SPECIAL REPORT WHO IS AN ADMINISTRATIVE EMPLOYEE FOR THE PURPOSE OF THE FAIR LABOR STANDARDS ACT EXEMPT STATUS? ( )

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1 SPECIAL REPORT WHO IS AN ADMINISTRATIVE EMPLOYEE FOR THE PURPOSE OF THE FAIR LABOR STANDARDS ACT EXEMPT STATUS? ( ) This Special Report was written by Daniel P. Hale, J.D., CPCU, ARM, CRM, LIC, AIC, AIS, API of Marsh & McLennan Agency LLC. Mr. Dan Hale can be contacted at or More Special Reports are available at The Fair Labor Standards Act ( FLSA ) requires that employers pay minimum wage and overtime for all hours worked over 40 hours per week to all employees who are not otherwise exempt. The distinction between exempt and non-exempt employees is one of the most difficult provisions of the Fair Labor Standards Act to comprehend and apply. Unfortunately, too many employers have tried to oversimplify the matter by classifying all salaried employees as automatically exempt from overtime pay. This is a dangerous error that exposes the employer to expensive FLSA litigation where an employer may be required to pay double the back wages as well as attorney s fees and court costs. Too many employers have tried to oversimplify the matter by classifying all salaried employees as automatically exempt from overtime pay. Each individual employee must qualify for one of the specific exemptions provided by the statute in order to be classified as exempt. Section 13(a)(1) of the FLSA provides an exemption for employees employed as bona fide executive, administrative, professional and outside sales employees. Each exemption requires that employees be individually evaluated to determine whether they meet the salary and duty requirements of the Department of Labor regulations in order to fall within the classification. Each exemption requires that employees be individually evaluated to determine whether they meet the salary and duty requirements of the Department of Labor regulations.

2 The majority of employers are more likely to utilize the executive and administrative exemptions under the FLSA, while the professional and outside sales exemptions occur with less frequency. This is the second in a series of articles analyzing the exemptions applicable to employers and will highlight the requirements for the administrative exemption. I. THE ADMINISTRATIVE EXEMPTION The administrative exemption is designed for relatively high-level employees who are involved in the day to day operations of the business. Under the FLSA, in order for an employee to qualify for the administrative employee exemption the employee must meet the following test: (1) The employee must be compensated on a salary basis at a rate not less than $455 per week ($23,600 per year); (2) 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 (3) The employee s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. A. Salary Basis Test The first factor of the three factor test is known as the salary basis test and requires that the employee receive a full predetermined salary amount of at least $455 for any week in which he performs any work. This amount cannot be subject to a reduction because of the variations in the quality or quantity of the work performed. If an employee s salary is subject to a reduction based on the quantity or quality of work performed, then the employee will be considered working on an hourly basis and will not qualify as exempt. The employee must receive his full predetermined salary amount for any week in which he performs any work at a rate not less than $455 per week. Management Practices: Who is an Administrative Employee ( )/hr 2 of 6

3 The remaining factors of the administrative exemption test are commonly referred to as the duties tests. An employee who meets the salary basis test is only exempt if he or she also performs certain job duties. B. Primary Duty is Office or Non-Manual Work To classify an employee as exempt under the administrative exemption, the primary work of the employee must be office or non-manual. This does not include employees who perform work that is operational or related to production, e.g. employees who make what the business sells. The primary work of the employee must be office or non-manual, as opposed to operational or production oriented. A primary duty means the principal, main, major or most important duty that the employee performs. Determination of an employee s primary duty must be based on a case by case analysis with an emphasis on the character of the employee s job as a whole. C. Administrative Work Directly Related to the Management or General Business Operations The administrative duties must not only be the primary duty of the employee, but must also relate directly to assisting with the running or servicing of the business. The employee s work must also relate directly to assisting with the running or servicing of the business. Examples of typical administrative functions which are directly related to management or general business operations include: o Labor relations and personnel management (for example, human resources); o Payroll and finance; o Records maintenance; o Accounting and tax; o Marketing and advertising; o Quality control; Management Practices: Who is an Administrative Employee ( )/hr 3 of 6

4 o Public relations; and o Legal and regulatory compliance Work that is directly related to the general operations of the business is different from work on a manufacturing line or from selling a product in a retail or service establishment. Clearly, the latter would not satisfy the duties test for the administrative exemption. Work that is directly related to the general operations of the business is different from work on a manufacturing line or from selling a product in a retail or service establishment. However, an employee may qualify for the administrative exemption if the employee s primary duty is the performance of work directly related to the management or general business operations of the employer s customers. For example, employees who act as advisors or consultants to their employer s clients, such as attorneys or certified public accountants, may be exempt. Employees who act as advisors or consultants to their employer s clients may be exempt. D. Employee Exercises Discretion and Independent Judgment. The third threshold requirement of the administrative exemption test requires that during the performance of an employee s primary duties, the employee must exercise discretion and independent judgment. The exercise of discretion and independent judgment involves the ability of an employee to make an independent choice free from immediate direction or supervision. In general, the exercise of discretion and independent judgment involves the ability of an employee to make an independent choice, after a comparison and evaluation of possible courses of conduct, free from immediate direction or supervision. Factors that can be used to determine whether an employee has the authority to make independent decisions include: Management Practices: Who is an Administrative Employee ( )/hr 4 of 6

5 o Whether the employee has the authority to formulate, affect, interpret or implement management policies or operating practices; o Whether the employee carries out major assignments in conducting the operations of the business; o Whether the employee performs work that affects business operations to a substantial degree; o Whether the employee has the authority to commit the employer in matters that have significant financial impact; and o Whether the employee has the authority to waive or deviate from established policies and procedures without prior approval. While all of the previously mentioned typical administrative functions normally involve the exercise of discretion and judgment, the employer should not assume that all administrative tasks involving independent discretion will be exempt. For example, secretaries often perform clerical work which is administrative and may involve some exercise of discretion and judgment; however, the exercise of judgment required for the administrative exemption to apply must be about matters of considerable importance to the operation of the enterprise as a whole. The employer should not assume that all administrative tasks involving independent discretion will be exempt. The exercise of judgment required for the administrative exemption to apply must be about matters of considerable importance to the operation of the enterprise as a whole. E. Matters of Significance. The last portion of the independent judgment test requires that such discretion be exercised with regard to matters of significance. The Department of Labor has indicated that matters of significance refers to the level of importance or consequence of the work performed and that an employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. Management Practices: Who is an Administrative Employee ( )/hr 5 of 6

6 In other words, decisions made with regard to matters of significance should be distinguished from daily routine decisions. Decisions made with regard to matters of significance should be distinguished from daily routine decisions. II. CONCLUSION Proper classification of employees is important to ensure proper compensation and to avoid violations under the federal wage and hour laws. What can you do to ensure compliance with the FLSA regulations? (1) Review the salary and duties of all exempt employees and reclassify any employees who do not meet the standards; (2) Review current pay and overtime practices to ensure compliance with the regulations; and (3) Update job descriptions to reflect the duties that make an employee exempt. This document is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein. Any statements concerning actuarial, tax, accounting or legal matters are based solely on our experience as consultants and are not to be relied upon as actuarial, accounting, tax or legal advice, for which you should consult your own professional advisors. Any modeling analytics or projections are subject to inherent uncertainty and the analysis could be materially affective if any underlying assumptions, conditions, information or factors are inaccurate or incomplete or should change. Management Practices: Who is an Administrative Employee ( )/hr 6 of 6