ASE receives many member calls about Fair Labor Standards Act (FLSA) exemptions. Most of them are about the Administrative exemption which, in our experience, is often mistakenly applied to jobs that should be non-exempt. Confusion and misunderstanding about the Administrative exemption are common; in fact, according to the law firm Seyfarth Shaw, that exemption has in recent years been responsible for the most class action suits involving overtime pay claims.
This past December the Fourth Circuit Court of Appeals, in Calderon v. Gelco General Insurance Co., held the defendant employer liable for inaccurately classifying its insurance fraud investigators as Administrative Exempt and not paying them overtime.
Most HR professionals agree that conceptually it is not difficult to understand the Executive, Professional and Outside Sales exemptions. The Computer Professional exemption can be somewhat confusing when distinguishing between true software programmers and engineers from software and hardware technicians. But the confusion level goes way up, even for the courts, when a salaried “white collar” position does not fit in any of the above exemption categories but the employer believes it should still be exempt. Many employers mistakenly see the Administrative exemption as a kind of catch-all classification for those kinds of positions. It is not.
The Wage and Hour Division, backed up by the Courts, emphasizes that all the FLSA exemptions are to be “narrowly construed,” thereby making it incumbent on the employer to clearly prove that an exemption is applicable to a given job. In the Calderon case the Fourth Circuit did exactly that, holding the employer to its highest civil standard of proof, that of showing “clear and convincing evidence.”
To meet the Administrative exemption, as with the Executive and Professional exemption the employee first must be paid 1) on a salary basis, and 2) at the required salary level (currently $455/week but due to increase substantially later this year when the new exempt regulations are finalized). The third test is the Duties test(s). In the case of the Administrative exemption, the exemption is applicable only to those who “run the business, the overhead functions,” as articulated by the law firm Seyfarth Shaw. Many employers forget that basic fact; the Administrative exemption cannot apply to production personnel who are “making the product or performing the service that the company sells.”
The Administrative exemption test is fact-specific to each business. In Calderon, the Court found that claims adjusters did not meet this test. The Court agreed that claims adjusters did not sell insurance, but they did investigate and settle claims; how can an insurance company sell insurance but not in turn be involved directly in processing the claims against the insurance it sells? The Court however looked to the next level of analysis of the Administrative exemption. Did the position “exercise independent judgement and discretion on matters of significance”? In the case of the claims adjusters the position did not “develop, evaluate or recommend business polices or strategies with regard to the claims they investigated.” Further, the court found that “the work duties [did not] relate to business policy or overall operational management.” Therefore the position should not have been classified exempt and the employees were eligible for overtime pay.
With new regulations on the way, now is the time employers should be reviewing their job classifications. As Seyfarth Shaw points out, “[F]or years employers have gotten away with misclassifying workers” by placing them in the often misused Administrative exemption,” and “now assume their classification is proper because they have not been challenged in the past.”
Employers often create the problem for themselves by drafting job descriptions that validate an exemption classification but are not accurate. The job descriptions as written overstate the authority level of the position by using such terms as “develops,” “evaluates and determines (policy),” “implements,” etc., when in practice the position has no such authority. When that happens, a diligent Wage and Hour representative or, worse, an aggressive plaintiff’s attorney can easily expose the gap between what is written and what is actually practiced. And what is actually practiced is what counts.
ASE members can take advantage of several ASE resources to assist with proper FLSA classification. ASE’s Virtual Library not only has a lot of information on FLSA exemption determination but also has a “White Collar Tool” in its CCH Answers Now resource. HR practitioners can also hone their FLSA knowledge in ASE’s Wage and Hour Law training class (currently scheduled for this coming February 23rd). If more concise help is needed ASE can provide FLSA Classification Analysis reports. Email Michael Burns or call him at (248) 223-8039 for more information.
Source: Seyfarth Shaw Employment Law Lookout. Is FLSA Administrative Exemption – It Is Not What You Think It Is 1/28/2016