Exempt Employees: Are Yours Watching the Clock?

Risk & Insurance, August, 2001 by William Atkinson

If you have salaried employees who spend a lot of time engaged in nonmanagerial, nonadministrative, and/or nonprofessional duties, it might be in your best interest to audit these functions carefully if you want to prevent being swept into a nationwide spate of Fair Labor Standards Act (FLSA)-related lawsuits.

"In the last two years, there have been more class-action ELSA wage-hour lawsuits filed nationwide than I have ever seen," reports Camille A. Olson, an attorney with Seyfarth Shaw in Chicago and author of An Overview of Wage and Hour Laws as They Apply to Newspapers (published jointly by the Newspaper Association of America, the American Society of Newspaper Editors, and the Society of Human Resource Management). "In California, it has been a tidal wave. There are no federal or state agencies that track the number of class-action lawsuits, but there have been more than 100 FLSA-related suits filed in California alone in the last few years.

Recent cases in Los Angeles County and Orange County, for example, include suits against Auto Club of Southern California, Bugle Boy, Daewoo Motor America, Denny's, Earl Scheib, Footstar, Linens'n Things, Little Caesar's, Mervyn's (Tar-get), Rent-A-Center, Washington Mutual Bank, and Wendy's.

What's at the heart of these class-action lawsuits? "One of the largest and most common issues in the cases relates to exempt status, whether an individual is subject to the recordkeeping and overtime pay obligations of applicable federal or state law," says Olson.

In general, according to Gerald L. Maatman Jr., the wave of suits is related to the challenges employers are finding in classifying new economy workers based on a law passed 60 years ago. Maatman, senior partner with Baker & McKenzie in Chicago and chairman of the firm's employment law practice, cites some examples. "Some Internet service providers have been sued for using high school students as volunteers in return for free Internet access time," he reports.

In addition, he says, "temporary employees have filed suit against employers to gain employee status, with the Microsoft case being the most well-publicized. Fast food restaurant managers, who manage restaurants but also have to spend time making french fries and waiting on customers, are suing for overtime. They claim, 'You pay me like a manager, but I'm just a worker, and you're squeezing 60 hours of work a week out of me but only paying me for 40.' When the FLSA laws were drafted in 1938, the Internet, large temporary employment agencies, and fast food restaurants did not even exist."

If the suits were filed by individual employees, they would not amount to much. "But since these are generally class-action suits, the small amounts of money owed to each employee, when aggregated to hundreds of employees, can get very expensive," cautions Maatman.

Olson agrees. "Mervyn's settled for $7.3 million with 1,600 managers claiming they were entitled to overtime pay," she reports. "Rent-A-Center settled for $3 million, paid to 500 class members. Perrier and Arrowhead Mountain Spring Water settled for $2.7 million in a recovery fund to be paid to 1,000 employees, plus $1.2 million in legal fees."

Exemptions of Concern

There are numerous potential employee classifications that can cause problems for employers.

* Executive Exemption. This is an exemption for managers and supervisors of other employees. To meet the requirements of the federal FLSA (various state laws may be stricter) for classifying managers and supervisors as exempt, there are three requirements: the employee's primary duty is the supervision of employees; the employee is paid more than $250 a week; and the employee is paid on a salary basis.

The first requirement is the primary duty test. If a person's primary duty is the supervision of two or more full-time equivalents (e.g.: it could be four part-time employees or more), an employer has met the primary duty test. "This is where most of the litigation focuses today," states Olson.

How is primary duty defined? "Supervisors can still perform the same work as employees, and there is no specific percentage required to prove primary duty according to federal law, but the courts are saying that supervisors must spend anywhere between at least 31 percent and 51 percent of their time in supervisory tasks," she replies.

How is "supervisory" defined? Courts look at questions such as: Does this person: Hire and fire employees, or have a say in the hiring or firing of employees? Assign work to employees? Schedule employees? Recommend employees for transfer or promotion? Conduct their performance reviews? Ask them to work overtime? Have a say in their pay increases? Attend meetings to which regular employees are not invited? It would be rare for any one of these to be the sole determinant of whether an employee should be legally classified as exempt or nonexempt. Rather, courts look at all of these and other questions in combination to make a determination.

The third requirement--that payment must be on a bona fide salary basis--is another area where litigation is focused. A person must be guaranteed this salary each and every pay period. "The amount cannot be decreased due to the quality or quantity of the person's work," explains Olson. "For example, if work is slow one day and the employer sends an exempt employee home, the employer cannot dock that person's pay."