The FLSA Administrative Exemption

Image courtesy of stockimages at FreeDigitalPhotos.net

Image courtesy of stockimages at FreeDigitalPhotos.net

In this third post in the FLSA Overtime Exemption series, I’m going to discuss the administrative exemption.

Again, as with all the exemptions, in order to be considered exempt the employee must meet the salary basis test which requires a minimum of $455 per week or $26,600 per year. One thing I have not yet mentioned previously in the other posts on the FLSA Overtime Exemptions is as part of the salary basis test the employee must receive a regular fixed and predetermined amount of compensation, minus permissible deductions, each workweek regardless of the quality or quantity of work done by the employee.

There are two duties tests for the administrative exemption:

  • The employee’s 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; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

In 2004 the Department of Labor (DOL) issued revised regulations in order to clarify some of the key concepts in these duties tests which I summarize below.

In the first duties test, the primary duty “directly related to the management of general business operations of the employer” means employees must perform work that is directly related to assisting with the operating or managing of the business and not working on the front line doing manual work.

Employees acting as consultants or advisor’s to an employer’s customers or clients may qualify for the exemption if their primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. A couple examples include financial consultants or tax experts.

The regulations also give some specific examples of administrative work related to the functional ares of a company’s business operations. These functions include tax, finance, accounting, auditing, purchasing, procurement, advertising, marketing, safety and health, human resources, public relations, legal, regulatory compliance, and Internet and database administration.

In the second duties test, things get a little more complicated regarding the statement “discretion and independent judgment with respect to matters of significance.” This statement means the employee has the authority to make an independent choice that is free from direction or supervision. An employee’s decisions can occasionally be reviewed and reversed and still be considered exercising discretion and independent judgment, and therefore, still be considered exempt.

Some factors to consider when looking at “discretion and independent judgment” are:

  • whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices;
  • whether the employee carries out major assignments in conducting the operations of the business;
  • whether the employee performs work that affects business operations to a substantial degree;
  • whether the employee has authority to commit the employer in matters that have significant financial impact;
  • whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation

Now, the term “matters of significance” means the level of importance or consequence of the work performed. The example from the DOL is an employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly.

It’s important to be very careful when classifying an employee under the administrative exemption. To me, it can be the most difficult one to get right.

Well, that concludes the administrative exemption post of my FLSA Overtime Series. The next post in the series will be the professional exemption.

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