vermont and Washington, D.C. State overtime tests differ from the new federal test: Alaska, California, Colorado, Connecticut, Hawaii, Illinois, Kentucky, Maryland, Minnesota, Montana, Nevada, New Jersey, New Mexico, North Dakota, Oregon, Washington, West Virginia and Wisconsin. Shannon Farmer is an associate in the labor and employment group at Ballard Spahr Andrews & Ingersoll. She concentrates her practice in representing employers in all aspects of labor and employment law. She can be reached at 215-864-8221 or [email protected]. If you are interested in submitting an article to law.com, please click here for our submission guidelines.

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