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Stay on the Safe Side in Claiming Administrative Exemptions from Overtime Regs

08/20/08

HR people working for employers covered by the Fair Labor Standards Act—which probably includes you—are usually aware that higher-level employees rate an exemption from the law’s overtime regulations. If the CEO works sixty hours a week, for example, she doesn’t get time-and-a-half for the twenty hours worked above the standard forty-hour workweek. She gets her basic salary no matter how many hours she works.

That’s called the “executive exemption,” and it’s often not hard to conclude that an employee either rates one or does not. But things get dicier when you try to apply another kind of exception to FLSA overtime regulations, the administrative exemption. Here is the so-called “short test” for determining when it is appropriate:

  1. The employee gets a salary of at least $250 per week.
  2. The employee has a primary duty consisting of office or nonmanual work directly related to management policies or the general business operations of the employer or the employer’s customers.
  3. The employee exercises discretion and independent judgment in performing the primary duty.

Test Yourself
A man filed suit against his employer under the FLSA, claiming he was owed overtime pay. His employer disputed this, saying he had an administrative exemption. Here are some of the facts:

The employer designs, manufactures, and sells robotic test and inspection equipment for the data storage industry. It hired the man as a field service engineer and assigned him to just one customer. He spent most of his time at the customer’s facility.

The employer described the man’s job duties as being in constant communication with the customer’s management and production employees, identifying problems and proposing solutions, determining whether equipment was under warranty, performing site inspections, attending meetings with the customer’s personnel, exercising discretion and independent judgment in keeping the customer happy, staffing and supervising installations, and setting his own schedule. In addition, the job description said that he supervised two to six employees.

The employee, however, disputed the record. He said that his job was to install, troubleshoot, and maintain the company’s products at the customer’s facility—period. He claimed he couldn’t make any but the most trivial decision without consulting his supervisor. On the other hand, he did have impressive job skills and used them daily to install and service very sophisticated equipment.

You be the judge—exempt or nonexempt?

Courts Disagree
The federal district court that first heard the case sided with the employer. The man appealed, and the Ninth Circuit Court of Appeals, judging by the opinion it delivered, took pleasure in delving into the facts of this case. It spent pages analyzing whether the man’s work was directly related to management policies or general business operations, whether he showed independent judgment in doing his job, whether the work was of substantial importance, and the extent to which he exercised discretion.

In the end, the appeals court reversed the district court’s decision. It sent the case back to be retried “for further factual development and findings.” Employers, in such situations, often cut their losses and settle with the employee.

What’s an Employer to Do?
This is not a satisfying conclusion to the case for readers looking for black-and-white criteria about when the administrative exemption is an option. But the case is nonetheless instructive.

Lesson one: Intelligent, knowledgeable people, including judges and lawyers, disagree on the nature of the administrative exemption and when it applies. Every situation is unique, and there are gray areas. If you desire certainty, the safest route is to classify an employee as hourly (nonexempt).

Lesson two: It’s up to the employer to prove that an employee is exempt. Don’t classify a job as exempt impulsively; give it serious thought and maintain documentation that supports your decision.

Lesson three: Make sure the job description accurately describes the duties involved. Look at each individual and what they do each day—not at the job title, which is often irrelevant.

Lesson four: Don’t presume a person with high-level skills working in a high-level position is automatically exempt. As the U.S. Department of Labor points out, employers err when they confuse “acquired job skills with the exercise of independent judgment and discretion.”

HR consulting firm Hewitt Associates offers these additional tips for classifying jobs as exempt or nonexempt:
  1. Don’t rely on grade level or status as indicators. Develop good processes to categorize jobs, like job descriptions, and use them.
  2. Use a team approach when classifying employees as exempt or nonexempt. Team members should include HR people and legal counsel.
  3. Audit compliance with the FLSA annually. Take a careful look at jobs with high staff counts, jobs created due to mergers or acquisitions, jobs redefined after internal reorganizations, and job changes due to advances in technology and work processes.
The more you know about the FLSA, the better. Educate yourself by picking up a copy of G.Neil’s new Wage and Hour Law Understood.


Other useful guides to wage-and-hour law include:
The Employer's Legal Handbook
Federal/State Law Manuals
FLSA Policy Forms