administrative exemption

With attention on the DOL’s salary increase required to meet the white collar exemptions, it is important for employers to remember that this is only one-half of the test to qualify for as an exempt employee.  The law also requires that the employee perform more than 50% of their time performing exempt duties.  For this week’s Friday’s Five, here are five examples of duties that qualify as exempt duties for the administrative exemption (click here for a description of some of the different exemptions that exist):

1.      Insurance claims adjusters

Insurance claim adjusters whose duties include activities such as interviewing insureds, witnesses and physicians; inspecting property damage; reviewing factual information to prepare damage estimates; evaluating and making recommendations regarding coverage of claims; determining liability and total value of a claim; negotiating settlements; and making recommendations regarding litigation.

2.      Financial services industry employees

Employees in the financial services industry whose duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products.

3.      Executive assistants

An executive assistant or administrative assistant to a business owner or senior executive of a large business generally meets the duties requirements for the administrative exemption if such employee, without specific instructions or prescribed procedures, has been delegated authority regarding matters of significance.

4.      Human resource managers

Human resources managers who formulate, interpret or implement employment policies and management consultants who study the operations of a business and propose changes in organization generally meet the duties requirements for the administrative exemption.

5.      Purchasing agents

Purchasing agents with authority to bind the company on significant purchases generally meet the duties requirements for the administrative exemption even if they must consult with top management officials when making a purchase commitment for raw materials in excess of the contemplated plant needs.

6.      (bonus) Property managers

In McKee v. CBF Corp. C.A. 5 (Tex) the court held that under the Fair Labor Standards Act (FLSA), that a “property manager” was an exempt employee under the administrative exception when her duties including overseeing the employer’s properties, ensuring they were properly maintained.  She also supervised five maintenance employees, approving their schedules and vacation time.  In addition, the property manager had employees reporting to her, as managers would generate a list of issues to be addressed on a daily basis.  She would decide which of these issues would be handled by outside contractors and tasking her employees to individual assignments.

Employers must be careful about this analysis, as California law can differ from federal law.  Therefore, experienced counsel should be consulted when conducting an audit regarding whether an employee is properly classified as an exempt employee.

The DOL’s Final Rule was issued this week (see my previous article for the details), and we have had a few days to digest the new rules.  Now employers need to start putting together a plan to ensure compliance with the federal rules, and take time to ensure they are also complying with applicable California law.  This Friday’s Five is five suggestions to start the process:

1. Understand that the DOL’s changes apply to the FLSA, not California law.

At risk of sounding like a lawyer, the analysis to determine if an employee is properly classified as an exempt employee is very detailed and complex.  California’s requirements differ from the Federal requirements in many ways.  Therefore, it is imperative that California employers understand which laws apply to their employees, and that they are following the correct laws.  The set of rules that provides the employee with more rights and protections is usually the law that governs.  For example, to qualify as an exempt employee under California law, the employee must be paid the equivalent of two times the state minimum wage for full-time employment.  As of January 1, 2016, with the state minimum wage at $10 per hour, the annual salary must be at least $41,600 to qualify for the California white collar exemptions.  This is less than the annual salary of $47,476 or $913 per week as set by the DOL in the Final Rule.  Therefore, in order to avoid paying overtime for work over 40 hours in a week, California employers will need to pay at the higher salary required by federal law by the December 1, 2016 deadline.

2. Understand which law – federal or California – applies to your workforce.

Again, this analysis is complex and needs to be done carefully with competent legal counsel.  Generally, the law that gives employees the most protections or benefits must be followed.  The FLSA had a much lower salary basis test in the past, so California employers generally had to comply with California law regarding exempt status because it set a higher salary basis (the equivalent of two times the state minimum wage for full-time employment, which equals $41,600 annually, or $3,466.67 per month based on $10 per hour) and a stricter duties test than federal law.  Now, California employers will likely need to focus on compliance with the higher salary required under Final Rule, which becomes effective December 1, 2016, but still must also likely comply with California’s stricter duties test.  This is territory where advice from an employment lawyer particular to the client’s situation is critical.

3. Take time to evaluate workforce and reclassify employees if needed.

Employers should use the DOL’s Final Rule changes as an opportunity to audit their workforce to determine if employee classifications need to be reclassified prior to the December 1, 2016 implementation date of the Final Rule.  While the DOL changed the salary level required to qualify as exempt, employers cannot forget to ensure that exempt employee must also meet the requirements of the duties test, which generally requires employees to perform high level managerial duties for a substantial portion of their worktime.  As mentioned above, California applies a different, stricter duties test on employers, and because this provides more protection to the employee, California employers usually have to meet the California duties test.

It would also be an ideal time when the DOL’s regulations take effect to reclassify employees as nonexempt without raising the question of why the reclassification is taking place.

4. Update timekeeping systems and policies.

The increase in the salary basis test will likely result in many employers reclassifying employees as nonexempt.  Therefore, with more employees needing to clock-in an out for their start and stop times (in addition to tracking the start and stop times for meal breaks as required under California law), employers need to ensure their timekeeping system is up-to-date and compatible with their workforce.

5. Enforce a strict policy prohibiting off-the-clock work and implement policies designed to limit the amount of overtime worked to keep costs under control.

With many more employees likely being reclassified as nonexempt, it is even more critical that employers ensure they take all appropriate steps to protect themselves from off-the-clock work claims.  Employers should have an effective timekeeping policy and train their managers about preventing off-the-clock work.  In addition, employers need to develop a policy and train managers on the correct policies to control unauthorized overtime worked.  Managing overtime costs requires effective policies and manager training to ensure all wage and hour laws are complied with.

I apologize for the long post in advance, but I’ve been receiving many questions about exempt vs. non-exempt classification of employees lately. This article is the first in a series of articles to help employers tread through this technical area, hopefully in a manner that makes it at least somewhat easier for employers to understand.

California law presumes that all employees are non-exempt employees, meaning that they are not exempt from the Labor Code requirements, such as overtime pay, meal and rest breaks, and minimum wage. Exempt employees are designated as such because they are “exempt” from certain wage and hour requirements due to their duties and pay. However, the employer bears the burden when classifying an employee as exempt, and simply providing a title to an employee does not make them exempt. The employee must meet very specific requirements for each applicable exemption, and if the requirements are not met the employer must comply with all wage and hour requirements – such as overtime pay, etc…. It is also important to note that some exemptions only exempt the employee from specific Labor Code provisions (for example, the inside sales exemption only exempts the employee from overtime pay requirements, but the employer is still required to provide meal and rest breaks).

There are many exemptions, and many nuances to each exemption, so employers should perform this analysis very carefully and receive advice from an experienced attorney or HR professional when classifying employees as exempt.

In my experience, here are the most common exemptions that arise in a workplace under California law and the requirements to meet each one:

1. Executive/managerial exemption
In order to meet the executive (managerial) exemption, the employee must meet all of the following requirements:

  1. Employee’s duties and responsibilities involve the management of the enterprise in which he or she is employed or of a customarily recognized department or subdivision of the enterprise;
  2. Employee customarily and regularly directs the work of two or more other employees;
  3. Employee has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring or firing and as to the advancement and promotion or any other change of status or other employees is given particular weight;
  4. Employee customarily and regularly exercises discretion and independent judgment in performing his or her duties;
  5. Is “primarily engaged” in duties that meet the test of the exemption;
  6. Earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.

The term "primarily engaged in" means that more than one-half of the employee’s work time must be spent engaged in exempt work and differs substantially from the federal test which simply requires that the "primary duty" of the employee falls within the exempt duties. Therefore, to qualify for this exemption, the employee must spend more than 50% of their work time on exempt duties.

2. Administrative exemption
To meet the administrative exemption, an employee must meet all of the following requirements:

  1. Employee spends more than one-half of their work time performing office or non-manual work directly related to management policies or general business operations for the employer or the employer’s customers;
  2. Employee “customarily and regularly” exercises discretion and independent judgment in carrying out job duties as to matters significant to the employer’s business;
  3. Performs his or her job only under general supervision and works along specialized or technical lines requiring special training, experience, or knowledge; and
  4. Is paid a salary equivalent to no less than two times the state minimum wage.

3. Computer professional exemption
To be an exempt computer professional, the employee must meet the following requirements:

1. The employee is primarily engaged in work that is intellectual or creative and requires the exercise of discretion and independent judgment.

“Primarily” is defined as requiring more than 50% of the employee’s work time be spent on these types of duties.

2. The employee is primarily engaged in duties that consist of one or more of the following:

  • The application of systems analysis techniques and procedures, including consulting with users, 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 documentation, testing, creation, or modification of computer programs is related to the design of software or hardware for computer operating systems.

3. The employee is highly skilled and is proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming, and software engineering.

4. The employee’s hourly rate of pay, or annual salary if paid on salaried basis, meets a minimum threshold amount set by California’s Division of Labor Statistics and Research (DLSR). For 2015, the DLSR set the amounts at $41.27 per hour or annual salary of not less than $85,981.40 for full time employment, and paid not less than $7,165.12 per month.

4. Commissioned inside sales exemption
To qualify as an exempt commissioned inside sales employee, an employee must meet the following requirements:

  1. Employee’s earnings must exceed one and one-half times the California minimum wage; and
  2. More than half of the employee’s compensation must be commissions.

Employers must note that this exemption is only for the overtime requirement, and other wage and hour requirements such as minimum wage, meal and rest breaks, time recording requirements still must be met.

5. Outside salesperson exemption
To qualify as an exempt outside salesperson the employee must:

  1. Be at least 18 years old;
  2. Must customarily and regularly work more than 50% their work time away from the employer’s place of business; and
  3. Must be engaged in selling tangible items or obtaining orders or contracts for products, services, or use of facilities.

With Governor Brown’s signing of the bill raising California’s minimum wage to $10.00 per hour by January 2016, there are a few new considerations this triggers for California employers.  This quick video discusses the increase in guaranteed salary employers must pay in order to for employees to qualify as exempt. 

//www.youtube.com/embed/hQk14P9aMJI

The Department of Labor issued its first “interpretation” letter (a change in policy by the DOL that replaces its opinion letters previously issued) by examining whether or not mortgage loan officers meet the administrative exemption of the Fair Labor Standards Act (FLSA). The DOL concluded that mortgage loan officer do not meet the exemption, and therefore are owed overtime wages. 

The DOL notes:

The financial services industry assigns a variety of job titles to employees who perform the typical job duties of a mortgage loan officer. Those job titles include mortgage loan representative, mortgage loan consultant, and mortgage loan originator.

The interpretation letter found that the typical mortgage loan officer’s duties begin with obtaining clients, collecting information about the clients (such as income, employment history, investments, and so forth), and then inputting this information into a computer program. The program sets forth appropriate loan products for the clients. The officer would then discuss the different pros and cons for each product with the client in order to match the client’s needs with one of the offered products.

The DOL noted that for the loan officer to qualify as exempt, their primary duty must be “the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers.” Work directly related to management or general business operations consists of work in areas such as accounting, budgeting, quality control, and human resources – not actually producing the product sold by the company or selling the product made by the company.

The DOL interpretation concluded:

Thus, a careful examination of the law as applied to the mortgage loan officers’ duties demonstrates that their primary duty is making sales and, therefore, mortgage loan officers perform the production work of their employers. Work such as collecting financial information from customers, entering it into the computer program to determine what particular loan products might be available to that customer, and explaining the terms of the available options and the pros and cons of each option, so that a sale can be made, constitutes the production work of an employer engaged in selling or brokering mortgage loan products.

This new guidance from the DOL establishes that employers in the financial industry with employees – in particular loan officers – must review this new interpretation and evaluate whether certain employees can simply be paid a salary, or if the employees must be reclassified as non-exempt and receive overtime. The DOL letter can be read here (PDF).

The case Pellegrino v. Robert Half International, Inc. (RHI) was brought by recruiters alleging that RHI failed to comply with Labor Code provisions pertaining to overtime compensation, commissions, meal periods, itemized wage statements, and unfair competition (under Business and Professions Code section 17200). 

As defenses, RHI argued that Plaintiffs’ claims were barred because they all entered into agreements that shortened their statute of limitations down from four years to six months. RHI also argued that the Plaintiffs were exempt from wage and hour laws because the employees qualified for the administrative exemption. The appellate court, in agreeing with the lower trial court, dismissed RHI’s defense that the Plaintiffs’ agreed to a shorter statute of limitation on the grounds that this agreement violated public policy and is unenforceable.

The Administrative Exemption

Employers bear the burden to prove that the employee does not qualify for overtime of one and a half times the employee’s regular hourly rate for all work performed over eight hours in one day and/or all hours over 40 in one week. Employees can qualify for a number of different exemptions, and in this case RHI argued that the Plaintiffs were administrative employees.

In order to qualify for the administrative exemption, the court noted that the employer must prove that the employee must:

(1) perform office or non manual work directly related to management policies or general business operations’ of the employer or its customers,

(2) customarily and regularly exercise discretion and independent judgment,

(3) perform under only general supervision work along specialized or technical lines requiring special training or execute under only general supervision special assignments and tasks,

(4) be engaged in the activities meeting the test for the exemption at least 50 percent of the time, and

(5) earn twice the state’s minimum wage.

The employee must meet all five elements in order to be an exempt administrative employee.

The court explained, by quoting the applicable regulations, that:

“The phrase ‘directly related to management policies or general business operations of his employer or his employer’s customers’ describes those types of activities relating to the administrative operations of a business as distinguished from ‘production’ or, in a retail or service establishment, ‘sales’ work. In addition to describing the types of activities, the phrase limits the exemption to persons who perform work of substantial importance to the management or operation of the business of his employer or his employer’s customers.”

The court found that the evidence did not support RHI’s argument that the Plaintiffs were administrative employees. The court explained that the account executives were trained in sales and evaluated on how well they met sales production numbers – which are not exempt duties. The account executives were also primarily responsible for selling the services of RHI’s temporary employees to its clients. And when they were not selling, they were recruiting more candidates for RHI’s “inventory.” The account executives also followed a “recipe” established by the company which required the employees to rotate their duties ever week between a “sales week,” “desk week,” and recruiting week.” The employees did not develop any policy, but simply followed the company’s system of performing their job. The court finally noted that the Division of Labor Standards Enforcement (DLSE) previously opined that recruiters who worked in a recruiting company did not qualify for the administrative exemption (which can be read at the DLSE’s website here (PDF)). All of these facts supported the trial court’s finding that the employer failed to meet its burden that the account executives were administrative employees.

This case is a good reminder to employers that they must be careful about how employees are classified. Simply because the employee has a high-level title, or every employer in the particular industry has always treated this type of employee as an exempt employee does not mean that the employees are properly classified. Courts will strictly apply the applicable exemption element-by-element to determine whether or not the employer must pay the employee overtime and provide meal and rest breaks. Finally, employers must remember that they will bear the burden of proof when asserting in court that the employee is properly classified as an exempt employee.

The case, Pellegrino v. Robert Half International, Inc. can be downloaded here (PDF).