What Qualifies an Employee for the Administrative Exemption?

You Asked!

Last month, we discussed the Executive Exemption. This month, we tackle the somewhat trickier Administrative Exemption. I say trickier because fewer employees qualify for this exemption than many employers think. This exemption requires you to examine not only the type of work the employee performs, but also the level or nature of that work. Simply put, your administratively exempt employees are your high-level, internal decision makers.

To qualify for the Administrative Exemption, an employee must:

  1. Be paid on a salary basis at a rate not less than $455/week

  2. Primary duty = office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers

    Words to the wise: “Work directly related to assisting with the running of the business” does not include the “production” or operating side of the business. Think of your administratively exempt employees as the “back of the house,” as they generally do not perform hands-on work or sales of your product or service.

    Functional areas generally related to management or general business operations include:

    [raw][one_third]

    • tax,
    • finance,
    • accounting,
    • budgeting,
    • auditing,
    • insurance,
    • quality control,
    • purchasing,

    [/one_third][one_third]

    • procurement,
    • advertising,
    • marketing,
    • research,
    • safety and health,
    • personnel management,
    • human resources,
    • employee benefits,

    [/one_third][one_third last]

    • labor relations,
    • public relations,
    • government relations,
    • computer network,
    • internet and database administration, and
    • legal and regulatory compliance.

    [/one_third][clear][/raw]

    Words to the wise: The exercise of discretion and independent judgment does not include clerical or secretarial work, recording or tabulating data, or performing mechanical, recurrent, or routine work. This is why most employees with “administrative” in their job titles do not qualify for this exemption.

    Even if an employee works in one of these areas, you must still analyze the level or nature of the work to assess whether the exemption applies using the third criteria below.

  3. Primary duty includes the exercise of discretion and independent judgment with respect to matters of significance

    “Discretion and independent judgment “involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after considering the various possibilities. “Matters of significance” refers to the level of importance or consequence of the work performed.

    Duties demonstrating discretion and independent judgment include:

    • authority to formulate, affect, interpret, or implement management policies or operating practices;
    • carries out major assignments in conducting the operations of the business;
    • performs work that affects business operations to a substantial degree, even if the assignments are related to the operation of a particular segment of the business;
    • authority to commit the employer in matters that have significant financial impact;
    • authority to waive or deviate from established policies and procedures without prior approval;
    • authority to negotiate and bind the company on significant matters;
    • provides consultation or expert advice to management;
    • involved in planning long- or short-term business objectives;
    • investigates and resolves matters of significance on behalf of management; or
    • represents the company in handling complaints, arbitrating disputes, or resolving grievances.

    Words to the wise: 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. Consequently, many employees that employers consider “key” or “critical” to the organization’s daily functioning do not qualify for this exemption.

Stay tuned for next month, when we will go over the Professional Exemption.

The U.S. Department of Labor plans to issue proposed regulations changing the
tests for exempt status of employees in November 2014. These regulations will
reduce the number of employees who will qualify for exempt status, making more
workers eligible for overtime pay. MSEC will analyze the proposed regulations
when issued and make you aware of their content. You will have an opportunity to comment on the proposed regulations before they become final.