Who Really Qualifies for the Administrative Exemption from Overtime?

By Marylou Fabbo - Skoler, Abbott & Presser, P.C.

January 26, 2023

Even employers with good intentions often have a misunderstanding of what it takes to legally classify employees as exempt (meaning, they are not entitled to overtime when working more than 40 hours in a workweek).  Unfortunately, when it comes to wage and hour violations, ignorance is not bliss.  Unlike many other areas of the law, intent is irrelevant.  Employers who make errors, regardless of the reason for those errors, open themselves to costly litigation and the payment of back wages.  Often, they are also on the hook for their own and their employees’ attorneys’ fees, and costs.

Under federal law, when an employer willfully classifies an employee as exempt instead of non-exempt, often to avoid paying overtime, employees can recover damages for a longer period of time (3 years) than if the employer were merely negligent (2 years) in doing so.  If an employer violates Massachusetts state law, any amount owed to the employee who is misclassified is automatically tripled.  The most common misclassification is classifying a non-exempt employee as exempt under the Administrative Exemption.

Last week the First Circuit (which decides appeals from the United States District Court for the District of Massachusetts and a few other Districts) threw out a decision that found in favor of an employer that classified an employee as exempt from overtime based on the “Administrative Exemption” to the federal Fair Labor Standards Act (“FLSA”).  In that case, United States Department of Labor v. Unitil Service Corp., the Department of Labor (“DOL”), alleged that the employer misclassified two categories of workers — Dispatchers and Controllers — as exempt, and it sought overtime compensation.  The employer is a utility holding company that owns firms providing gas or electricity to approximately 200,000 customers in New England.

The employer argued that the workers were exempt Administrative employees not entitled to overtime payments. The federal district court agreed, and granted judgement for the employer. The First Circuit disagreed, and reversed the judgment.

Before getting into the decision, a quick review of the Administrative Exemption may be helpful. Here are some factors that must be met to qualify an employee as exempt from overtime based on the Administrative Exemption:

1.  Salary Basis.  The employee must be paid a salary.  If you are paying an employee on an hourly basis, that employee cannot fall within the Administrative Exemption.  The minimum salary must be at least $684 per week.

2.  Primary Duty Must Be “Overhead” Work.  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.  First of all, if you have an employee doing manual work, that employee is not eligible for the Administrative Exemption.  Second, the employee must be doing something that is not what your business does.  (More about that later).  For example, a Director of President of Human Resources of a company that manufactures toasters is not doing what your company is in business to do-make and sell toasters.  That person is considered “overhead,” i.e. needed to run your business.  (Whether that person is exempt as an Administrative Employee may depend on the next factor.)

3.  Authority.  Even of your “overhead” employee meets factor three, it’s still possible that the employee does not qualify for the Administrative Exemption.  Under this last prong, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.  Employees’ duties must rise to a level generality beyond responsibility for day-to-day tasks to satisfy the Administrative Exemption.   The DOL provides several examples of jobs that do and do not require sufficient discretion and independent judgment to meet this prong, which can be found here.

In the recent First Circuit case, the Court focused on factor two above — whether the employees’ primary duties were directly related to the management or general business operations of the employer or its customers.  If the employees’ primary duties related to the employer’s business purpose, “in that they produce the product or provide the service that the company is in business to provide,” they are not eligible for the Administrative Exemption.   In that case, the Dispatchers and Controllers provided operational and administrative services to the company’s subsidiaries.  The district court concluded the employees were exempt because they provided overhead-type services. However it did not take the next step and perform a relational analysis between the services and the employer’s business.  In fact, the services performed happened to be what the company was in business to do, namely, provide operational and administrative services to its subsidiaries.  The First Circuit reversed the trial court’s decision.

What Should Employers Do to Reduce Their Risk of a Classification Error?

An employer needs to have at least a basic understanding of the factors that must be met in order to classify an employee as exempt and what its employees are doing.  The latter may seem obvious, but employees’ jobs tend to evolve over time for reasons such as to accommodating changes in workflow, redistribution of work after an employee leaves, or because clients’ needs change.  Don’t rely on job descriptions when classifying employees.

Employers should also conduct an overall audit at least once every three years (and preferably annually). Also, if an employer is hiring a new employee or an employee is changing jobs at the company, the position description should be reviewed, updated, and evaluated for exempt status.  We recommend they consult with employment counsel for guidance if you encounter any questionable classifications or for advice on how to rectify an error.