The most common problem I’ve encountered since opening up my practice is employers who are not compensating their employees correctly.  Unfortunately for these employers, wage and hour cases are big business for plaintiffs’ attorneys, and the Department of Labor loves making examples out of unsuspecting employers who are, in many cases, simply uninformed about the intricacies of compensation law.  Even a single FLSA violation (even if unintentional and made simply out of ignorance of the law) can bankrupt a company.

You’re Likely Covered by the FLSA

For virtually every employer in the United States, wage payment practices are governed by the Fair Labor Standards Act, or FLSA.  Many states and municipalities have similar wage payment laws that provide workers additional “protections,” but the FLSA is granddaddy of them all.  Being able to issue-spot potential FLSA problems is the bare minimum for employers.

The FLSA mandates that employers pay employees who are subject to the Act at least the minimum wage for all hours worked (currently $7.25) and overtime pay for all hours worked in excess of 40 hours in a workweek at a rate of time and one-half the employee’s regular rate of pay.  Workers who are subject to the Act’s minimum wage and overtime provisions are referred to as “non-exempt” employees.

The FLSA, however, provides exemptions from these minimum wage and overtime pay provision for employees employed in bona fide executive, administrative, professional, certain computer-related, and outside sales positions, provided that certain criteria are met for each position sought to be exempted.  Employees whose job positions meet the criteria of one or more of the exemptions, and who, therefore, are not entitled to receive minimum wage and/or overtime pay, are referred to as “exempt employees.” ^[1]

Importantly, neither a job title (such as manager, supervisor, or administrator) nor the fact that an employee may be paid a salary (even a “good salary”) is alone sufficient to establish the exempt status of an employee.  The exempt or non-exempt status of any particular employee must be determined on the basis of whether the employee’s salary and duties meet the requirements of the FLSA’s specific exemptions.  Exemptions, moreover, are narrowly construed and outcomes in which employees ARE entitled to minimum wage and overtime are favored by the Department of Labor (the agency responsible for enforcing the FLSA).

Each exemption and its general application will be discussed separately.

Executive Exemption

To qualify for the executive employee exemption, the employee must:

• be compensated on a salary basis at a rate not less than $455 per week;
• have as his primary duty the management of the enterprise or managing a customarily recognized department or subdivision of the enterprise;
• customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and
• have the authority to hire or fire other employees, or make recommendations concerning another employee’s employment status that are given particular weight.

Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period.  The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.  Subject to a specific number of exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.  If the employer makes deductions from an employee’s predetermined salary for reasons other than the allowable exceptions, that employee is not paid on a “salary basis.”

A “primary duty” under the FLSA means the principal, main, major, or most important duty.  This is a case-by-case, fact specific inquiry that examines the character of the employee’s entire job.

A non-exhaustive, non-determinative list of activities that are considered “management” include interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production records; appraising employees’ productivity; handling employee complaints; disciplining employees; planning work; determining techniques; apportioning work; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling a budget; and monitoring or implementing legal compliance measures.  Simply designating an employee a “line-lead” or “foreman” is generally not, without more, sufficient to satisfy the “management” criteria.

The term “customarily recognized department or subdivision” designates a unit with permanent status and operations, as opposed to a collection of employees assigned from time to time to a specific job or series of job.  “Customarily and regularly” means more frequent than occasional, but less than constant.  Generally, the term includes work done at least once a week.

Considerations for whether an employee’s recommendations are given “particular weight” include whether it is part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon.  An executive’s recommendations usually must pertain to employees whom the executive customarily and regularly directs and does not include occasional suggestions.  An employee’s recommendations may still be deemed to have “particular weight” even if a higher-level manager’s recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee’s change in status.

Administrative Exemption

To qualify for the administrative exemption, the employee must:

• be compensated on a salary basis at a rate not less than $455 per week;
• have as his primary duty the performance of office or non-manual work directly related to the management or general business operations of employer or employer’s customers; and
• as a part of his primary duty, exercise discretion and independent judgment with respect to matters of significance.

The “salary basis” and “primary duty” considerations for the administrative exemption are the same as for the executive exemption.

To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running the business, as distinguished, for example, from working on a production line or selling a product.  Work “directly related to management or general business operations” generally includes work in functional areas such as accounting, budgeting, quality control, purchasing, procurement, advertising, safety and health, human resources, computer network, Internet and database administration, and similar activities.  An “administrative assistant” does not generally qualify for the administrative exemption.

An employee may qualify for the administrative exemption, however, if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers.  Thus, employees acting primarily as consultants to their employer’s clients or customers may be exempt.

The “exercise of discretion and independent judgment” generally involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered.  The term implies that the employee has authority to make an independent choice, free from immediate direction or supervision.  Considerations include whether the employee, for instance, has authority to formulate or implement management policies or operating practices, carries out major assignments in conducting the operations of the business, performs work that affects business operations, has authority to commit the employer in matters of financial impact, and whether he has authority to waive or deviate from established policies and procedures without prior approval.  The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment.  “Discretion and independent judgment” must be more than applying well-established techniques, procedures or specific standards described in manuals or other policy sources.

The term “matters of significance” refers to the level of importance of the work performed, but does not imply that a risk of substantial financial loss/gain as a result of the employee’s actions is sufficient to satisfy this element.

Professional Exemption

To qualify for the professional exemption, each of these four tests must be satisfied:

• The employee must be compensated on a salary basis at a rate not less than $455 per week;
• He must have as his primary duty the performance of work requiring advanced knowledge, that is predominately intellectual, and requires the consistent exercise of discretion and judgment;
• The advanced knowledge must be in a field of science or learning; and
• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

The “salary basis” and “primary duty” considerations for the professional exemption are the same as for the executive and administrative exemption.

Professional work is distinguished from work involving routine mental, manual, mechanical, or physical work.  A professional employee generally uses the advanced knowledge to analyze, interpret or make deductions from varying facts or circumstances. Advanced knowledge cannot be attained at the high school level.

Fields of science or learning include law, medicine, accounting, engineering, various sciences, pharmacy, and other occupations that have a recognized professional status.   The positions that qualify for the professional exemption are distinguishable from the mechanical arts or skilled trades where the knowledge could be of a fairly advanced type, but is not in a field of science or learning.

This exemption is, instead, restricted to professions where specialized academic training is a standard prerequisite for entrance into the profession.  The best evidence of meeting this requirement is having the appropriate academic degree.  However, the word “customarily” means the exemption may be available to employees in such professions who have substantially the same knowledge level and perform substantially the same work as the degreed employees, but who attained the advanced knowledge through a combination of work experience and intellectual instruction.  This exemption does not apply to occupations in which most employees acquire their skill by experience rather than by advanced specialized intellectual instruction.

Exemptions for Computer-Related Jobs

To qualify for the computer employee exemption, the following tests must be met:

• The employee must be compensated either on a salary basis at a rate not less than $455 per week or, if compensated on an hourly basis, at a rate not less than $27.63 an hour;
• The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field;
• The employee’s primary duty must consist of:
  • The application of systems analysis techniques and procedures to determine hardware, software or system functional specifications;
  • The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications;
  • The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or
  • A combination of the aforementioned duties, the performance of which requires the same level of skills.

The “primary duty” consideration for the computer-related occupations exemption is the same as for the executive and administrative exemption.  The computer employee exemption does not include employees who merely repair computer hardware or employees whose work is simply highly dependent upon the use of computers, but who are not primarily engaged in computer systems analysis and programming.

Outside Sales Exemption

To qualify for the outside sales employee exemption, all of the following tests must be met:

• The employee’s primary duty must be making sales; and
• The employee must be customarily and regularly engaged away from the employer’s place or places of business.

The salary requirements of the regulation do not apply to the outside sales exemption, but an employee who does not satisfy the requirements of the outside sales exemption may still qualify as an exempt employee under one of the other exemptions if all the criteria for the exemption is met.

“Primary duty” and “customarily and regularly” have the same meaning for the outside sales exemption as for the other exemptions in which these terms are used.

An outside sales employee makes sales at the customer’s place of business and does not include sales made by mail, telephone, or the Internet unless such contact is used merely as an adjunct to personal calls. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephonic solicitation of sales is considered one of the employer’s places of business.

Motor Carrier Exemption

Employees who fall within the U.S. Secretary of Transportation’s authority (under the Motor Carrier Act of 1935) to establish qualifications and maximum hours of service are generally exempt from the FLSA’s overtime requirement.

The overtime exemption generally applies to drivers, driver’s helpers, loaders, or mechanics whose duties affect the safety of operations of motor vehicles in interstate commerce.  It does not apply to dispatchers, office personnel, unloaders, or those who load but who are not responsible for the proper loading of the vehicles.   Furthermore, the exemption does not apply to an employee during weeks in which the employee operates or works on vehicles weighing less than 10,000 pounds.

Conclusion

As you can see, the application of the FLSA and its various exemptions can be a complex process that will depend almost entirely on the specific nature of the duties of the positions to be exempted.  Carefully preparing comprehensive written job descriptions that are consistent with the various criteria of a particular exemption is certainly a good start towards ensuring that the employee will be determined to be exempt, but it is imperative that the employee’s actual duties match with the exemption’s criteria.

Fixing existing FLSA issues is a complicated, and in most cases, seemingly insurmountable Catch-22.  There are steps that can be taken to mitigate risk while coming into FLSA compliance, but no employer should undertake any action related to correcting wage and hour problems without the guidance of experienced employment counsel.