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.

• Tips for Evaluating 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.