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Random Thoughts on FLSA Administrative Exemption

by Kara E. Shea

I’ve been working with several clients lately on Fair Labor Standards Act (FLSA) compliance issues — specifically, on exemption classification audits. During an audit, I review all the jobs an employer has deemed exempt from overtime under the FLSA and try to decide whether the positions have been correctly classified. It’s a painful process for the client and for me because I know that reclassifying positions from exempt to nonexempt can be a financial, logistical, and personnel nightmare. On the other hand, I also know that if my client is found to have misclassified employees, the consequences are even more of a nightmare — overtime back-pay awards going back two or three years, liquidated damages, attorneys’ fees, and months or even years of time-consuming and stressful litigation.

Mastering HR report: Overtime

Exemption confusion
Without a doubt, the exemption that causes the most confusion and biggest headaches for my clients (and me) is the administrative exemption. I thought it might be helpful to share some of my thought processes with readers who also may be struggling with this exemption.

First, the basic requirements for the exemption are that employees must be paid at least $455 per week on a nonfluctuating salary or fee basis. In addition, the employee’s primary duty must (1) be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers and (2) include the exercise of discretion and independent judgment with respect to matters of significance.

Wage and Hour Compliance Manual

Administrative work
Administrative work is the “behind the scenes” work that keeps a business up and running. Examples include HR, payroll and finance (including budgeting and benefits management), records maintenance, accounting and tax preparation, marketing, quality control, legal and regulatory compliance, and some computer-related work (e.g., network, Internet, and database administration). The regulations are clear that making or selling whatever product or service the business provides is not considered an administrative function.

While “behind the scenes” work will typically be deemed administrative, work that puts the employee “on the stage,” interacting with the public and facilitating whatever commercial transaction the business relies on for its income, is less likely to be deemed administrative in nature.

HR Guide to Employment Law, including overtime

Discretion and independent judgment
Even employees who are clearly performing administrative functions must also have a fairly high degree of authority within the organization to qualify for the administrative exemption. For example, secretarial and clerical employees may be performing administrative work for the business, but they will not be administratively exempt because their positions don’t involve the authority to make independent decisions on matters that affect the business. Deciding how much authority is enough to support the exemption is always a tricky call.

Factors that determine whether an employee is administratively exempt include whether he has the authority to interpret or formulate company policies, how important his assignments are in relation to the overall business operations of the company, whether he has the authority to commit the employer in matters that have significant financial impact, and whether he has the ability to deviate from company policy without approval. The last point is particularly important — employees who are regularly called on to use their own judgment to solve problems and “think outside the box” are more likely to be deemed administratively exempt. Employees who principally conduct their jobs according to preestablished rules and parameters and must seek permission to go “outside the box” are less likely to be deemed exempt.

Basic Training for Supervisors, including wage and hour issues

Bottom line
Even highly compensated employees who are critical to the success of an organization may not fit into the administrative exemption. If that’s the case, other exemptions may be available, or the position may need to be significantly altered or reclassified as nonexempt. These are tough calls — when in doubt, seek the help of an experienced employment attorney.

Kara E. Shea is the editor of Tennessee Employment Law Letter and a partner with Miller & Martin PLLC, practicing in the Nashville office. She can be reached at (615) 244-9270.

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