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Applying the FLSA's ''White Collar'' Exemptions Requires an Understanding of More than the Employee's Attire

Monday, March 19, 2012
George Patterson | Bloomberg Law The Fair Labor Standards Act (FLSA) requires generally that employees be paid at least the minimum wage for all hours worked, and receive overtime compensation equal to one and one-half times their regular rates of pay for hours worked in excess of 40 per week.1 However, because inflexible rules concerning hours and pay rates can be impractical or counterproductive when applied to certain types of occupations, federal law2 has long recognized the right of employers to designate certain classes of workers as "exempt" from the FLSA's minimum wage and overtime requirements.3 Exempt categories of employment include commissioned retail or service employees,4 drivers, driver's helpers, loaders and mechanics employed by motor carriers engaged in interstate commerce,5 certain farmworkers,6 salesmen, partsmen and mechanics employed by automobile dealerships,7 and certain seasonal and recreational workers.8 Business and labor interests have also acknowledged that strict legal requirements governing minimum wage and maximum work hours have little utility when it comes to well-paid professionals, in whom employers often vest considerable autonomy regarding daily work activities. Thus, one category of exemptions that are of particular interest for many employers in today's economy are the so-called "white collar" exemptions,9 which apply to six main classes of employees: executive, administrative, professional, outside sales, computer professionals and highly compensated employees.10 While employers often assume it is unnecessary to tabulate weekly hours worked and determine overtime rates for employees in traditional white collar fields, courts have shown an increasing willingness to permit costly class action lawsuits against employers who misread the exemptions' technical requirements.11 Further, the Department of Labor (DOL) announced in 2011 that it was partnering with the IRS and several state agencies in a "Misclassification Initiative" to identify employees wrongly classified as exempt and "enforce violations of the law that result from employee misclassification."12 Accordingly, any decision to classify employees as exempt should be based on a careful analysis of each of the exemptions' specific statutory and regulatory requirements, as well as a detailed review of any DOL opinion letters and court decisions addressing the exemptions.

White Collar Exemptions

To take advantage of the white collar exemptions, an employer must do more than merely designate the employee as an executive, administrator or professional by assigning him or her that job title.13 Instead, the employer must establish that the appropriate conditions apply with respect to compensation and specific occupational duties. The requirements for the six white collar exemptions are summarized as follows: — Executive Exemption The executive exemption applies to employees who: (1) earn at least $455 per week or $23,660 per year;14 (2) have as their primary duties the management of the business at issue or one of its recognized departments or subdivisions;15 (3) customarily or regularly direct the work of at least two other employees;16 and (4) have the authority to hire or fire other employees, or have significant input on the hiring, firing, advancement or promotion of employees.17 This exemption also applies to an employee who owns at least a bona fide 20 percent equity interest in the business, provided the employee is also actively engaged in the business's management.18 — Administrative Exemption The administrative exemption applies to employees who: (1) earn at least $455 per week or $23,660 per year;19 (2) have as their primary duties the performance of office or non-manual work directly related to the management or general business operations of the business or its customers;20 and (3) have included among their primary duties the exercise of discretion and independent judgment with respect to matters of significance.21 Examples of exempt administrative workers include insurance claims adjusters, certain financial services employees, executive or administrative assistants, human resource managers and purchasing agents.22 — Professional Exemption The professional exemption applies to employees who: (1) earn at least $455 per week or $23,660 per year;23 and (2) have as their primary duties the performance of work: (a) requiring knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction, or (b) requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.24 The professional exemption is divided into two subcategories based on the type of work involved, one for "learned" professionals and another for "creative" professionals.25 Some examples of exempt learned professionals include registered nurses, dental hygienists, physician assistants, certified public accountants, chefs, athletic trainers, funeral directors and embalmers.26 Exempt creative professionals may include actors, musicians, composers, painters, novelists, screenwriters and journalists.27 In addition, teachers, attorneys and physicians are generally considered exempt professionals.28 — Computer Employee Exemption The computer employee exemption applies to employees who: (1) earn at least $27.63 per hour, $455 per week or $23,660 per year;29 and (2) have as their primary duties: (a) the application of systems analysis techniques and procedures to determine hardware, software or system functional specifications, (b) the design, development, documentation, analysis, creation, testing or modification of computer systems or programs, (c) the design, documentation, testing, creation or modification of computer programs related to machine operating systems, or (d) some combination of these duties requiring the same level of skills.30 — Outside Sales Exemption The outside sales exemption does not depend on the employee earning any minimum level of compensation, but applies to employees who: (1) have as their primary duties: (a) making sales as defined by the FLSA, or (b) obtaining orders or contracts for services or for the use of facilities paid for by the client or customer; and (2) are customarily and regularly engaged away from the employer’s place of business in performing this primary duty.31 To take just one example of recent high profile challenges to the use of white collar exemptions, a controversy regarding whether the outside sales exemption applies to sales representatives in the pharmaceutical industry is currently awaiting resolution by the United States Supreme Court.32 — Highly Compensated Employee Exemption Employees earning annual compensation of at least $100,000 are exempt from FLSA minimum wage and overtime requirements if they perform one or more of the duties of an exempt executive, administrative or professional employee.33 A highly compensated employee's earnings can be comprised of commissions, nondiscretionary bonuses and other nondiscretionary compensation.34 The highly compensated employee exemption, which overlaps with other white collar exemptions, is intended to eliminate the need for a detailed analysis of job duties, given that a high level of compensation is typically a strong indicator of exempt status.35 However, certain employees, including blue collar workers such as carpenters, electricians, mechanics and plumbers,36 as well as public safety employees such as police officers, firefighters, and paramedics,37 do not fall within the highly compensated employee exemption regardless of how much they are paid.

Tests for Exempt Status

In determining whether an employee qualifies for one of the white collar exemptions, courts apply the regulatory language and DOL guidance to assess whether the employee's position satisfies three tests: the "salary basis" (or, alternatively, "fee basis") test, the "salary level" test and the "duties" test.38 If the job does not satisfy the requirements of all three of these tests, the employee must be treated as non-exempt and must receive at least the minimum wage for all hours worked as well as overtime pay for hours in excess of 40 per week. — Salary Basis Test The salary basis test requires that the employee be paid on a "salary basis," meaning that the employee "regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed."39 In addition, subject to certain exceptions, the exempt employee "must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked."40 Notably, only the executive exemption requires that the employee be compensated exclusively on a salary basis. The administrative, professional, computer employee, and highly compensated employee exemptions apply if the employee is paid either on a "salary or fee" basis.41 Moreover, as discussed, the outside sales exemption does not require compensation on either a salary or a fee basis.42 — Fee Basis Test Pursuant to the "fee basis" test, an exempt employee must be "paid an agreed sum for a single job regardless of the time required for its completion."43 To determine whether the fee payment meets the minimum salary requirements for exemption under the regulations, the amount paid to the employee may be tested "by determining the time worked on the job and whether the fee payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours."44 — Salary Level Test The "salary level" test simply refers to the amount a salaried employee is paid, and requires that the employee's salary be at least $455 per week or $23,600 per year.45 — Duties Test Once an employer establishes that an exempt employee's job satisfies the salary (or fee) basis test and the salary level test, it must confirm that the requirements of the "duties" test have also been met.46 While each particular exemption describes the specific tasks an employee falling within that exemption must perform, the duties test clarifies that these exempt tasks must be the employee’s “primary duty,” defined as his or her "principal, main, major or most important duty."47 When determining an employee's primary duty, factors to consider include "the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee."48

Challenges in Applying Exemptions

— Jobs Involving Exempt and Non-Exempt Tasks Applying the duties test when employees, or agencies acting on their behalf, challenge an employer's decision to classify workers as exempt is often a contentious undertaking. Questions inevitably arise regarding which duties are exempt and whether they constitute a sufficient portion of the employee's overall job to bring the entire position within the exemption. DOL regulations provide generally that an employee's "primary duty" is that which "constitutes the major part (over 50 percent) of an employee's work."49 However, a duty "constituting less than 50 percent of an employee's work (alternative primary duty) may be credited as the primary duty" if it: (1) constitutes a substantial, regular part of the work assigned and performed; (2) is the reason for the existence of the position; and (3) is clearly exempt work in terms of the basic nature of the work, the frequency with which the employee must exercise discretion and independent judgment, and the significance of the decisions made.50 Despite this focus on time and percentages, however, sections of the regulations enacted more recently explain that while the amount of time spent performing exempt work can be a useful guide in determining whether such work is the employee's primary duty, the final determination must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole.51 Thus, while employees who spend more than 50 percent of their time performing exempt work will generally satisfy the primary duty requirement, employees who spend less than half their time performing exempt duties "may nonetheless meet the primary duty requirement if the other factors support such a conclusion."52 By way of example, the DOL regulations explain that assistant retail managers may have management as their primary duty — and thus fall within the executive exemption — if they supervise and direct other employees, order merchandise, manage the budget and authorize the payment of bills.53 Moreover, this exemption may apply even to an assistant retail manager who spends more than 50 percent of his or her time performing non-exempt work, such as running a cash register.54 Notably, however, the exemption will not apply if the manager is closely supervised and earns little more than non-exempt workers.55 The DOL's Field Operations Handbook also explains that when a retail food service manager's primary duty is managing the establishment, performing work such as serving customers or cooking food during peak customer periods does not eliminate the manager's exempt executive status.56 This more flexible approach to the executive exemption is based on the fact that executives typically make decisions regarding when to perform nonexempt duties and remain responsible for the success or failure of business operations while performing non-exempt tasks.57 Thus, such managers can both supervise subordinate employees and serve customers at the same time without being disqualified from the exemption.58 — Loss of Exemption due to Deductions Another risk of which employers should be aware is the potential loss of an employee's exempt status due to seemingly justifiable wage deductions. In this regard, the DOL regulations specify several permissible and impermissible deductions, the latter of which may result in the loss of the exemption and employer liability for unpaid overtime.59 An employer generally forfeits the exemption when it makes deductions from an employee's pay for partial day absences; absences for jury duty; disciplinary suspensions unless imposed in good faith for infractions of workplace conduct rules; and absences the employer orders because work is unavailable even though the employee is ready, willing and able to work.60 Conversely, employers can typically make deductions for the following reasons without jeopardizing the employee's exempt status: to account for absences of a full day or more for personal reasons other than sickness or disability; to account for absences of a full day or more for sickness or disability if in accordance with a bona fide plan, policy or practice providing compensation for loss of salary; to offset jury or witness fees or military pay the employee receives; to impose penalties for infractions of "safety rules of major significance"; for disciplinary suspensions based on infractions of workplace conduct rules; for hours not worked in the first or last weeks of employment; and for hours taken as unpaid leave under the Family and Medical Leave Act (FMLA), 29 U.S.C. § 2601, et seq.61 Notably, the regulations provide a safe harbor from liability for employers that make improper deductions inadvertently, preserving the exemption if the employer reimburses the worker within the "window of correction."62 Under this safe harbor, the exemption is not lost if the employer has a clearly communicated policy prohibiting improper deductions, a mechanism for receiving complaints, provides reimbursement for improper deductions and makes a good faith commitment to comply with wage laws in the future.63


The white collar exemptions offer companies a variety of benefits, including reducing the workload and expenses of payroll departments and providing skilled employees with the freedom to accomplish long-range tasks without having to continually obtain preapproval for overtime work. Nevertheless, the exemptions can create complex challenges when applied to occupations that do not fit neatly into their specifications, and failing to appreciate the subtleties of their application can prove extremely costly for employers. As a result, employers should periodically review the job duties and compensation levels of exempt and non-exempt employees in an effort to maintain compliance with the DOL's requirements. In doing so, they should keep in mind that non-exempt status is the default designation and that the employer is responsible for demonstrating that an exemption applies.64DisclaimerThis document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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