The Fair Labor Standards Act (FLSA) exempts bona fide administrative employees from minimum wage and overtime requirements. If the salary level test and the standard duties test are satisfied, an employee is exempt. One part of the standard duties test is that the employee's primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. How do employers determine this?

In a BLR webinar titled "Exempt or Nonexempt: How to Find and Fix Misclassification Mistakes," Kara E. Shea outlined more specifics on nonexempt vs. exempt workers. She gave guidance on the so-called "white collar exemptions" and what criteria must be considered.

Nonexempt vs. Exempt Workers: The White Collar Exemptions

While "white collar" is not an exemption class, Shea explained that this phrase "is really just a catch-all . . . to describe a cluster of exemptions that are commonly-applicable in most workplaces." She explained that these include the common exemption categories: executive, administrative, professional, outside sales, and computer employees. There are many more categories than this, and in fact some are very specific, but these are the most commonly applied.

With the exception of outside sales, each of these common exemptions must be paid on a non-fluctuating salaried basis of at least $455 per week and they must perform exempt duties. Probably the vaguest and most misused of these exemptions is the administrative exemption.

Nonexempt vs. Exempt Workers: Qualifying for the Administrative Exemption

In order to qualify for the administrative exemption, Shea explained, an employee must:

• "Be compensated on salaried basis of not less than $455 per week."
• "Have a primary duty . . . of performing office or non-manual work directly related to the management or general business operation of the employer or the employer’s customers."
• Have a primary duty which includes the exercise of discretion and independent judgment.

So, what constitutes administrative work as outlined in the second point? This is typically work that is linked with running or servicing the employer’s business behind the scenes. This can include areas like taxation, finance, auditing, budgeting, quality control, purchasing or procurement, public relations, compliance, human resources, and computer network, internet and database administration. This can also apply when someone is providing similar services to the employer’s customers.

Administrative work, however, must not be:

• Routine or clerical in nature
• Merely the application of set policies and procedures to tasks, even if advanced skills are required
• Production work
• Inside sales work

Nonexempt vs. Exempt Workers: Applying the Discretion and Independent Judgment Test

"Just doing administrative work is not enough; they have to be operating at a pretty high level of authority." Shea noted. We saw earlier there are three factors to qualify for the administrative exemption:

• Salaried basis of not less than $455 per week
• Primary duty of performing administrative work (office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers)
• Primary duty which includes the exercise of discretion and independent judgment

This third factor – having a primary duty that includes the exercise of discretion and independent judgment – is what Shea is referencing in terms of authority level. The Department of Labor (DOL) has given us some factors to consider:

1. Whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices
2. Whether the employee carries out major assignments in conducting the operations of the business
3. Whether the employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business
4. Whether the employee has authority to commit the employer in matters that have significant financial impact
5. Whether the employee has authority to waive or deviate from established policies and procedures without prior approval
6. Whether the employee has authority to negotiate and bind the company on significant matters
7. Whether the employee provides consultation or expert advice to management
8. Whether the employee is involved in planning long- or short-term business objectives
9. Whether the employee investigates and resolves matters of significance on behalf of management
10. Whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances

With all of these considerations, it’s easy to see how the administrative exemption can be misused when classifying exempt workers. For more information on exempt workers or nonexempt vs. exempt status, order the webinar recording. To register for a future webinar, visit http://catalog.blr.com/audio.

Attorney Kara E. Shea, a member at Miller & Martin PLLC, provides advice on issues and compliance to national, regional, and local employers of all sizes, ranging from Fortune 500 companies to small businesses in a variety of industries. She also represents employers on a variety of employment issues such as wage and hour cases, including class actions.