The Fair Labor Standards Act (FLSA) generally requires employers to pay employees minimum wage for all hours worked, and time and one half the regular rate for all overtime hours worked.  But the FLSA includes many exceptions and exemptions that can cause significant confusion among employers.  Where misused, employers may be subject to significant back wage liability.

Widely considered to be the most problematic of the “white collar exemptions,” the Administrative Exemption lets an employer pay a salary to an administrative employee without having to pay overtime.  But employers are almost guaranteed to have misclassified at least one of these employees as a result of misunderstanding the exemption’s requirements.

Administrative Exemption Elements:
The Administrative Exemption applies if the employee:

  1. Is paid on a salary or fee basis of at least $455.00 per week;
  2. Performs office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
  3. Exercises discretion and independent judgment with respect to matters of significance.

DOL Interpretation & Guidance:
The U.S. Department of Labor’s (DOL) general policy is that coverage is broad and exemptions are narrow.  This is particularly true for the Administrative Exemption because of the relatively undefined, subjective requirements.  DOL investigators are instructed that it is likely easier to identify nonexempt duties rather than exempt duties performed by alleged administratively exempt employees first.  This training can give investigators a cynical view of the administrative exemption as they first seek nonexempt duties.

DOL guidance has a similar tone.  The DOL shocked the banking industry when it issued guidance in 2010 stating that the exemption did not apply to mortgage loan officers (See DOL Guidance Here). The DOL stated that mortgage loan officers were engaged in selling loan products to customers, which the DOL analogized to the production operations of a factory or sales in a retail establishment.   Such duties are not considered to be related to business operations under the regulations.

Potential Penalties:
Whether an employer is subject to a DOL investigation or lawsuit involving the Administrative Exemption, employers should be aware that liability may be significant if there are systemic misclassification issues.  Back wages in the form of unpaid overtime usually result from a DOL investigation.  Additional fines, including civil money penalties, may also be assessed depending on the circumstances.  In a lawsuit, back wages and liquidated damages are almost guaranteed where violations are found.  Employers should be proactive in reviewing and analyzing administrative positions to ensure continued compliance, particularly where the classification has been in place for many years and/or job descriptions and duties have changed.

Action Items:
Moving forward, employers should:

  1. Identify all employees and positions that are currently classified as administratively exempt;
  2. Review and make necessary updates to job descriptions and duties;
  3. Carefully review the elements of the exemption to determine if the employee satisfies the exemption; and
  4. Reclassify positions that do not meet the requirements of the exemption.

Please do not hesitate to contact us if you have any questions or concerns regarding these issues.

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