The administrative exemption from overtime can be one of the most difficult of the various overtime exemptions to apply, and it causes employers the most headaches. Now, in one of the few published judicial decisions to address this subject, a California appeals court has provided guidance on who qualifies as an exempt administrator.
Customer Service Duties
Advanced Business Integrators, Inc. (ABI), sells and implements/installs ABI Mastermind software, which is used by sports and entertainment venues for scheduling, payroll, and other purposes. During the implementation phase, ABI sends employees to the customer site to install the software and train the customer.
ABI hired Michael Eicher to be a consultant at a $60,000 salary. He spent half his time in the office and half at customer sites providing customer service and training on the Mastermind software. In particular, he devoted the majority of his work time to training customers on Mastermind and troubleshooting the software for customers. He also spent time gathering information about customers’ employment practices and entering customer data into appropriate fields in Mastermind. He didn’t hire or fire employees, negotiate contracts, or consult with ABI or customers about business policies and practices.
Overtime Claim Filed
Eventually, Eicher filed a labor commissioner claim for unpaid overtime. The labor commissioner found that Eicher qualified for the administrative exemption and wasn’t entitled to overtime pay.
Eicher took his case to a trial court, which found in his favor, ruling that Eicher wasn’t an exempt administrator. The court awarded him $56,353 in back overtime compensation, $16,503 in interest, and $40,000 in attorney’s fees as authorized by Labor Code Section 1194 for a prevailing employee in an overtime suit. ABI appealed.
Requirements for Exemption
The appeals court explained that under California law, overtime exemptions are to be construed narrowly. The court said an employee must satisfy each of the following five requirements to qualify for the administrative exemption under California law:
- Perform office or nonmanual work directly related to the management policies or general business operations of the employer or customers.
- Customarily and regularly exercise discretion and independent judgment.
- Perform under only general supervision work along specialized or technical lines requiring special training, or execute under only general supervision special assignments and tasks, or regularly and directly assist a proprietor, manager, or exempt administrator.
- Be engaged in the activities meeting the test for the exemption at least 50 percent of the time.
- Earn a salary equal to twice the California minimum wage. Currently, based on the state minimum wage of $7.50 per hour, the required annual salary is $31,200.
Exemption Doesn’t Apply
The contested requirement was whether Eicher performed office or nonmanual work directly related to ABI’s management policies or the general business operations of ABI or its customers. The court explained that the law draws a distinction between administrative employees–who perform this type of work–and production employees, who do not. Production employees engage in an activity that constitutes the company’s primary purpose, and they are not exempt from overtime.
Paying Overtime: 10 Key Exemption Concepts
Only one thing really matters in the determination as to whether or not an employee is exempt: The duties the employee performs. Learn how to avoid costly, preventable mistakes with our free White Paper, Paying Overtime: 10 Key Exemption Concepts.
The court concluded that Eicher’s duties, which primarily consisted of implementing and troubleshooting the software for customers, was akin to production work because he was simply engaged in the core day-to-day business of ABI. What’s more, Eicher had no “personal effect” on the policy or general business operations of ABI or its customers.
Hours Worked, Attorney’s Fees
The court, however, reduced the overtime award to $46,617 because the trial court, improperly, included Eicher’s paid time off hours in calculating back overtime.
The court went on to reject ABI’s argument that Eicher should not have received attorney’s fees because Section 1194 only authorizes attorney’s fees in a “civil action” or lawsuit for unpaid overtime, but not when the action arises as an appeal from a labor commissioner ruling. The court ruled that a Section 1194 award of attorney’s fees is indeed appropriate when an employee successfully appeals a labor commissioner decision. What’s more, Eicher was entitled to additional attorney’s fees for this appeal, and the appeals court directed the trial court to determine the amount.
Apply Exemptions Carefully
This case serves as an important reminder of the risks of misclassifying employees as exempt. Thus, before designating an employee as exempt and not paying the person overtime, be sure to carefully review the actual duties and responsibilities of the person’s position. For more information on the administrative exemption, see the CEA Employer Guide, Who’s Entitled to Overtime? How to Avoid Mistakes When Classifying California Employees.
1 Eicher v. Advanced Business Integrators, Inc., Calif. Court of Appeals (Dist. 3) No. C051746, 2007