Figuring out who’s exempt from the overtime rules and who isn’t can be very complicated. Impressive titles and salaries don’t count. Only the employee’s actual job duties matter. And of the four main exemptions-managerial, administrative, professional and sales-the administrative exemption is the least clear-cut. In fact, employers continue to reel from an epidemic of multi-million dollar lawsuits over classification mistakes. But in a new ruling, a court sided with an employer who was challenged for not paying overtime to a group of workers it classified as exempt administrators. Here is what happened, along with some practical tips on how to tell whether your administrative employees are entitled to overtime.
The case involved marketing representatives for John Alden Life Insurance Co. Their job was to act as the link between the insurer and outside independent sales agents, keeping them up to date on new products, pricing and how to promote John Alden products.
John Alden treated the marketing representatives as exempt from the overtime laws. But the workers complained that they had been misclassified and were entitled to back and future overtime. The U.S. Department of Labor took the case and sued the company for violating the federal Fair Labor Standards Act.
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.
Under federal law, administrative employees who meet certain minimum salary requirements are exempt if they: 1) are engaged in nonmanual work directly related to management policies or general business operations of substantial importance to the employer or employer’s customers; and 2) regularly exercise discretion and independent judgment.
The John Alden employees claimed their jobs did not satisfy these standards because the work was routine and not of substantial importance to the company’s business operations.
The Court of Appeal sided with John Alden. First, the court found the marketing representatives’ job duties were all related to general business operations. For example, the reps were required to understand the subtleties of the insurance market, familiarize themselves with the sales agents and their customers, and decide the best way to promote and market John Alden products.
Second, the Court concluded the employees’ work was of substantial importance to John Alden. The court said that employees don’t have to actually draft company policy to be exempt administrators. As long as they carry out major assignments or their work affects business operations to a substantial degree, they qualify as exempt.
Discretion And Independent Judgment
The court also found the marketing representatives met the requirement of using discretion and independent judgment in their jobs. For example, the employees had to decide which agents should sell a given product and which products to market to whom. And the marketing representatives did not use prepared sales pitches, but decided on their own how to present the company’s products.
Result Could Have Been Different
The court’s ruling doesn’t mean all marketing representatives are exempt from overtime. For example, sales agents for employers who only sell other companies’ products-rather than their own-might not be exempt, according to the court. That’s because in that situation the employer’s sole business is to “produce” sales, making the employees non-exempt “production workers” rather than exempt administrators. Also, workers with little discretion in how to market their products might not qualify.
Figuring out who’s entitled to overtime is made even more difficult because California law and federal law are different. You must always follow whichever law requires overtime to be paid. The following checklist should help you make sense of the rules. If you answer yes to all five questions, your employee is probably exempt:
- Does the employee perform non-manual or intellectual work directly related to management policies or general business operations of the employer or the employer’s customers? Generally, employees whose work involves advising management, strategic planning, negotiating, representing the company, high-level purchasing, promoting sales, or business research may qualify. However, work that is significant to business operations only because a mistake can be disastrous-like mishandling a phone call that loses a client-does not meet the standard.
Also note that under the federal regulations, exempt administrators are grouped into three main categories. First are executive or administrative assistants, who work for an executive who cannot attend to all of their duties and has delegated a good deal of discretionary authority to the assistant. Second are specialists who advise management (or customers). This category includes credit managers, claim adjusters, sales research experts, wage-rate analysts, tax experts and statisticians. It also covers employees in charge of a functional department-even a one-person department-such as purchasing agents, buyers and human resource managers. Third are employees who perform special assignments, often away from the business premises, such as certain field representatives.
- Does the employee exercise discretion and independent judgment? Under both state and federal law, exempt administrators must have the power to look at several possible courses of action and make an independent decision-free from immediate supervision. Just because the decision may be subject to review does not necessarily mean the employee doesn’t qualify as exempt. But simply applying special skills or following company procedures is not enough.
- Does the employee a) assist an owner, manager or another exempt administrator; or b) under only general supervision, perform special assignments or specialized or technical work requiring special training experience or knowledge? Generally, the less supervision an employee needs, the more likely the person is exempt.
- Does the employee spend more than 50% of work time on administrative duties? To qualify for the administrative exemption in California, workers must spend more than half their time performing exempt duties.
- Does the employee earn a salary of at least $1,150 per month? A worker must earn at least $1,150 in monthly salary to meet both state and federal earnings rules.