Misclassified As Exempt: A Classic FLSA Overtime Mistake

(Published August 31, 2009)

 

Companies often make the mistake of bestowing exempt status on anyone who has management-related duties. Just because an individual is called a "manager" and has some discretion to perform their job does not necessarily mean they are truly exempt. In order to ensure your managers are correctly classified, you need to evaluate whether their management-related duties actually fit one of the exempt classification tests under the federal Fair Labor Standards Act (FLSA). Incorrectly classified managers could be entitled to big bucks in back overtime pay.

 

How Much Authority Does A Manager Need?

Example: Grocery store managers claimed they were not exempt employees because they spent almost no time performing managerial tasks; instead, their main duties revolved around customer service, cleaning, and sales. They also claimed they lacked real authority over their stores and employees, and were required to consult with their district managers before making management decisions. The store claimed that the managers interviewed, hired, trained, evaluated, and disciplined employees; maintained store inventory; and were relatively free from supervision of their daily activities.

 

Are these managers exempt? No. An appeals court ruled that a jury could reasonably find that the managers' primary duty was not management and that the district managers actually managed the stores. The court upheld the jury's $297,000 back pay award.

 

How Much Non-Exempt Work Can A Manager Do?

Example: A manager for a gas station/convenience store spent approximately 60% of her time performing non-managerial tasks, such as stocking merchandise, sweeping floors, cleaning bathrooms, operating the register, and performing routine clerical duties. Her management duties included supervising, hiring, training, and disciplining employees; preparing weekly work schedules; resolving employee complaints; evaluating employees' performance; recommending salary increases and terminations; and terminating employees. The manager argued in court that her primary duty was not management because she spent just 40% of her time engaged in management-related activities.

 

Is this manager exempt? Yes. Time alone is not the sole test for determining an employee's "primary duty," especially when, as in this case, the performance of managerial and non-managerial duties overlap. The court held that her managerial duties were more critical to the success of the business than her non-managerial duties. Reason: If she failed to perform her non-managerial duties (i.e., cleaning, stocking), the station would still run, albeit much less effectively; if she failed to perform her managerial duties (i.e., hiring, scheduling, training), the station would not run at all because there would be no one else to perform these essential tasks.

 

How Much Can Managers Be Managed?

Managers do not need to be an ultimate decision-maker in order to be considered exempt employees. Managers' exempt status is not jeopardized just because there is someone else higher up on the corporate ladder that has the final say in hiring, firing, and other employment decisions. The Department of Labor (DOL) has stated that a manager can meet the executive exemption test "even if a higher-level manager's recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee's change in status." The DOL looks at whether it is part of the manager's job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Alternatively, to meet the administrative exemption test, a manager must exercise discretion and independent judgment. The fact that a higher-up may review and revise or reverse a manager's decisions does not mean that the manager is not exercising discretion and independent judgment. The DOL considers whether the manager:

• has authority to formulate, affect, interpret, or implement management policies or operating practices;
  
  

• carries out major assignments in conducting the operations of the business;
  
  

• performs work that affects business operations to a substantial degree;
  
  

• has authority to commit the employer in matters that have significant financial impact; or
  
  

• has authority to waive or deviate from established policies and procedures without prior approval.

Note: There is much more to both the executive and administrative exemption tests than is written here, and there are additional exemption tests.

 

Related Topic(s): Payroll Management/FLSA, Payroll Management/Exempt vs. Non-Exempt