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Administrative Exemption – An Often Misunderstood and Misused FLSA Classification

August 24, 2022

By Michael Burns, courtesy of SBAM Approved Partner ASE

Of the five major Fair Labor Standards Act (FLSA) exemptions (there are close to 21 other FLSA industry or job exemptions), one of the most misunderstood and misused is the Administrative Exemption. 

Employers can benefit from identifying jobs as exempt, because when exempt, the employer does not have to pay the position overtime when the person works more than 40 hours in a week, and they do not have to keep that employee’s hours worked records.

The four other major FLSA exemptions are Executive, Professional, Outside Sales, and Computer Professional Exemptions. When an employer cannot classify a “salaried” job into one of the above exemptions, the tendency is to want to throw that position into the seemingly catch all category of Administrative Exempt. After all, when you read the Administrative Exemption’s job duties test, it seems to describe duties that are broad and encompassing enough to fit into that category.

Before looking at the particulars of the administrative classification’s job duties, the first two exemption tests must be met. First, the job must be paid at the proper legal level of $684 per week ($35,568/yr.) and second it must be paid on a salary basis. No deductions from pay can normally be made because of time worked or quality of work.

Once the salary basis and salary level tests are met, the job must then meet the job duties test of the particular exemption. For the Administrative Exemption, these are:

  • The employee’s primary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Read in layman’s terms, these two criteria seem to be a pretty low bar to meet for a lot of jobs. But per the FLSA, they are not easy to meet.

Take the recent ruling by the 11th Circuit Court of Appeals in a case where the company’s position of Property Inspector was classified as exempt under the Administrative Exemption. Their job was to investigate the company clients’ broadband infrastructure to determine what the source of any damage was, who was liable for the damage, as well as to calculate the cost of repairs. The employee would write a report and submit that report to their manager.

Seems like a job that fits the Administrative Exemption at first plush. It conducted nonmanual work and one would think that it exercised discretion around how the inspector conducted their investigation and how they reported what they found. Not the case if the facts around the job are looked at closer.

The second criteria of the administrative job test is that work has to be related to management of the company or general business operations of the employer or the employer’s customers. What does this really mean? It means that the work being performed cannot directly be upon what the company produces or the services it performs – kind of counter-intuitive. This is sometimes called the production dichotomy. Why wouldn’t a job that impacts the employer’s production or services at a high level not be exempt?

In this particular case the company’s Property Inspectors did work that was core to what the company’s business was. That of inspecting their clients’ broadband infrastructure and reporting on what the damages were. That was the company’s main business. This fact alone disqualifies the job from the Administrative Exemption under the first test.

Second, the Appeals Court found that the fact-finding investigation the property inspectors performed did not meet the exercise of discretion and independent judgement with respect to matters of significance part of the Administrative Exemption test. This position only reported back what they found in their investigation. They did not have authority to recommend such actions as litigation, negotiation of settlements, or to apply or not apply company policy in a particular case. They did not have policy making or changing authority, so they therefore did not meet the high standard of this exemption – exercising discretion and independent judgement to matters of significance.

Based upon the facts of the job, the Property Inspectors did not meet the Administrative Exemption test of the FLSA.

Employers classifying employees exempt or non-exempt need to be careful around using the Administrative Exemption. It is not a catch-all classification to categorize salaried employees that otherwise seem to be doing higher level office or non-manual work in order to avoid overtime pay cost or even just bestow some level of status to an employee’s job by making it exempt. The cost to an employer can be high.

Misclassification of a job as exempt can cost an employer unpaid wages, including overtime, liquidated damages of twice the actual back wages (three times if the employer is shown to have willfully misclassified the job), and attorney’s fees. Not to mention the cost and distraction of defending against a Wage and Hour complaint or lawsuit.

Determining the legal status of a job if very fact specific. Employers need to properly analyze their jobs to ensure proper FLSA classification. Keep up-to-date job descriptions that accurately detail job duties. For job classification determinations that are too uncertain to make a proper exempt or non-exempt classification determination, seek qualified legal counsel or classify them as non-exempt to be safe.

ASE offers an FLSA classification class for HR professionals and Management: FLSA Changes and Working with Exempt/Non-exempt Classification Analysis. The next class is scheduled for October 20, 2022 in Troy, MI. Register here.

For help understanding FLSA classifications, ASE members can research this online in the ASE Member Dashboard via CCH HRAnswersNow or Zywave HR Services Suite. If you need FLSA classification determination help, ASE provides that analysis and determination support in its consulting services area. For more information on these and other ASE services visit our website.

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