One of the biggest challenges for an employer is to properly classify employees under the Fair Labor Standards Act (FLSA). The federal FLSA requires employers to designate positions as exempt or non-exempt. The benefit of an employee being classified as exempt is the employer avoids having to pay overtime for any hours worked beyond 40 in a week.

The US Department of Labor (US DOL) seeks to prevent misclassification by employers as part of its compliance audit process. A recent Massachusetts case is a reminder that misclassification and non-payment of wage cases are in the department’s crosshairs.

There are six categories of exempt classification. They include executive, professional (learned and creative), administrative, outside sales, computer employee and highly compensated.

To qualify as exempt, the employer must be able to overcome three specific tests. The employee must be paid on a salary basis (weekly, biweekly, or monthly), be paid at least $684 a week and pass specific duties test relevant to that position.

The administrative classification often proves the most challenging for employers as it is the one most open to nuance and interpretation. The key duties provisions state that:

• 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.

In a recent case brought in Massachusetts federal court involving a large multistate employer, the DOL claimed the employer violated the FLSA in three ways:

• misclassifying inside sales representatives (“ISRs”) as exempt from overtime pay based on the administrative exemption;
• failing to maintain accurate records of the hours worked by non-exempt employees; and
• retaliating against employees by dissuading them from speaking freely to DOL investigators.

The federal judge hearing the case ruled in favor of the DOL on the first two claims but decided the retaliation issue should go to trial.

In reaching its decision, the court had to address the question of what is the primary duty of these employees?

According to the company ISRs perform a variety of tasks including:

• having to “meet and exceed” sales and gross profit goals
• process and maintain customer orders
• initiate transfers of products and materials between store locations
• execute purchase orders for specialty materials
• oversee deliveries to customers, and
• produce bids for customer approval.

The employer argued that its inside sales representatives also had authority to deviate from listed prices when preparing customer orders.

Misclassification

Notwithstanding the employer’s claims, the court determined that the evidence clearly showed the ISRs’ primary duty was to make sales.  The judge wrote… “Since the ISRs’ primary duty closely relates to the employer’s business purpose, in that they produce the product or provide the service that the company is in business to provide,’ the employer cannot meet the (primary duty) prong of the administrative exemption test.”  While the sale of the product is related to the employer’s management of its business, it is an ancillary function and not sufficiently tied to the core business.

The judge noted that the evidence showed that sales performance was “central” to how the defendant evaluated the job performance of its ISRs, with supervisors looking at the employee’s sales, number of bids written for customers, and percentage of bids resulting in completed sales.

Retaliation

The question of retaliation emerged from emails to employees inviting them to be a part of the DOL investigation and indicated they should advise management should they be interviewed by investigators. The judge determined that there was insufficient evidence to affirmatively state that retaliation had occurred and instead referred the matter over for trial.

Consequences

In this case the employer owes back wages for all overtime worked from the summer of 2018 to the present. Determining the actual amount of back wages owed will be extremely challenging since the company did not keep records for all those years as it assumed it was not required due to the exempt classification.

As result of this decision, the company will have to begin adhering to the FLSA record-keeping requirements for all newly reclassified non-exempt employees.

This case serves as a reminder that employers need to take care when determining whether an employee is exempt, especially when it involves the administrative exemption. An employer seeking to classify an employee as exempt needs to review the job description against the law’s requirements to make sure they are confident and comfortable with the justifications they are using to classify the position as exempt.

AIM members wishing to discuss this or any other human-resource issue may contact the AIM HR Helpline at 1-800-470-6277.