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Classifying employees as exempt under the
FLSA can be difficult. If you classify them incorrectly, you may owe them
overtime. A recent court decision sheds some light on the criteria for two
of the exemptions.
Some employers classify employees as exempt
under the Fair Labor Standards Act (FLSA) in order not to have to pay them
overtime. However, if you misclassify these employees, you will most
likely end up owing them overtime. A recent decision by the Seventh
Circuit Court of Appeals, in Piscione v. Ernst & Young, No. 96 C 1494
(3/23/99), analyzed the requirements for two of the exemptions, the
administrative and professional exemptions, and provided helpful guidance
for classifying employees as exempt.
Employee Claims Nonexempt Status, Asks for
Overtime Pay
In this case, the employee worked
as a consultant in the employer’s Human Resources Consulting Group from
1991 to 1996. During this time, he was promoted from staff consultant to
senior staff consultant, and later to manager. His duties included
management of client accounts and benefit plans, performance of plan
valuations, preparation of government filings, calculation of benefits,
and the supervision of employees. In addition, he was pursuing
certification as an actuary and met the employer’s required twenty hours
of continuing education each year.
Upon resignation in 1996, he filed suit
claiming the employer incorrectly classified him as an exempt employee and
that he was due overtime pay. The employee alleged that his job duties did
not require him to use discretion and judgment as required to meet the
administrative or professional exemption. The lower court disagreed,
finding that the employer properly classified him as exempt. The employee
appealed the decision, and the Seventh Circuit also ruled in favor of the
employer.
Court Rules Employee Fits Exemptions
The Seventh Circuit began its
analysis by looking at the FLSA’s criteria for the administrative and
professional exemptions. It determined that the “short” tests for the
exemptions could be applied since the employee earned more than $250 a
week. A longer test must be used for employees who earn less than $250.
The administrative exemption’s short test
requires that the employee be paid on a salary basis, uses discretion and
judgment in his work, and has as his primary duties nonmanual or office
work directly related to management policies or general business
operations. The professional exemption’s short test also requires
compensation on a salary basis and the use of discretion and judgment. In
addition, the employee’s work must require advanced knowledge in a field
of science or learning acquired by a prolonged course of study.
In applying these tests, the court focused
on four key criteria, the two common elements of the administrative and
professional tests and the two elements specific to the individual tests.
First, the court determined that the employee was paid on a salary basis
because he received the same amount of pay in each pay period and it was
not subject to any reductions because of the employee’s quantity or
quality of work.
Second, the court addressed whether the
employee used discretion and judgment in his work. It found clear evidence
that the employee used discretion and judgment in planning projects,
analyzing accounts, solving problems, improving processes, and supervising
employees. Although the employee argued that he consulted with others in
making decisions, the court noted that consultation implies an exchange of
views or a request for advice. It does not indicate a lack of discretion
or judgment.
Third, the court looked at the
administrative exemption’s requirement that the employee’s primary duties
consist of nonmanual or office work that shows a direct relation to
management policies or general business operations. The court noted that
an employee’s primary duty is the one on which he spends the most time or
is clearly most important to the employer. The court found that the
employee spent more than 50% of his time in administrative duties such as
client management and improving methodologies. In addition, the court
looked at the relation of the employee’s primary duties to management
policies or business operations. Since the employee played an important
role in setting up a new voice response system and enhancing client
services, the court found that his primary duties affected the employer’s
policies or operations and helped to carry them out. As a result, he was
covered under this element of the administrative exemption.
Finally, the court turned to the
professional exemption’s requirement that the employee’s primary work
require advanced knowledge in a field of science or learning acquired
through a lengthy course of study and instruction. The court determined
that since the employee had a bachelor’s degree in mathematics, was
studying to become an actuary, and kept up with the employer’s education
requirements, he had the requisite advanced knowledge. In addition, the
court found that the employee met the professional exemption since his
primary job duties, including client contact, analysis of data, and
analyzing problems and communicating solutions to clients, required the
use of this advanced knowledge.
Based on these findings, the court ruled
that the employee met all of the short test elements for both
administrative and professional exemptions.
This case demonstrates that an
employer must examine many aspects of an employee’s work to deter- mine
whether he meets the criteria for the administrative and professional
exemptions. The following tips may help in making these evaluations:
Understand what “salary basis” means.
If you deduct any money from an employee’s salary for partial day
absences, violation of rules (other than safety rules), or the quality
or quantity of work, he may no longer be exempt.
Know what is meant by “discretion and
judgment.” The use of discretion and judgment is one of the most
frequently misunderstood and misapplied criteria. Work that involves
following established techniques or procedures usually requires skill
more than discretion or judgment. However, a departure from or change in
the procedures may require the use of discretion or judgment.
Document the primary duties of your
employees. The amount of time spent on the duties is a useful guide
in determining an employee’s primary duties. Keep in mind that the
primary duties also must directly affect the employer’s policies or
operations.
Show the specialized knowledge needed
to perform the job. In this case, the employee’s occupation was not
one of the obvious professional exemptions, such as a doctor or lawyer,
but his educational background and the continuing education needed for
his job put him in this exemption.
Do not rely on job title when
classifying an employee as exempt. Job titles can be deceiving. For
example, there can be a vast difference in the levels of responsibility
for employees who are called “administrative assistants,” making some
clearly nonexempt and others exempt. Always look at the actual duties
being performed.
For more information on administrative and
professional exemptions, see Hours of Work, Chapter 207, page 207:14,
notes 24 and 25. For additional information on FLSA Regulations and
Interpretations, see Department of Labor web site,
www.dol.gov/dol/esa/public/regs/cfr/29cfr/toc_Part500-899/0541_toc.htm. |
Personnel
Policy Service, Inc.
