Founders, stay out of legal trouble: Part III

When it Comes to the Administrative Exemption, It Often Comes Down to Trust

Dan Gilmore is helping founders stay out of trouble with this next installment in his series on classifying hires. You can also check out Part I on salaried employees and overtime and Part II on executive exemptions. Questions about these issues? Put them in the comments.

As I hope you have realized after my last two posts, which employees are and are not entitled to overtime compensation is more than a question of whether they are paid a salary and if their position is identified internally as “exempt”. To actually be exempt from the minimum wage and overtime protections of the federal Fair Labor Standards Act (FLSA), the employee’s position must meet all of the requirements of one of the FLSA’s recognized exemptions.

Next up in this mini-series is what is known as the “administrative employee” exemption.

This exemption is primarily intended for employees whose duties are directly related to assisting with the running or servicing of the business, which can include a wide range of functional areas within the business.

To qualify for this exemption, all of the following tests must be met:

• The employee must be compensated on a salary or “fee basis” at a rate not less than $455 per week;

• 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.

As I discussed with the executive exemption, it’s critical for employers to be careful to not jeopardize, even inadvertently, an employee’s salaried status by taking actions such as making improper deductions from an employee’s established salary.

The “fee basis” in the first requirement refers to an employee who is paid an agreed amount for a single, ordinarily unique, job assignment, regardless of the time required for its completion. To determine whether the fee payment satisfies the minimum salary requirement, the employer should consider the time worked on the job and then determine whether the payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours. The U.S. Department of Labor (DOL) provides the example of an artist paid $250 for a painting that took 20 hours to complete. This would meet the minimum salary requirement since the rate would amount to $500 if 40 hours were worked.

Trust is included in the title of this post since at the core of this exemption is the requirement that in performing his or her primary duty, the employee must “exercise discretion and independent judgment with respect to matters of significance.” The DOL explains that this “involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered … and implies that the employee has authority to make an independent choice, free from immediate direction or supervision.” The fact that the employee’s initial decision may be later altered or overturned by a superior doesn’t necessarily prevent the exemption from being met as long as the initial decision satisfies this standard.

I often explain that there may be employees who, due to such things as inexperience or the need for additional training, simply cannot be trusted to make the type of independent decisions required to meet this exemption. These decisions are beyond merely following existing rules, procedures and guidelines, and not every employee at every stage of their employment is capable of taking on this level of responsibility involving matters that really do make a difference for the business. As a result, there may be employees who cannot be currently trusted to the extent required by the FLSA’s regulations, but who mature professionally to the point that their discretion and judgment may be consistently relied upon. In the meantime, be careful.

My next post will describe the basic for what’s necessary to meet the requirements of the FLSA’s professional employee exemption.

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