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Chances Are Your Employee is Not Exempt From Overtime Pay - It's Time to Reanalyze the Administrative Exemption

With the Illinois Department of Labor and U.S. Department of Labor increasing their audits for 2013, it is time for your business to analyze your exempt employees. Time and time again, businesses fail to properly categorize certain employees, which can expose the business to potential liability. The following review is simply a summary of the administrative exemption. Every business should consult with an expert to analyze its specific situation. Under the Fair Labor Standards Act and the Illinois Minimum Wage Law, certain management employees can be exempt from both the minimum wage and overtime requirements, if the individuals make a certain salary and perform certain duties. Even though businesses feel that individuals' duties are essential and very important to the organization, they may not rise to the level required under the wage and hour laws.

Many businesses review their workforce and determine that certain individuals fall within the administrative exemption, simply because they are salaried. This is a big misunderstanding. The salary portion is only the first requirement necessary to properly categorize an individual under the administrative exemption.

The first step is called the salary basis test, where the individual must be provided a predetermined salary of at least $455 per week, regardless of the individual's quality or quantity of work. Although, certain situations may arise that allow a business to deduct a portion of the individual's salary, such circumstances are very fact specific and need to be analyzed by an expert before the salary is deducted in order to be in compliance with the law. Otherwise, the business may improperly deduct a salary and destroy the exemption altogether. If a business does satisfy the salary basis test, it can move to the next step, which is analyzing the individual's job duties to determine if the individual can meet the duties test.

The duties test, in general, analyzes the individual's actual duties and whether those duties directly relate to the business's management or general business operations. If it is read broadly, this exemption could apply to many individuals within the organization. However, a business should objectively narrow its analysis, because it is often the most misapplied exemption.

This portion of the exemption is either not known by the business or simply misapplied. The business must look at the individual's actual duties, which must primarily be performed in the office and cannot be manual type work. As stated above, the individual's work must be directly related to the management or general business operations of the business or the business's customers, and the individual must have independent judgment on matters of significance. The misapplication typically occurs when defining whether the individual's actual duties involve "independent judgment on matters of significance." But all portions of the test must be met and below is a basic description of what each term means.

The first key aspect that a business must review is whether or not the individual's "primary duties" are related to the general management or operations of the business. It is not enough for an individual to perform some duties related to the general management or operations, but the individual's "primary duties" must relate to the general management or operations. So then the question becomes what is considered the general management or business operations? This will be different for every business. The Department of Labor has provided some guidance on what type of work would fall within the general manager or business operations. Job duties that involve marketing, advertising, auditing, budgeting, purchasing, human resource, and legal compliance are just some.

What separates an administrative exempt employee from an hourly employee who might also assist in the management and operation of a business, however, is the third requirement that the administrative exempt employee exercise discretion and independent judgment with respect to matters of significance. This type of discretion and independent judgment involves making decisions that can bind the company in financial matters, create and implement company policies, or resolve important issues on behalf of the company. Further, it is important to understand that the individual does not have to be the final decision maker, but the individual's opinion has provided some weight in the ultimate decision.

The administrative exemption is the most difficult exemption to properly apply because so many individuals in a business's organization seem to fit into the exemption. At least at first glance. But the business should get outside help to objectively review the individual's job duties to assure that the individual falls within the exemption; otherwise, the business risks providing too much weight to certain individual's job duties. In any event, businesses must use the above factors and have them independently analyzed to assure that they do not violate the administrative exemption and risk costing the business thousands of dollars in litigation.

Questions? Please contact Sean F. Darke in the Chicago office at sedarke@wesselssherman.com  or by phone at (312) 629-9300. 

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