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Misclassification and the FLSA – Who’s Exempt?

December 21st, 2007 by John Campbell

Under the Fair Labor Standards Act (FLSA), an employer has the ability to qualify an employee as “exempt” from the requirement that overtime be paid.  However, there is obvious potential for abuse if an employer could qualify anyone as exempt, thereby avoiding the extra cost of overtime. As a result, the FLSA provides guidance as to who can qualify as “exempt.”

Before talking about the finer points of who qualifies, a common sense explanation is probably helpful.  Generally, an exempt employee either manages other people with the right to fire them, manages some or all of the operations of the business, or is specially trained and educated to perform “professional” work.  The actual tests set out in the revised FLSA considers two important issues when determining exemption.  One is easy, and one is not.  First, an employee must earn at least $455 per week in salary in order to be exempt.  (This is up from the old FLSA standards.) Second, an assessment of the employee’s duties and responsibilities must be undertaken to determine whether exemption is appropriate.
With regard to duties and responsibilities, there are three broad categories of potentially exempt employees. They are:

1. Executive employees;
2. Administrative employees; and
3. Professional Employees.

Executive Employees
The executive duties test requires employees to be involved in supervising two or more employees and have authority to hire or fire or where the suggestions of such employees in such areas as hiring, firing, advancement, promotion or other change in status are given particular weight.   The regulations give specific guidance as to how to determine whether an employee’s suggestions are in fact given “particular weight.”

Administrative Employees
The administrative duties test requires that an employee have a “primary duty” of “performing office or non-manual work related to the management or general business operations of the employer or the employer’s customers.”  There is also a requirement that the employee have the right to exercise “discretion and independent judgment.” (For a definition of this term and a number of others that appear in the FLSA you can click here)  Language such as “discretion and independent judgment” makes this area of classification prone to litigation because employers are sometimes tempted to classify employees as exempt when the issue is a close call.  If a court later determines that the employees did not have the authority to make independent decisions, the employer is liable.

Professional Employees
This field recognizes learned professionals.  Although proposals would have allowed this category to include people who do not necessarily have formal training but have developed significant skill sets, such language did not make it into the FLSA.  As such, there will continue to be concentrated litigation in the computer field regarding whether or not employees, who often have high level positions and developed skills but little or no formal education in computer science or other computer fields, qualify as exempt.  The exposure in these fields can be huge for companies.  For example, if a company has 40 computer workers that it qualifies as exempt, each making significant salaries, and it is later determined that they are not “exempt” from overtime, the damages can pile up quickly. 

Remember from my last post on the FLSA (click here to review it) that employees are entitled to 1.5 times their hourly rate for every hour of overtime.  What if a computer worker is making the equivalent of $25 per hour, but he should have been paid $37.50 (1.5 x $25) for each hour he worked of overtime, and he worked 10 hours of overtime a week? (I note that computer programmers are often exempt, but not always. I’ll aim to dedicate a post to computer programmers and other computer employees in the future.)   That means he lost $125 per week, or $6,250 per year and that is doubled as a penalty. So each worker is owed $12,500 per year.  For this hypothetical company, the actual damages are $500,000.   The numbers I used are modest.   IBM settled an FLSA claim against it, on behalf of 37,000 current and former tech support workers classified by IMB as exempt, for $65 million. 

What if You Are Classified as Exempt but Don’t Qualify?
If you have read the categories above, are qualified as exempt, but think you might not be, please feel free to give me a call.  (Also, you might be interested in the checklists provided on a University of Washington page dedicated to the FLSA.  Click here to view the page.)  Remember, the FLSA is complicated and has a number of exemptions that are not discussed in this post.  It may be that your employer is being fair and honest, but it doesn’t hurt to be sure.  If you are misclassified, or are asked to work off-the-clock, you deserve additional pay.   Click here to email me, or feel free to call Simon Passanante at 314-241-2929.

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