FLSA Administrative Employee Exemption: Discretion and Independent Judgment
The Fair Labor Standards Act requires covered employers to pay minimum wages and overtime compensation to certain categories of employees. However, the law contains several exceptions or “exemptions” from these requirements, most of which turn on a combination of the employees’ pay and the nature of employees’ job duties. For example, Section 13(a)(1) of the FLSA, a.k.a. 29 U.S.C. § 213(a)(1), provides an “exemption” from both minimum wage and overtime pay for certain categories of so-called “white collar” employees — namely, employees working as bona fide executive, administrative, professional, or outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain categories of computer employees.
To qualify for a white collar exemption, employees must be paid on a salary basis at not less than $684 per week (as of January 1, 2020) and have job duties that satisfy certain requirements. Importantly, job titles do not determine whether an employee is exempt from the FLSA. For an employee to be exempt, her actual real-life job duties and salary must meet all the requirements of the FLSA and the Department of Labor’s implementing regulations.
This post will focus on the exemption for administrative employees. The Department of Labor is also an excellent resource for information about the administrative employee exemption. The DOL’s implementing regulations with respect to the administrative employee exemption are generally located at 29 CFR § 541.200-204.
Administrative Employee Criteria
To qualify for the administrative employee exemption (and therefore, not be entitled to receive overtime pay under the FLSA), an employee must meet all of the following requirements:
- The employee must be compensated on a “salary basis” (as defined in 29 CFR § 541.602) or “fee basis” (as defined in 29 CFR § 541.605) at a rate not less than $684 per week (lower amounts apply for non-federal employees in U.S. territories);
- The employee’s “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;
- The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Definition of “Primary Duty”
As used in these regulations, “primary duty” means the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty 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. Factors to consider when determining an employee’s primary duty include, without limitations, the relative importance of any 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. 29 CFR § 541.700.
Definition of “Directly Related to Management or General Business Operations”
To meet the “directly related to management or general business operations” requirement, an employee must perform work directly related to assisting with the running or servicing of the business. This is different from, for example, working on a manufacturing production line or selling a product in a retail or service establishment. 29 CFR § 541.201(a).
As defined in the DOL regulations, work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities. 29 CFR § 541.201(b)
Work Directly Related to Management or Operations of Customers
It’s worth noting that an employee may qualify for the administrative exemption if her primary duty is performing work directly related to the management or general business operations of the “employer’s customers.” 29 CFR § 541.201(a). This means that an employee who acts as a consultant to her employer’s clients or customers — as tax experts or financial consultants, for example — may qualify for the exemption. 29 CFR § 541.201(c).
Definition of “Discretion and Independent Judgment”
To qualify for the administrative exemption, an employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. As defined in the regs, the exercise of “discretion and independent judgment” involves comparing and evaluating possible courses of conduct and acting or making a decision after the various possibilities have been considered. 29 CFR § 541.202(a).
The phrase must be applied to all the facts, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. 29 CFR § 541.202(b)&(c).
In making the “discretion and independent judgment” determination, the regulations provide examples of many factors to consider, including but not limited to:
- whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices;
- whether the employee carries out major assignments in conducting the operations of the business;
- whether the employee performs work that affects business operations to a substantial degree;
- whether the employee has authority to commit the employer in matters that have significant financial impact;
- whether the employee has authority to waive or deviate from established policies and procedures without prior approval
- whether the employee has authority to negotiate and bind the company on significant matters; and
- other similar factors identified in the regulation.
29 CFR § 541.202(b).The fact that an employee’s decisions may be revised or reversed after review does not necessarily mean the employee does not exercise discretion and independent judgment. 29 CFR § 541.202(c).
The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources. It also “does not include clerical or secretarial work, recording or tabulating data, or performing other mechanical, repetitive, recurrent or routine work.” 29 CFR § 541.202(e).
Definition of “Matters of Significance”
As used in the regulations, the term “matters of significance” refers to the level of importance or consequence of the work performed. 29 CFR § 541.202(a). An employee does not exercise discretion and independent judgment with respect to matters of significance just because the employer will experience financial losses if the employee fails to perform the job properly. 29 CFR § 541.202(f). For example, a messenger who is entrusted with carrying large sums of money does not exercise discretion and independent judgment with respect to matters of significance even though serious consequences may flow from the employee’s neglect. Id. Similarly, an employee who operates very expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee’s duties may cause serious financial loss to the employer. Id.
Administrative Employee Examples
The regulations contain many examples and explanations regarding specific categories of employees who typically may or may not qualify for the administrative employee exemption. Those examples and explanations are located at 29 CFR § 541.203.
The administrative exemption may also be available to employees who meet the salary basis or fee basis test, or on a salary basis which is “at least equal to the entrance salary for teachers in the same educational establishment,” and whose primary duty is “performing administrative functions directly related to academic instruction or training in an educational establishment.” 29 CFR § 541.204(a).
The term “educational establishment” means an elementary or secondary school system, an institution of higher education or other educational institution. 29 CFR § 541.204(c).
Academic administrative functions include operations directly in the field of education, and do not include jobs relating to areas outside the educational field. 29 CFR § 541.204(c). Employees engaged in academic administrative functions include: the superintendent or other head of an elementary or secondary school system, and any assistants responsible for administration of such matters as curriculum, quality and methods of instructing, measuring and testing the learning potential and achievement of students, establishing and maintaining academic and grading standards, and other aspects of the teaching program; the principal and any vice-principals responsible for the operation of an elementary or secondary school; department heads in institutions of higher education responsible for the various subject matter departments; academic counselors and other employees with similar responsibilities. 29 CFR § 541.204(c)(1).
These categories of academic employees may qualify for the administrative exemption because having a primary duty of performing administrative functions directly related to academic instruction or training in an educational establishment necessarily involves exercising discretion and independent judgment with respect to matters of significance.
Highly Compensated Employees
Highly compensated employees performing office or non-manual work and paid total annual compensation of $107,432 or more (which, as of January 1, 2020, must include at least $684 per week paid on a salary or fee basis) are exempt from the FLSA if they “customarily and regularly” perform at least one of the duties of an exempt executive, administrative or professional employee. 29 CFR § 541.601.
The term “customarily and regularly” means a frequency that must be “greater than occasional” but which “may be less than constant.” 29 CFR § 541.701. Tasks or work performed “customarily and regularly” includes work normally and recurrently performed every workweek; it does not include isolated or one-time tasks. Id.
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