California HR

Who Is Not Exempt from Overtime: Employer Will Pay $8 Million for Misclassifying Managers

A national car rental firm has just agreed to a whopping $8 million settlement for failing to pay overtime to employees improperly classified as exempt from the overtime laws. The agreement was reached after Agency Rent-A-Car was sued by 395 of its California managers and assistant managers who claimed back overtime and steep penalties.

Here’s a look at how the case came about-and what the rental firm did wrong.

Disgruntled Employee Goes to Labor Commissioner and Sues

The problem first came to light when Steven Goodale, an employee at one of Agency Rent-A-Car’s California offices, went to the Labor Commissioner claiming unpaid overtime. The Labor Commissioner found in his favor, but Agency refused to pay and contested the award-which may have been their undoing.

Goodale went out and hired a lawyer who filed a class action suit on behalf of all managers and assistant managers working in approximately 70 Agency Rent-A-Car California offices. The employees claimed they were improperly classified as exempt managers and should have been paid overtime under state law.

The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.

Five-Part Test

Under California and federal wage and hour rules, employees are exempt from overtime if their duties fall into one of four main categories: managerial or executive, administrative, professional or sales. Employees who are exempt usually perform high-level work and are salaried.

The Agency employees’ attorney, Steven G. Zieff, a partner in the San Francisco law firm of Rudy, Exelrod, Zieff & True, told CEA that 80% of the managers worked in three-person offices. Because the offices were so small, the managers and assistant managers often performed the same work as other employees.

Agency nevertheless argued that the workers were properly classified as managers and weren’t entitled to overtime. But the court said that to qualify as a manager exempt from overtime, an employee must pass this five-part test:


  1. Manage all or part of a business. The employee’s primary duties must be to manage the whole business, or at least a permanent department or subdivision. Although managing a field office would probably have met this criterion, Agency ran into trouble because of the lower-level duties its managers performed.


  2. Direct the work of two others. This is where Agency had its biggest problem. Since some of its offices had only two people, those managers couldn’t be exempt because there weren’t two other people to manage. Likewise, in three-person offices, there weren’t enough workers for the assistant managers to supervise.


  3. Devote more than 50% of time to management. This part of the test was Agency’s second major headache. There were many instances where managers didn’t spend enough time performing managerial duties such as setting prices or handling employee complaints and discipline. Instead, the managers often did the same work as their subordinates, including filling out rental contracts and other routine office duties.

    Plus, as Agency discovered, assistant managers who manage a business only when the regular manager is away are usually not exempt. In fact, Agency ultimately conceded that their assistant managers were incorrectly classified and should have qualified for overtime.


  4. Have authority to hire and fire. Because Agency managers made hiring and firing recommendations that were taken into consideration by the company’s district managers, the court said it passed this part of the test.


  5. Right to exercise discretion and make important decisions. Some Agency managers used discretion in adjusting rental rates, negotiating with body shops, screening job applications, etc. But managers in the smaller, three-person offices didn’t do this work on a regular basis, so they couldn’t qualify as exempt.


Court Rules for Employees; Employer Faces Big Dilemma

The court found that in most instances, Agency had incorrectly classified its managers. Faced with this decision, Agency agreed to settle the case by paying the employees almost $8 million-$5.6 million in back wages plus $2.3 million for attorneys’ fees.

David Posteraro, general counsel for National Auto Credit, the successor to Agency Rent-A-Car, told CEA that the company settled the case to avoid a second lengthy trial on the workers’ damages-one that could have lasted as long as a year.

Plus, Agency was faced with an all-too-common problem. Believing its salaried managers and assistant managers were exempt, it had not kept track of the exact hours they put in. This lack of records would have made it almost impossible for Agency to refute hundreds of employees’ claims for specific overtime hours worked-making settlement the most economic alternative.