Under the FLSA, employers must pay non-exempt employees overtime compensation for time worked in excess of forty hours per week. However, a few categories of employees are exempted from the overtime pay requirements. These include individuals employed in a bona fide Administrative capacity, as well as those who are Executives, Professional, Computer Professional, or Outside Sales employees – all terms of art under the FLSA and its regulations. A position falls within the “Administrative” exemption if all three of the following criteria are met:
- the employee is compensated on a salary or fee basis at a rate of not less than $455 per week;
- the employee’s primary duty is 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 include the exercise of discretion and independent judgment with respect matters to significance.
29 C.F.R. § 541.200(a).
Significantly, employers bear the burden of establishing entitlement to the FLSA exemptions which, the U.S. Supreme Court has ruled, are narrowly-construed and only apply to those employees who fit squarely within the terms of the exemption. Thus, to classify employees within the Administrative exemption, employers must demonstrate that an employee’s duties satisfy both its substantive prongs.
Yet, too often, employers fail to pay adequate attention to the individual components of each of the substantive prongs of the Administraive exemption, resulting in the misclassification of personnel they deem important to their operations. Employers have often concluded that the performance of any administrative-type duty constituted exempt work, failing to appreciate the primary duty requirement that it 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.” See 29 C.F.R. § 541.200 and § 541.205(a)(3). Alternatively, employers simply concluded that an individual’s exercise of “discretion and independent judgment” was enough to place the worker within the Administrative exemption.
In the recent Whalen and Reiseck decisions, the U.S. Court of Appeals for the Second Circuit re-emphasized that to qualify as an exempt Administrative employee, the employee must both perform work “directly related to management policies or general business operations[,]” and “customarily and regularly exercise discretion and independent judgment” (in addition to satisfying the salary-basis test). To perform work, “directly related to management policies or general business operations”, the Second Circuit clarified that two independent components must be established: First, the employee must be performing work that is “administrative” in nature as distinguished from “production” work. Second, the work must be shown by the employer to be of “substantial importance” to the management or operation of its business or that of its customer’s. In both cases, the Appeals Court observed, the analysis revealed that neither employee performed work directly related to management policies or general business operations.