Fair Labor Standards Act: Administrative Exemption

The Fair Labor Standards Act (FLSA) requires employers to pay employees minimum wage for all hours worked and overtime at a rate of time and one-half the regular rate of pay when an employee works more than 40 hours in a workweek. However, there are certain exemptions from both the minimum wage and overtime requirements of the FLSA. These five “white collar” exemptions (executive, administrative, professional, computer professional and outside sales) are defined by the Department of Labor (DOL) in the Code of Federal Regulations Part 541. This series will discuss the highlights of each exemption.

Anyone who works in an office is an administrative employee, right? So, we shouldn’t have to pay our administrative assistants, bookkeepers, etc. overtime, right? WRONG!

In our last article, we discussed the Executive Exemption under the Part 541 of the Fair Labor Standards Act (FLSA). In this, the second part in our series of articles discussing white collar exemptions under the FLSA, we’re going to talk about the Administrative Exemption. But the title is somewhat misleading, making one believe if someone doesn’t work on a production line or in a warehouse, we can make them “exempt”.

But that’s not the case. There are three (3) tests that must be met in order for an employee to be exempt under the Administrative Exemption:

  • The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $684 per week;
  • 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; and
  • The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The salary basis test of $684 per week seems clear. However, there are specific guidelines that have to be followed and we’ll discuss those in a future article in this series.

The primary duty of this job “must be the performance office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers”. So, if a person works in an office, obviously he or she isn’t performing manual work. Check. The second part of the primary duty test deals with performing work directly related to the management or general business operations. If you think about it, does anyone perform work that DOESN’T relate to the management or general business operations of the employer? Isn’t that why we hire people?

But that’s not how this primary duty test is interpreted. When the regulations talk about “directly related to management or general business operations”, it references performing work in functional areas such as tax, finance, quality control, human resources, public relations, etc. The employee must perform work directly related to assisting with the running of or servicing of the business as opposed, to for example, working on a production line or selling in a retail environment.

The final part of the administrative exemption test revolves around the discretion and independent judgment on matters of significance used by the individual in the performance of their duties. So one may question why an administrative assistant or bookkeeper doesn’t meet this criterion when they are required to use some level of discretion and independent judgment. The reason they don’t typically fall under the administrative exemption is because their duties generally don’t require them to use the high level of discretion and independent judgment that is prescribed in the regulations.

When we look at the FLSA regulations, they state:

“In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered. The term ‘‘matters of significance’’ refers to the level of importance or consequence of the work performed….Factors to consider when determining whether an employee exercises discretion and independent judgment with respect to matters of significance include, but are 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, even if the employee’s assignments are related to operation of a particular segment of the business; 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; whether the employee provides consultation or expert advice to management; whether the employee is involved in planning long- or short-term business objectives; whether the employee investigates and resolves matters of significance on behalf of management; and whether the employee represents the company in handling complaints, arbitrating disputes or resolving grievances….The exercise of discretion and independent judgment implies that the employee has authority to make an independent choice, free from immediate direction or supervision.”

Examples of positions that may be exempt under this category may include but are not limited to Human Resource Managers, who create, interpret and implement policies on behalf of the company, Purchasing Agents who have authority to bind the company on significant purchases and employees in the financial services industry who collect and analyze information regarding a customer’s income, assets, investments or debts, determine which financial products best meet the customer’s needs and financial circumstances and advise the customer regarding the advantages/disadvantages of different financial products.

More information about the FLSA’s administrative exemption can be found in the DOL’s Fact Sheet at http://www.dol.gov/whd/regs/compliance/fairpay/fs17c_administrative.pdf.

Please note that individual states may have different minimum salary standards. Check out ADP’s article on Exempt Employees: Minimum Salary Requirements for 2022.

You can also view our latest micro-learning sessions…Make This Job Exempt! and I Have to Pay Employees for That?!

EAF members can also access our White-Collar Exemption Advisor interactive tool in our CCH HR Compliance Library.

EAF responds to hundreds of hotline calls and emails monthly. We would be happy to answer any interesting questions you may have too! Contacts us at [email protected] or 407.260.6556

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