Managers – Assistant Managers: Exempt or Non-Exempt?
Many employers are faced with the question of whether their Managers or Assistant Managers meet the requirements for one of the exemption classifications as promulgated by the Fair Labor Standards Act (FLSA). Obtaining the correct answer is critical since a manager who is improperly classified as exempt will be eligible for back pay back two (2) years (possibly 3) for overtime worked.
In exploring whether or not a manager is exempt, we first must understand status is determined by the actual duties performed, not by title of the position. Just because someone is titled an “assistant manager" or “manager" does not mean that the position is exempt from the FLSA. Furthermore, the employer must act in good faith and show a reasonable basis for arriving at an exemption status. When managers and assistant managers have been determined to be exempt, it is normally through the “executive" white collar exemption, and the focus is upon the individual’s primary duties including “managing" and “exercising discretion and independent judgment."
The most common and widely used exemption classification for managers and assistant managers is the Executive White Collar Classification-541.1. The following explores the executive tests for application.
The Executive Classification
The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.
However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status. In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the Department’s regulations.
To qualify for the executive employee exemption, all of the following tests must be met:
• The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;
• The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;
• The employee must customarily and regularly direct the work of at least two (2) or more other full-time employees or their equivalent; and
• The employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
Generally, “management" includes, but is not limited to, activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.
Department or Subdivision
The phrase “a customarily recognized department or subdivision" is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function.
Customarily and Regularly
The phrase “customarily and regularly" means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.
Two or More
The phrase “two (2) or more other employees" means two full-time employees or their equivalent. For example, one (1) full-time and two (2) half-time employees are equivalent to two (2) full-time employees. The supervision can be distributed among two (2), three (3) or more employees, but each such employee must customarily and regularly direct the work of two (2) or more other full-time employees or the equivalent. For example, a department with five (5) full-time non-exempt workers may have up to two (2) exempt supervisors if each supervisor directs the work of two (2) of those workers.
Factors to be considered in determining whether an employee’s recommendations as to hiring, firing, advancement, promotion or any other change of status are given “particular weight" include, but are not limited to, whether it is part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Generally, an executive’s recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include occasional suggestions. An employee’s recommendations may still be deemed to have “particular weight" 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.
Exemption of Business Owners
Under a special rule for business owners, an employee who owns at least a bona fide 20% equity interest in the enterprise in which employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive.
Highly Compensated Employees
Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 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 identified in the standard tests for exemption.
29 CFR 541.106 addresses the question of whether an individual is exempt when performingboth exempt and non-exempt work. Concurrent performance of exempt and non-exempt work does not disqualify an employee from the executive exemption if the requirements stated above are met. Whether an employee meets these requirements when performing concurrent duties is determined on a case-by-case basis and is based on the employee’s “primary duty" (see below). Generally, exempt executives make the decision regarding when to perform non-exempt duties and remain responsible for the success or failure of business operations under their management while performing non-exempt work. In contrast, the non-exempt employee generally is directed by a supervisor to perform the exempt work for defined time periods. An employee whose primary duty is ordinary production work or routine, recurrent, or repetitive tasks cannot qualify for exemption as an executive.
For example, a manager in a retail establishment may perform work such as serving customers, cooking food, stocking shelves, and cleaning the establishment, but performance of such non-exempt work does not preclude the exemption if the manager’s primary duty is management. A manager can supervise employees and serve customers at the same time without losing the exemption.
In contrast, a relief supervisor or working supervisor whose primary duty is performing non-exempt work does not become exempt merely because the non-exempt employee occasionally has some responsibility for directing the work of other non-exempt employees when the exempt supervisor is unavailable.
“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 include the relative importance of the exempt duties as compared with the 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 non-exempt work performed by the employee.
The amount of time spent performing exempt work can be a useful guide in determining whether exempt work is the primary duty of an employee. For example, employees who spend more than 50% of their time performing exempt work will generally satisfy the primary duty requirement. Time alone, however, is not the only test, and nothing in the regulations requires that exempt employees spend more than 50% of their time performing exempt work. Employees who spend less than 50% of their time performing exempt duties may meet the primary duty requirement if other factors support such a conclusion.
For example, managers in a retail establishment who perform exempt executive work such as supervising and directing other employees, ordering merchandise, managing the budget, and authorizing payment of bills may have management as their primary duty even if the managers spend more than 50% of their time performing non-exempt work such as running the cash register. However, if such managers are closely supervised and earn little more than the non-exempt employees, the managers would not satisfy the primary duty requirement.