Understanding overtime pay rules: The administrative exemption

An overview for architecture firm leaders on which of their employees qualify for the administrative exemption

All businesses have an incentive to manage their costs of doing business, and paying employees overtime pay is an expensive proposition. Under the Department of Labor (DOL) rules, businesses are not required to pay an employee overtime if the employee is considered “exempt” from the overtime pay requirements. Accordingly, employers have an incentive to characterize employees as exempt. This incentive must be balanced, however, with the need to remain compliant with applicable labor laws. If you are found to be non-compliant with DOL rules, your firm may have significant exposure for back pay and penalties.

This series from AIA's Risk Management Program offers insight into DOL's requirements for properly classifying employees as exempt in five distinct categories; this entry covers the administrative exemption.

The administrative exemption is relevant to a firm’s non-professional employees. To qualify for the administrative exemption, the employee must satisfy all of the following tests:

1. Does the base hourly wage compensation exceed the minimum salary threshold ($23,660 or $455 per week);

2. Is the employee’s primary duty the performance of office or non-manual work directly related to the management or general business operations of the firm or the firm’s clients; and

3. Does the employee’s primary duty include the exercise of discretion and independent judgment with respect to matters of significance?

For the most part, determining whether an employee satisfies the minimum salary threshold is a straightforward matter. Whether an employee satisfies the other two tests, however, can require a firm to make much more difficult and nuanced determinations.

To satisfy the second test, the employee’s primary job responsibilities must directly relate to the running or servicing of the firm’s business. Determining whether an employee satisfies this portion of the test is not crystal clear. The Department of Labor offers some guidance, noting that jobs in areas including tax; finance; accounting; budgeting; advertising; marketing; personnel management; human resources; employee benefits; public relations; computer network, Internet and database administration; and legal and regulatory compliance would typically satisfy the second test. The list is not exhaustive, however, leaving firm leadership with difficult decisions.

Deciding that an employee performs such a role is also not the end of the determination process; further complicating matters is the third test. Much like the second test, determining whether an employee’s primary duties include the sufficient exercise of discretion and independent judgment to qualify under the exemption is not an easy decision. Firms must evaluate an employee’s primary, or core, responsibilities and determine if those responsibilities include the ability to make sufficiently independent choices that are largely free from immediate oversight by a superior. Additionally, the employee’s ability to exercise independent discretion and judgment cannot be limited to trivial, mundane, or routine matters and instead must be exhibited in areas that are of significant importance to the business of the firm.

Unfortunately, there are few easy answers when determining whether an employee may be considered exempt under the administrative exemption. But, to best assure compliance with applicable labor law, there are a few necessary steps your firm should take.

First, have a clear set of job descriptions that are mindful of the applicable tests outlined above for your staff members and be vigorous and consistent in their use during hiring and performance reviews. Second, have a consistent policy related to promotions, especially if a promotion involves an anticipated change from non-exempt to exempt pay status. Consistent promotion policies will better able firms to viably articulate their justifications for changing an employee’s status from non-exempt to exempt. Third, engage your attorney and other knowledgeable advisor to regularly review your firm’s policies. Finally, regularly review developments of in DOL laws.

It should also be noted that the administrative exemption is not the only exemption to the DOL overtime pay requirement. Firms should be aware of these other exemptions and how they may apply to their employees.

Additionally, these resources can be used by firms to help determine employee compensation and exempt status:

General Guidance from DOL

DOL Fact Sheet 17C - Exemption for Administrative Employees Under the FLSA

AIA Salary Calculator (including job descriptions)

For more on DOL's labor laws, visit AIA’s Risk Management Program page.

AIA has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice.