Figuring out whether an administrative employee is exempt from overtime can be a challenge. But as a recent California Court of Appeal ruling highlights, the consequences for misclassifying employees can be staggering. We’ll provide guidelines you can use to help ensure that your workers are classified correctly.
Claims Reps Challenge Administrative Exemption
This class action lawsuit covered 2,400 claims representatives from about 70 Farmers Insurance Exchange branch claims offices in California. The representatives argued that Farmers misclassified them as exempt administrative employees and that they were entitled to overtime dating back to 1993. A trial court agreed.
Exemption Test
Under new state wage and hour rules, as well as the federal Fair Labor Standards Act, administrative employees are exempt if they primarily do nonmanual work directly related to management policies or general business operations for the employer or its customers. Administrative employees must also regularly exercise discretion and independent judgment and meet minimum salary requirements.
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.
Duties Don’t Pass Test
The appellate court upheld the trial court’s ruling, finding that the claims representatives were rank-and-file production workers with no administrative roles. The court explained that under federal rules defining exempt administrative duties, which California now follows, you need to identify the company’s principal mission and whether the employee performs an administrative or production role in it. Administrative duties involve handling the enterprise’s business affairs; production work involves the day-to-day activities that produce the commodity—whether goods or services—that the business offers its clients or customers.
In this case, the branch claims offices’ sole mission was claims adjusting, and the claims representatives performed the day-to-day activities of that business. The claims representatives spent most of their time on routine claims processing, including investigating and estimating claims, filling out forms and performing related clerical work. They referred all important questions to branch or regional claims managers.
The court noted that the representatives had no formal advisory role in setting policy and didn’t help manage business operations such as purchasing and staffing. Thus, the claims representatives had been improperly classified as exempt from overtime.
Huge Pricetag
The case now returns to the lower court to determine damages, which could exceed $100 million for unpaid overtime from 1993 to the present. Plus, the employees are entitled to attorneys’ fees, which have already topped $1.2 million.
4-Point Checklist
Of the four main exemptions from overtime—executive/managerial, administrative, professional and sales—the administrative exemption is the least clear-cut. However, the following checklist should reduce the confusion. If you answer yes to all four questions, your administrative employee is probably exempt:
- Does the employee perform nonmanual or office work directly related to management policies or general business operations of you or your customers? There are three types of exempt administrators: a) executive or administrative assistants working for an executive who delegates a good deal of discretionary authority to them; b) specialists, such as credit managers and financial analysts, who advise management or customers; and c) employees who perform special assignments, often away from the business, such as certain field representatives. The administrator may also be in charge of a functional department such as purchasing.
- Does the employee customarily and regularly exercise discretion and independent judgment? Exempt administrators must have the authority to look at several possible courses of action and make a decision free from immediate supervision. It can be subject to managerial review.
- Does the employee spend at least 50% of their time on exempt duties? You can figure in time spent on nonexempt tasks if they’re “directly and closely related” to the employee’s exempt duties. Plus, your reasonable expectations and the job’s realistic requirements may be considered when determining how much time the employee spends—or should spend—on exempt duties. Workers cannot make themselves nonexempt by not spending enough time on their primary responsibility.
- Does the employee earn a monthly salary at least two times the state minimum wage for full-time employment? Based on the current minimum wage of $6.25 per hour, employees—including part-time workers—must earn a salary of at least $2,166.67 per month.