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If you are employed in an administrative capacity and your job meets all the requirements of the administrative exemption law, your employer does not have to pay you overtime or pay extra for missed breaks.

For this reason, employers love the administrative exemption and they use it and abuse, causing workers to lose thousands of dollars in overtime pay.

Before we plunge into a detailed discussion of how to determine whether you are an administrative employee, there are three  important points you must keep in mind as you read this article.

1)  Just because your employer pays you a salary that does not mean that you are an exempt administrative employee. This is one of the biggest myths and misconceptions that many people are mislead by. While a salary is an important factor in determining whether you are properly classified as an administrative employee, other factors need to be satisfied as well. Therefore, you can be a salaried employee and still be entitled to overtime if you work more than 8 hours a day or 40 hours a week.

2)  Just because your employer gives you a glorified title of “Manager” or “Administrator” that does not mean that you are an exempt administrative employee. Your job title has nothing to do with your classification, what matters is your actual job responsibilities and duties.

3)  Finally, it is a responsibility of your employer to prove that you are an exempt administrative employee. This means that if there is a legal dispute before the court or state employment agency about your employment status, the burden is on the employer to prove that you are exempt from the overtime laws.

California Administrative Exemption Law

The definition of the administrative exemption is formulated in Wage Orders established by Industrial Welfare Commission (IWC). IWC is a California regulatory agency that sets standards for minimum wages and maximum hours. According to IWC Wage Orders, your employer can classify you as an exempt administrative employee only if ALL  of the following requirements are satisfied:

  1. you must perform “office or non-manual work directly related to management policies or general business operations;”
  2.  you must “customarily and regularly exercises discretion and independent judgment;”
  3. you must regularly and directly assist the owner of the business, or another exempt administrator;
  4. you must be engaged in these adminisrative duties more than 50% of your work time; and
  5. you must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment ($33,280 a year or $2560 a month).

Examples and Explanation of Administrative Exemption 

While on its face these five requirements are straightforward, in practice, the definition of the administrative exemption has been the subject of much litigation. Specifically, employers and employees disagree over (1) what constitutes a work “directly related to management policies,” and (2) how much of “independent judgment and discretion an employee must exercise. Let’s consider each of these two elements separately

1) “directly related to management policies”

One easy way to understand what constitutes a “work directly related to management policies” is to think of two types of work: production and administration. California and federal courts refer to this distinction as an “administrative/production” dichotomy. An administrative work relates to employees whose work involves servicing the business itself – employees who “can be described as staff rather than line employees.” On the other hand, a production work involves the duties and responsibilities relating to producing the actual final product or service that constitutes the very essence of the company’s business.

For example, a sales person working for Toyota  Dealership would fall into a production category, because the main business of any auto dealership is to sell cars. On the other hand, an accountant who keeps, audits, and inspects financial records of Ford Dealership would be considered an administrative employee, given the other four requirements are also satisfied.

However, an accountant working for Deloitte would not be an administrative worker, but rather, a member of the production team, because selling accounting services to public is the essence of Deloitte’s business. But if the same accountant is transferred into an in-house department that is responsible for accounting and auditing of Deloitte’s own books, that accountant would be an exempt administrative employee.

Other examples of administrative work include budgeting, quality control, purchasing, advertising, research, human resources, labor relations, and similar areas.

Insurance adjusters 

Insurance adjusters who handled auto and homeowner insurance claims were “production” employees and, therefore, were entitled to overtime pay. Because the adjusters’ duties were limited to only adjusting routine claims, which was the essence of employer’s business, the court held that it was a production work.  Bell v. Farmers Ins. Exch.

Computer Professionals 

An employee whose primary responsibilities included implementing and troubleshooting his employer’s software at customer venues, as well as providing on-site and off-site customer support was improperly classified as the exempt administrative employee. Because he was simply “engaged in the core day-to-day business” of his employer, a software company, he was more like a production worker. He had no personal effect on the employer’s policy or general business operations. He had no management authority and as such was entitled to overtime. Eicher v. Advanced Business Integrators, Inc.

However, in Combs v. Skyriver Communication, Inc., an employee of a wireless broadband internet service provider was found to be an exempt administrative employee and was not entitled to overtime, because he was performing tasks and functions that involved matters of substantial importance to running the business. Combs was a hired as a “manager of capacity planning” and later became a “director of network operations.”  His work primarily involved “the behind the scenes operations of administering and developing the company’s computer network and systems”. In his resume, Comb indicated that as director of network operations, he performed a broad array of important functions, including project management, budgeting, vendor management, purchasing, forecasting; management of employees, overseas deployment of wireless data network, the integration and standardization of three networks into the Skyriver architecture; and the overseeing of day-to-day network operations of the company. Rejecting the administrative/production” dichotomy, the court held that Comb’s work was directly related to Skyriver’s general business operations. The court explained that because his duties clearly “met the test of the exemption” under the applicable IWC Wage Order, the “administrative/production worker” dichotomy did not apply.

Account Executives 

In Pellegrino v. Robert Half International, Inc., the court held that account executives, employed by  the world’s largest staffing firm Robert Half, were not administrative employees, but rather glorified salespersons. The account executives received salary and commissions and their  duties included recruiting and placing candidates with Robert Half’s customers. They were not envolved in setting the internal policies of the company. Instead, they were trained and evaluated for the purpose of achieving quantitative success in “selling the services of RHI’s temporary employees to clients.”

Supervisors and  Managers

In United Parcel Service (UPS) Wage and Hour Cases, a California appellate court found that an employee who worked at various times as a supervisor and manager was properly classified as administrative employee. The manager was not regularly engaged at the production level of the UPS system: he did not engage in the loading, unloading, sorting and delivery of packages. The manager’s duty include implementing UPS policy and action plans that promoted efficiency and  smooth interaction between various UPS units; training, auditing and supervising employees; securing workplace safety and timely package delivery. The manger also dealt with customers and union officials promoting positive customer and employee relations with management. The court held that these job functions could only reasonably be characterized as related to the running of UPS’s general business operations. Therefore, the manager was not entitled to overtime.

2) “Discretion and independent judgment” 

As stated earlier, to be the exempt administrative employee, a worker must exercise discretion and independent judgment over matters of substantial importance.

All employees regularly exercise their independent judgment or discretion at work. However, not every judgment or discretion is “of substantial importance.” For example, an insurance adjuster has discretion to choose at what time to call the insured to discuss his personal injury claim. An IT manager is expected to independently decide how to fix  hardware or update software. However, these judgments are minor and do not rise to the level of “substantial importance.” The worker must have the authority to make independent choices on the highest or higher levels of business policy, planning and coordination of operations. He must have the power to evaluate possible courses of action and to implement a decision after considering various possibilities. These independent choices must be free from immediate supervision. For example, an IT manager who decides how much money should be spent annually on firewall to protect the internal network is exercising judgment on the matter of substantial importance.

Further, discretion and independent judgment are distinguished from skills and procedures. For example, an employee who simply uses his skills and knowledge and follows prescribed procedures or protocol is not exercising “discretion” and “judgment.” Nordquist v. McGraw–Hill Broadcasting

Because the IWC’s definition of the administrative exemption closely parallels the federal regulatory definition of the same exemption, California courts often refer to federal court cases to determine whether the administrative exemption applies. To learn more about the administrative exemption under the federal law, consider reading the opinion letter on this topic  prepared by U.S. Department of Labor, Wage and Hour Division.  

Free Case Evaluation

 The administrative exemption is difficult to apply and requires a close analysis of all relevant facts. If you feel like you were misclassified as an administrative employee and denied overtime, it is important that you consult a wage and hour specialist who can carefully to review your case. To schedule an appointment with our San Francisco employment law attorney, please contact our office.

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