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Appeals Court Limits FLSA Administrative Exemption

Posted on February 7, 2023

The U.S. Court of Appeals for the First Circuit (which includes Massachusetts) recently reversed a lower court’s award of summary judgment to a New Hampshire employer, finding that the district court had applied the wrong analysis of the administrative exemption to the Fair Labor Standards Act (FLSA).

Of the three most common white-collar exemptions – executive, professional and administrative – the administrative is the most challenging for an employer to prove. The administrative exemption is widely used by employers to exempt employees from the FLSA’s overtime requirements.

The employer provides centralized administrative and professional services to its subsidiaries.  This includes monitoring the electrical grid and gas pipelines that distribute energy to end-user customers by operation of centralized electric and gas control rooms, which are staffed by the roles at issue here.

The job titles in question are dispatchers and controllers, similar positions except that dispatchers work in electricity and controllers in gas.  The employer had classified these two roles as exempt, and the employees challenged the classification in a suit seeking overtime pay, as they regularly worked more than 40 hours per week.

The lower court in this case had determined that the dispatchers and controllers’ jobs met the following three criteria, all required for the administrative exemption:

  1. They are compensated on a salary or fee basis in an amount not less than $684 per week;
  2. The primary duty is 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
  3. Their primary duty includes the “exercise of discretion and independent judgment with respect to matters of significance.”

The issue on appeal was whether the jobs met the second prong of the administrative exemption test.  Their pay met the salary threshold of the first prong of the test and the third prong was not addressed in the appeal.

The First Circuit focused on the FLSA regulations, which further explain the second prong as requiring that “an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.”

The dispatchers and controllers had similar roles in their respective areas of the employer’s business.  Both were found to spend 60 percent  or more of their time performing “monitoring and control” of their respective systems – the dispatchers the electric systems and the controllers the gas pipeline systems.

The First Circuit found that their activities, using the stricter “relational analysis,” while related to the general business operations of their employer and its customers, was not sufficiently related to higher-level or more widely applicable aspects of the business’s operations.  Rather, they were involved in routine, day-to day operations.  In other words, although their duties were related to the employer’s operations, they did not rise to the level of generality necessary to meet the second prong of the administrative exemption test.

The case was remanded to the District Court for further analysis using the relational analysis.  It sends a clear message that the First Circuit will more closely scrutinize application of the administrative exemption.

AIM members with questions about FLSA classifications or any other employment matter may contact the AIM Employer Hotline at 800-470-6277.