Beware misclassifying workers as exempt administrative employees

February 27, 2009

Excerpted from Indiana Employment Law Letter written by attorneys at the law firm of Baker & Daniels

As employers know, certain employees aren't entitled to overtime pay under the federal Fair Labor Standards Act (FLSA). The most common exemptions include the executive, administrative, and professional exemptions. Because the administrative exemption is more nebulous than the executive and professional exemptions, employers often misclassify non-exempt workers as exempt administrative employees.

Although it should be all too familiar to most employers by now, those misclassified workers are entitled to back pay, liquidated damages, attorneys' fees, and litigation costs if they take the matter to court. This article explains the three requirements of the administrative exemption to help employers determine whether they are classifying employees properly.

HR Executive Special Report: Overtime Revisited: The DOL's Final Regulations

Three requirements
The administrative exemption has three requirements, all of which an employee must satisfy to qualify: (1) salary basis, (2) management or general business operations, and (3) discretion and independent judgment.

First requirement: salary basis
The first requirement of the administrative exemption is that the employee be paid at least $455 per week on a fee or salary basis. "Salary basis" is defined as a predetermined amount constituting all or part of an employee's compensation made on a regular weekly or less frequent basis that isn't subject to reduction because of variations in the quality or quantity of the work performed.

Subject to certain specified exceptions, the employee must receive the full salary for any week in which he performs work without regard to the number of days or hours worked, although he need not be paid for any workweek in which he performs no work. An employee is not paid on a "salary basis" if deductions from his predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business.

If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. Thus, an employee who receives an hourly wage does not qualify for the administrative exemption.

Basic Training for Supervisors: easy to read guides to avoid legal hazards, including wage and hour law

Second requirement: management or general business operations
The second requirement of the administrative exemption is that the employee's primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or its customers. "Primary duty" means the principal, main, major, or most important job that the employee performs. Determination of an employee's primary duty must be based on all the facts in a particular situation. Factors to consider include (1) the relative importance of the exempt duties as compared with other types of duties, (2) the amount of time spent performing exempt work, and (3) the difference between the employee's salary and the wages paid to other employees who perform the kind of non-exempt work that the employee performs.

Manual laborers or other "blue collar" workers who perform work involving repetitive operations with their hands, physical skill, or energy do not satisfy the second requirement of the administrative exemption. To satisfy the requirement, an employee must perform work directly related to the operation or servicing of the business as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.

Work directly related to management or general business operations includes work in functional areas such as accounting, quality control, purchasing, procurement, marketing, safety and health, human resources, public relations, government relations, and legal and regulatory compliance.

Evaluate your employee classifications with the Employment Practices Self-Audit Workbook

Third requirement: discretion and independent judgment
The third requirement of the administrative exemption is that the employee's primary duty must include discretion and independent judgment with respect to matters of significance. Generally, the exercise of discretion and independent judgment involves the comparison and evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures, or specific standards described in manuals or other sources. "Matters of significance" refer to the level of importance or consequence of the work performed.

For example, personnel clerks who simply screen applicants to obtain data regarding their minimum qualifications and fitness for employment generally do not satisfy the third requirement of the administrative exemption. That's because they typically will reject all applicants who do not meet minimum standards for the particular job or for employment by the company.

Ordinary inspectors generally don't satisfy the requirement because they normally perform specialized work along standardized lines involving well-established techniques and procedures that may have been catalogued and described in manuals or other sources and rely on techniques and skills acquired by special training or experience.

Examiners and graders who grade lumber generally do not satisfy the third requirement because they often perform work involving the comparison of products with established standards that are frequently catalogued.

Learn more about correctly classifying your workers in the Wage and Hour Compliance Manual

Bottom line
Many employers mistakenly misclassify non-exempt workers as exempt. The potential adverse consequences of misclassification are significant. Employers could be held liable for back pay, liquidated damages, attorneys' fees, and litigation costs. If an employee fails to satisfy any of the three requirements, he doesn't qualify for the administrative exemption. If an employers is unsure about whether it is classifying employees properly, consult with counsel.

Return to HR Hero Line e-zine for more tips and articles

Copyright 2009 M. Lee Smith Publishers LLC.INDIANA EMPLOYMENT LAW LETTER . INDIANA EMPLOYMENT LAW LETTER does not attempt to offer solutions to individual problems, but rather to provide information about current developments in Indiana employment law. Questions about individual problems should be addressed to the employment law attorney of your choice.

: