You have been busy with an employee reclassification project. You are feeling good about all your changes until you come to the final one, the one you set aside suspecting it would be a challenge.

The position is clearly not executive, nor does it fit in the professional classification. The person does not perform outside sales or computer programming. The only exempt classification remaining is administrative, if you believe this position is to be properly classified as exempt. But calling someone administrative in their job title no way guarantees they will be exempt under the Fair Labor Standards Act (FLSA) administrative exception.

As you review the rules regarding administrative employee classification you are quickly reminded of why you held off until the end to handle this classification. Many HR professionals will tell you that this is the trickiest of the five major exempt employment subgroups. It is often seen as much art as science. But there are resources, and a systematic approach will make it easier to determine whether the position is exempt and to justify that classification.

Classification process

The law says the exempt administrative employee must be paid at least $684 per week and the person must be paid on a salary basis. Assuming the salary threshold is easily met, it’s time to dig deeper into the administrative exemption under the FLSA regulations. That means we grappling with the “duties” test.

The FLSA regulations require that to be classified as administrative, the following conditions must be met:

• 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.

These two bullet points are loaded with questions. What is “primary duty”? What does “directly related to management or general business operations” mean? Who are the “employer’s customers”? What is “discretion and independent judgment”? And finally, what are “matters of significance”?

Fortunately, the FLSA regulations provide some answers.

Primary Duty

“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 in its entirety. Factors to consider when determining the primary duty of an employee include, but are not limited to:

• the relative importance of the major or most important duty as compared with other types of duties;
• the amount of time spent performing the major or most important duty;
• the employee’s relative freedom from direct supervision; and
• the relationship between the employee’s salary and the wages paid to other employees for performance of similar work.

The amount of time spent performing the specific duty can be a useful guide in determining whether such work is the primary duty of an employee. Thus, employees who spend more than 50% of their time performing a specific duty will generally satisfy the primary duty requirement.

Time alone, however, is not the sole test, and nothing requires that exempt employees spend more than 50% of their time performing a specific duty. Employees who do not spend more than 50% of their time performing their major or most important duty may nonetheless meet the primary duty requirement if the other factors support such a conclusion.

Directly Related to Management or General Business Operations

To meet this requirement, 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.

Work “directly related to management or general business operations” includes, but is not limited to, work in functional areas such as:

• tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing, and procurement;
• advertising, marketing, research, safety and health, personnel management, and human resources;
• employee benefits, labor relations, public relations, government relations, computer network, internet and database administration; and
• legal and regulatory compliance and similar activities.

Employer’s Customers

An employee may qualify for the administrative exemption if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. Thus, employees acting as advisors or consultants to their employer’s clients or customers — as tax experts or financial consultants, for example — may be exempt.

Discretion and Independent Judgment

In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or deciding after the various possibilities have been considered. The term must be applied in the light of all the facts involved in the employee’s particular employment situation and implies that the employee has authority to make an independent choice, free from immediate direction or supervision.

Factors to consider 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 administrative position is not required to perform all these duties but any company seeking to classify a position as administrative exempt should carefully evaluate this list of factors to determine whether these are the duties performed by this position.

The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources.

Matters of Significance

The term “matters of significance” refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly.

For example, an employee’s failure to perform a bank deposit causing the business to have insufficient funds to cover payments does not make that position a matter of significance. Similarly, an employee who operates expensive equipment does not exercise discretion and independent judgment with respect to matters of significance merely because improper performance of the employee’s duties may cause serious financial loss to the employer.

Final thoughts

Deciding that a position is administratively exempt often takes the most time and care to determine the most appropriate course of action. If you do elect to classify a position as exempt, make sure to document your process and reasoning to enable you to explain to a Department of Labor investigator if ever needed.

AIM members with questions about this or any other human resources matter may contact the AIM Employer Hotline at 1-800-470-6277.