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April 29, 2013 | Payroll Software | Posted by Vicki Lambert, CPP

Interpreting the Terms of Exempt Employees

Determining whether or not an employee can be categorized as exempt under the Fair Labor Standards Act (FLSA) is a process done daily by employers all across the United States.  But by the very nature of the rules under the FLSA that must be interpreted and followed, it can be and often is an arduous and difficult process to do correctly. And many times employers do make costly mistakes.  For example, in 2011 the U.S. Department of Labor (DOL) recovered a total of $934,551 in overtime back wages for 479 employees of a national health care company and $104,280 in civil money penalties after an investigation by the department's Wage and Hour Division determined that the employees had been incorrectly classified as exempt under the administrative category and consequently denied compensation for all hours worked.

The fact that the employer must interpret the terms the DOL uses and then apply that term to the employee being categorized is one of the reasons the task of determining which employee is exempt is so complex. For example, under the four categories of exempt, executive, administrative, professional and outside sales, the term “primary duty” is used.  The term is defined as the “principal, main, major or most important duty that the employee performs”.  But the DOL is very quick to point out that the term is based on all the facts in a particular case. So what is the primary duty for one exempt employee is not the same for another exempt employee even if both are classified under the executive exemption.

Each category of exempt may also have its own terms that must be interpreted.  And sometimes those terms lead to other terms that need deciphering. For example under the executive category the employee must supervise “two or more other employees”.  But what exactly does the FLSA mean by “two or more other employees”?  Generally it is defined as two full-time employees or the equivalent.  So now the term “full-time” needs to be defined, which under the FLSA generally means a 40 hour week.  But what is meant by “or the equivalent”?  Basically any combination of two full time employees will be accepted.  For example the executive can supervisor one full time employee and two employees who work 20 hours a week each. To ensure that the employee is classified correctly under the executive category the employer cannot make a single mistake on any of the terms.

Sometimes the terms are extremely esoteric in nature.  As shown above, the term “full-time” can actually be quantified.  But what about one of the terms used to define the administrative exemption. Under the administrative exemption the employee’s primary duty must include the “exercise of discretion and independent judgment with respect to matter of significance”.  Although the FLSA gives general guidelines it does not specifically spell out what the requirement must entail.  It does not define benchmarks that must be met or job duties that must be performed. For example, “matters of significance” refers to the level of importance or consequence of the work being performed.  But it is up to the employer to take that requirement and ensure that the employee’s job duties fall within the parameters of the term. And if it doesn’t…well don’t forget the national health care company and its $1,138,831 in back wages, penalties and interest.

Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website offers a payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations. With 40 years of hands-on experience in all facets of payroll functions as well as over three decades as a trainer and author, Ms. Lambert has become the most sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States that have been attended by executives and professionals from some of the most prestigious firms in business today. A pioneer in electronic and online education, Ms. Lambert produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is also an adjunct faculty member at Brandman University in Southern California where she is the instructor for American Payroll Association’s “PayTrain” online program.