Over-Reliance on the Administrative Exemption

Section 13(a)(1) of the Fair Labor Standards Act exempts certain administrative employees from the Act's overtime pay requirements. Of the four primary exemptions under Section 13(a)(1), employers most frequently misapply, and thus over-rely upon, the administrative exemption test.

The Administrative Exemption Test

To qualify for the administrative employee exemption, all of the following must be satisfied:

• The employee must be compensated on a salary or fee basis at a rate of not less than $455 per week;
• The employee's primary duty must be 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
• The employee's primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

According to the Supreme Court of the United States, this exemption must be "narrowly construed against employers" seeking to apply it, and its application must be "plain and unmistakable." Also, the burden of proving application of the exemption is on the employer, and the employer must establish the propriety of the application by clear and convincing evidence. Collectively, these standards mean that the employer will lose any dispute that involves a close call of either the facts or the law.

Areas of Over-Reliance

Employers frequently over-rely on the administrative exemption for office, clerical and non-production staff in one or more of four areas: primary duty, direct relationship to management, discretion and judgement, and significance.

Primary Duty

The primary duty of the employee in question must satisfy all aspects of the test. This means qualifying work with qualifying exercise of discretion and independent judgment must be the principal, main, major or most important duty that the employee performs. All too often, employers rely upon the administrative exemption if the employee performs any qualifying work. The performance of qualifying administrative work on occasion is insufficient.

Directly Related to Management

The primary duty in question must directly relate to management or general business operations. Tnis means those duties involved in running or servicing the business establishment as distingquised, for example, from those involved in production or selling the products or providng the services of the establishment.

Applying the administrative-production dichotomy can be more difficult in service-providing settings as compared to manufacturing. The key is that non-manufacturing employees should be considered "production" employees in those instances where their job is to create or to provide (or assist in this effort) the very services that the establishment offers to the public.

Employers frequently misapply the administrative exemption test when they focus on the indispensability or relative importance of the job in question. Someone with whom the business believes it "cannot do without" is often improperly deemed an administrative-exempt employee. This is the wrong focus. Application of the test depends upon the nature of the work involved, not the consequences of performance.

Qualifying work often is performed in the areas of finance and accounting, insurance, purchasing and procurement, advertising and marketing, human resources, information technology and legal compliance. However, this does not mean that all positions in these fields qualify or that other fields do not. A good rule of thumb is to identify people who have substantively helped develop, implement or conduct compliance with general business policies and objectives.

Discretion and Judgment

The routine application or enforcement of employer policies and procedures does not qualify as exempt administrative work. The employee must regularly exercise discretion and independent judgement. This involves the comparison and evaluation of possible courses of action or making a decision based on those courses of action. "Independence" requires that the employee be free from immediate direction or supervision. However, the employee need not have ultimate authority in all respects. Indeed, the fact that an employee's discretionary decisions may be revised or reversed after subsequent review does not mean that the employee is not exercising the requisite discretion and judgement. Factors to consider are:

• Whether the employee has the authority to formulate, affect, interpret or implement management policies;
• Whether the employee carries out major assignments in business operations;
• Whether the employee has the authority to commit the employer in matters that have a significant impact on operations; and
• Whether the employee has the authority to waive or deviate from established policies or procedures without prior approval.

Significance

The employee's exercise of discretion must be on matters of significance to the employer. Again, this focuses on the nature of teh matter, not the cvonsequences of the employer's failure to perform properly. For example, an employee responsible for formulating and implementing new benefits policies would be handling a matter of significance. An employee operating a piece of equipment with a $200,000 replacement cost on an improtant job would not be handling a matter of significance for purposes of this test.

Posted by Thamer E. "Chip" Temple III