April 17 Tip of the Week

“Recent Guidance on the FLSA and the Administrative Exemption”

The Fair Labor Standards Act requires employers to pay employees one and a half times their regular wage rate when an employee works more than 40 hours in a week.  Some states are more stringent and require overtime pay for hours worked in excess of 8 in a day or additional pay for working more than six days in a row.  Given the additional expense of paying overtime, employers frequently classify certain positions as exempt from the overtime rules.  There are three common exemptions under the FLSA:  executive, administrative, and professional employees. Most states follow the federal rules related to these exemptions. To qualify for one of these three exemptions, a position must meet both a salary and duties test.  A recent First Circuit Court of Appeals decision, Walsh V. UNITIL SERVICE CORPORATION, No. 22-1070 (1st Cir. Mar. 22, 2023), has shed greater light on the test for the administrative exemption. 

In its opinion, the First Circuit Court of Appeals examined the district court’s decision to grant summary judgment to the employer, agreeing with the employer’s claim that dispatchers and controllers involved in the company’s utility delivery service were administrative employees under the Fair Labor  Standards Act.  In setting aside the lower court’s grant of summary judgment, the First Circuit noted that the determination as to whether a position falls within the administrative exemption consists of a three pronged test.  Employees must be compensated on a salary or fee basis equal to $684 per week; their 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 must exercise independent judgment or discretion in the carrying out of their duties.  In reaching its decision, the First Circuit focused on the second prong and the question of whether the work performed by the dispatchers and controllers was “directly related” to the general business operations of the company. 

Because the employer in this case was engaged in the business of providing operational and administrative services to its customers.  The dispatchers and controllers were directly involved in providing those services to customers; they were not providing administrative services to the company itself, but to its customers.  Applying this reasoning, the court found that the grant of summary judgment was improper.  The court cited the following from the Fair Labor Standards Act regulations to support its conclusion: 

“Human resources managers who formulate, interpret or implement employment policies․ generally meet the duties requirements for the administrative exemption” while “personnel clerks who ‘screen’ applicants to obtain data regarding their minimum qualifications and fitness for employment generally do not.” 29 C.F.R. § 541.203(e).

What does this mean for employers?  When classifying employees as exempt from overtime rules, an employer must thoroughly analyze the work performed by the position to ensure that all of the conditions for such an exemption exists.  To qualify for the administrative exemption, an employee should not be performing work that is the actual business the employer is engaged in – administrative work is work that supports the organization.  The analysis must take into consideration both the spirit and intent of the law, because an improper classification of employees can be very costly.  At myHRcounsel, we can assist you in drafting or reviewing job descriptions to ensure that the requirements of each type of overtime exemption are met.