Navigating the FLSA's 'White Collar' Exemptions

So what facts are necessary to support designating an individual as an exempt executive, administrative or professional employee? There are two separate 'tests' that an employer must satisfy.

The first is commonly known as the salary test. The salary test is identical regardless of whether the employer is claiming an executive, administrative or professional exemption. The test requires that the exempt employee regularly receive each pay period, on a weekly or less frequent basis, a predetermined amount constituting all or part of his compensation. The employee's salary may not be reduced for absences occasioned by the employer, or operation of the business, such as lack of work. For absences of less than a week caused by jury duty, attendance as a witness, or temporary military leave, employers may offset any amount the employee receives for those duties against the salary due for that week. Additionally, deductions of one or more days (but less than a week) are permitted only for absences resulting from personal reasons other than sickness or accident; sickness or disability in accordance with a bona fide plan, policy or practice; or good-faith discipline for infractions of safety rules of major significance. However, employers may not dock an exempt employee's pay for fractions of a day missed, other than in cases of intermittent leave pursuant to the Family and Medical Leave Act. They also may not dock exempt employees for disciplinary infractions, other than for violations of major safety rules.

Understanding and correctly applying the salary test is extremely important when invoking the 'white collar' exemptions, because the U.S. Supreme Court has taken the position that either an actual practice of making improper deductions, or even a policy that creates a 'significant likelihood' that improper deductions will be made, will forfeit the exemption. Illustrative cases involve class actions against Sbarro and Shoney's by current and former managers, challenging the chains' policies of reducing wages by taking deductions for cash shortages and the like. In both cases the courts held that the deductions were improper and violated the companies' managers' exempt status. It should be noted that employers may have the opportunity to remedy certain illegal deductions. The FLSA provides a 'window of correction' during which an employer may redress all inadvertent deductions, or those made for reasons other than lack of work. To take advantage of this window, however, employers must reimburse all affected employees for all improper deductions and commit to future compliance.

As stated above, the salary test is but one of the standards an employer must satisfy to properly invoke the administrative and executive exemptions. The FLSA also requires that a duties test be satisfied, which examines the would-be exempt employee's primary responsibilities. Certain job duties and responsibilities are considered to be administrative, executive or professional in nature. For example, where an employee makes at least $250 per week, and his or her primary duty is to perform office or non-manual work relating to management policies or general business operations, and the individual exercises discretion and independent judgment, that employee will qualify as an exempt administrative employee. Likewise, where an employee earns at least $250 per week and the employee's primary duty is to manage an enterprise or a department or subdivision thereof while he or she regularly directs two or more full-time employees, that individual will qualify as an exempt executive employee. Finally, where an employee earns at least $250 per week, an employee may be considered a professional employee if his or her primary duty is work that either: requires advanced knowledge in a field of science or learning customarily acquired through prolonged specialized intellectual instruction; is original and creative in a recognized field of artistic endeavor; or teaching or requires theoretical and practical application of specialized computer skills. It should be noted that where an employee's salary is less than $250 per week, there are additional requirements he or she must satisfy to be properly classified as exempt.

Although these duties appear straightforward in writing, their application is surprisingly complicated and made even more difficult by conflicting case law and Department of Labor advisory opinions. Accordingly, if an employer is at all uncertain about whether or not an employee or group of employees qualify for an exemption, the employer should not risk incorrectly classifying those individuals and should consult an employment attorney to assist in making those critical determinations. Employers should let what happened to Waffle House recently serve as a lesson against cavalier classification, as misclassification recently cost that employer $3 million in unpaid overtime damages. Waffle House had a practice of staffing each of its restaurants with a unit manager, whom the company classified as an exempt executive. In a class action brought on behalf of current and former unit managers, the district court found that those 'exempt' employees had been misclassified. Among the facts that the court took into account were that unit managers served as grill cooks for the busiest of three shifts; the unit managers' training manual stated that the primary objective of the training was to become a proficient grill operator, while the secondary objective was exposure to management duties and responsibilities; unit managers often substituted for absent hourly employees; and hourly employees performed the duties of absent unit managers. This case highlights the importance of carefully evaluating the duties involved in exempt positions.

Where the Department of Labor's Wage and Hour Division audits an employer and determines that its employees have been erroneously classified as exempt, the employer will be liable for unpaid overtime premiums for the preceding 2 years. Moreover, if the violations are deemed 'willful,' the FLSA provides a 'look back' period of 3 years, along with the availability liquidated (double) damages.

Compounding the hazards that the FLSA presents to employers, it should be noted that an unusual feature of the FLSA is that a company's owners, officers, managers, and supervisors can face personal liability for violations ' without the Department of Labor making the traditional showing necessary to pierce the corporate veil. In evaluating personal liability, the Department's key inquiry is whether the person to be held liable possessed 'the power to control the workers in question, with an eye to the 'economic reality' presented by the facts of each case.' The fact that a company could face personal liability should add an additional impetus for employers to remedy misclassification of employees.

Finally, employers should take note that on March 27, 2003, the Department of Labor proposed new federal regulations relating the FLSA's overtime exemptions that could significantly redefine employees who qualify for overtime compensation. Under the proposed regulations, an employee who earns less than $22,100 per year would automatically be entitled to overtime regardless of whether they are hourly or salaried employees, and notwithstanding their management status. The proposed changes also clarify the definitions of administrative, executive and professional employees. Essentially, employees will satisfy the proposed exemption if they supervise more than two employees and have hiring and firing authority, or if they have an advanced degree or similar training and work in a specialized filed, or work in their companies' operations, finance or auditing departments. The regulatory proposals, which are subject to a 90-day public comment period, do not require congressional action and could become effective as early as the end of this year.

Audrey N. Browne is a shareholder in the New Orleans office of Watkins Ludlam Winter & Stennis, PA, where she represents employers in labor and employment law matters.

Most sophisticated employers are aware that the Fair Labor Standards Act (FLSA) requires that employees be paid overtime when they have worked more than 40 hours per week. Most employers also know that the FLSA contains certain exemptions from that rule. Those exemptions include what are commonly known as the 'white collar' exemptions. The white collar exemptions apply to those employees 'employed in a bona fide executive, administrative, or professional capacity.' When those exemptions apply, they may save significant overtime costs and ' often more importantly ' provide employers with useful flexibility for scheduling employees. Unfortunately, many employers in various industries are classifying employees as exempt who do not qualify for the exemption. Failure to pay overtime compensation to employees who are not legally exempt can result in employer liability for the unpaid overtime, liquidated (double) damages, and attorney fees. Given the significant impact that such liability can have on a business and the fact that overtime litigation is increasing exponentially, misclassification of employees is a growing area of concern for employers.

There are many common mistakes that employers make when attempting to classify their employees for purposes of exempting them from overtime compensation. One of the most common mistakes is assuming that if an employee is paid a salary as opposed to an hourly wage, that fact is sufficient to classify the employee as exempt. Another oft-made mistake is assuming that written job descriptions, as opposed to actual duties, constitute grounds upon which to classify certain employees as exempt. Both assumptions are grossly incorrect. The fact that an employee is paid a salary is only one of many factors necessary for classifying an employee as exempt. Similarly, while job titles and written job descriptions may assist in the classification process, it is the actual duties that an employee performs which determine whether or not that employee is exempt.

Exempt Tests

So what facts are necessary to support designating an individual as an exempt executive, administrative or professional employee? There are two separate 'tests' that an employer must satisfy.

The first is commonly known as the salary test. The salary test is identical regardless of whether the employer is claiming an executive, administrative or professional exemption. The test requires that the exempt employee regularly receive each pay period, on a weekly or less frequent basis, a predetermined amount constituting all or part of his compensation. The employee's salary may not be reduced for absences occasioned by the employer, or operation of the business, such as lack of work. For absences of less than a week caused by jury duty, attendance as a witness, or temporary military leave, employers may offset any amount the employee receives for those duties against the salary due for that week. Additionally, deductions of one or more days (but less than a week) are permitted only for absences resulting from personal reasons other than sickness or accident; sickness or disability in accordance with a bona fide plan, policy or practice; or good-faith discipline for infractions of safety rules of major significance. However, employers may not dock an exempt employee's pay for fractions of a day missed, other than in cases of intermittent leave pursuant to the Family and Medical Leave Act. They also may not dock exempt employees for disciplinary infractions, other than for violations of major safety rules.

Understanding and correctly applying the salary test is extremely important when invoking the 'white collar' exemptions, because the U.S. Supreme Court has taken the position that either an actual practice of making improper deductions, or even a policy that creates a 'significant likelihood' that improper deductions will be made, will forfeit the exemption. Illustrative cases involve class actions against Sbarro and Shoney's by current and former managers, challenging the chains' policies of reducing wages by taking deductions for cash shortages and the like. In both cases the courts held that the deductions were improper and violated the companies' managers' exempt status. It should be noted that employers may have the opportunity to remedy certain illegal deductions. The FLSA provides a 'window of correction' during which an employer may redress all inadvertent deductions, or those made for reasons other than lack of work. To take advantage of this window, however, employers must reimburse all affected employees for all improper deductions and commit to future compliance.

As stated above, the salary test is but one of the standards an employer must satisfy to properly invoke the administrative and executive exemptions. The FLSA also requires that a duties test be satisfied, which examines the would-be exempt employee's primary responsibilities. Certain job duties and responsibilities are considered to be administrative, executive or professional in nature. For example, where an employee makes at least $250 per week, and his or her primary duty is to perform office or non-manual work relating to management policies or general business operations, and the individual exercises discretion and independent judgment, that employee will qualify as an exempt administrative employee. Likewise, where an employee earns at least $250 per week and the employee's primary duty is to manage an enterprise or a department or subdivision thereof while he or she regularly directs two or more full-time employees, that individual will qualify as an exempt executive employee. Finally, where an employee earns at least $250 per week, an employee may be considered a professional employee if his or her primary duty is work that either: requires advanced knowledge in a field of science or learning customarily acquired through prolonged specialized intellectual instruction; is original and creative in a recognized field of artistic endeavor; or teaching or requires theoretical and practical application of specialized computer skills. It should be noted that where an employee's salary is less than $250 per week, there are additional requirements he or she must satisfy to be properly classified as exempt.

Although these duties appear straightforward in writing, their application is surprisingly complicated and made even more difficult by conflicting case law and Department of Labor advisory opinions. Accordingly, if an employer is at all uncertain about whether or not an employee or group of employees qualify for an exemption, the employer should not risk incorrectly classifying those individuals and should consult an employment attorney to assist in making those critical determinations. Employers should let what happened to Waffle House recently serve as a lesson against cavalier classification, as misclassification recently cost that employer $3 million in unpaid overtime damages. Waffle House had a practice of staffing each of its restaurants with a unit manager, whom the company classified as an exempt executive. In a class action brought on behalf of current and former unit managers, the district court found that those 'exempt' employees had been misclassified. Among the facts that the court took into account were that unit managers served as grill cooks for the busiest of three shifts; the unit managers' training manual stated that the primary objective of the training was to become a proficient grill operator, while the secondary objective was exposure to management duties and responsibilities; unit managers often substituted for absent hourly employees; and hourly employees performed the duties of absent unit managers. This case highlights the importance of carefully evaluating the duties involved in exempt positions.

Where the Department of Labor's Wage and Hour Division audits an employer and determines that its employees have been erroneously classified as exempt, the employer will be liable for unpaid overtime premiums for the preceding 2 years. Moreover, if the violations are deemed 'willful,' the FLSA provides a 'look back' period of 3 years, along with the availability liquidated (double) damages.

Compounding the hazards that the FLSA presents to employers, it should be noted that an unusual feature of the FLSA is that a company's owners, officers, managers, and supervisors can face personal liability for violations ' without the Department of Labor making the traditional showing necessary to pierce the corporate veil. In evaluating personal liability, the Department's key inquiry is whether the person to be held liable possessed 'the power to control the workers in question, with an eye to the 'economic reality' presented by the facts of each case.' The fact that a company could face personal liability should add an additional impetus for employers to remedy misclassification of employees.

Finally, employers should take note that on March 27, 2003, the Department of Labor proposed new federal regulations relating the FLSA's overtime exemptions that could significantly redefine employees who qualify for overtime compensation. Under the proposed regulations, an employee who earns less than $22,100 per year would automatically be entitled to overtime regardless of whether they are hourly or salaried employees, and notwithstanding their management status. The proposed changes also clarify the definitions of administrative, executive and professional employees. Essentially, employees will satisfy the proposed exemption if they supervise more than two employees and have hiring and firing authority, or if they have an advanced degree or similar training and work in a specialized filed, or work in their companies' operations, finance or auditing departments. The regulatory proposals, which are subject to a 90-day public comment period, do not require congressional action and could become effective as early as the end of this year.

Audrey N. Browne is a shareholder in the New Orleans office of Watkins Ludlam Winter & Stennis, PA, where she represents employers in labor and employment law matters.