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Professional Service Agreement

Managers & Assistant Managers: Exempt or Non-Exempt?

Many employers are faced with the question of whether their Managers or Assistant Managers meet the requirements for one of the exemption classifications as promulgated by the Fair Labor Standards Act (FLSA). Obtaining the correct answer is critical since a manager who is improperly classified as exempt will be eligible for back pay back two (2) years (possibly 3) for overtime worked.

In exploring whether or not a manager is exempt, we first must understand status is determined by the actual duties performed, not by title of the position. Just because someone is titled an "assistant manager" or "manager" does not mean that the position is exempt from the FLSA. Furthermore, the employer must act in good faith and show a reasonable basis for arriving at an exemption status. When managers and assistant managers have been determined to be exempt, it is normally through the "executive" white collar exemption, and the focus is upon the individual's primary duties including "managing" and "exercising discretion and independent judgment."

The most common and widely used exemption classification for managers and assistant managers is the Executive White Collar Classification-541.1. The following explores the executive tests for application.

The Executive Classification

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek.

However, Section 13(a)(1) of the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bona fide executive, administrative, professional and outside sales employees. Section 13(a)(1) and Section 13(a)(17) also exempt certain computer employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status. In order for an exemption to apply, an employee's specific job duties and salary must meet all the requirements of the Department's regulations.

To qualify for the executive employee exemption, all of the following tests must be met:

� The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week;

� The employee's primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise;

� The employee must customarily and regularly direct the work of at least two (2) or more other full-time employees or their equivalent; and

� The employee must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.


Generally, "management" includes, but is not limited to, activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees' productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures.

Department or Subdivision

The phrase "a customarily recognized department or subdivision" is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function.

Customarily and Regularly

The phrase "customarily and regularly" means greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks.

Two or More

The phrase "two (2) or more other employees" means two full-time employees or their equivalent. For example, one (1) full-time and two (2) half-time employees are equivalent to two (2) full-time employees. The supervision can be distributed among two (2), three (3) or more employees, but each such employee must customarily and regularly direct the work of two (2) or more other full-time employees or the equivalent. For example, a department with five (5) full-time non-exempt workers may have up to two (2) exempt supervisors if each supervisor directs the work of two (2) of those workers.

Particular Weight

Factors to be considered in determining whether an employee's recommendations as to hiring, firing, advancement, promotion or any other change of status are given "particular weight" include, but are not limited to, whether it is part of the employee's job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. Generally, an executive's recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include occasional suggestions. An employee's recommendations may still be deemed to have "particular weight" even if a higher level manager's recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee's change in status.

Exemption of Business Owners

Under a special rule for business owners, an employee who owns at least a bona fide 20% equity interest in the enterprise in which employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive.

Highly Compensated Employees

Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative or professional employee identified in the standard tests for exemption.

Concurrent Duties

29 CFR 541.106 addresses the question of whether an individual is exempt when performing both exempt and non-exempt work. Concurrent performance of exempt and non-exempt work does not disqualify an employee from the executive exemption if the requirements stated above are met. Whether an employee meets these requirements when performing concurrent duties is determined on a case-by-case basis and is based on the employee's "primary duty" (see below). Generally, exempt executives make the decision regarding when to perform non-exempt duties and remain responsible for the success or failure of business operations under their management while performing non-exempt work. In contrast, the non-exempt employee generally is directed by a supervisor to perform the exempt work for defined time periods. An employee whose primary duty is ordinary production work or routine, recurrent, or repetitive tasks cannot qualify for exemption as an executive.

For example, a manager in a retail establishment may perform work such as serving customers, cooking food, stocking shelves, and cleaning the establishment, but performance of such non-exempt work does not preclude the exemption if the manager's primary duty is management. A manager can supervise employees and serve customers at the same time without losing the exemption.

In contrast, a relief supervisor or working supervisor whose primary duty is performing non-exempt work does not become exempt merely because the non-exempt employee occasionally has some responsibility for directing the work of other non-exempt employees when the exempt supervisor is unavailable.

Primary Duty

"Primary duty" means the principal, main, major, or most important duty that the employee performs. Determination of an employee's primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee's job as a whole. Factors to consider include the relative importance of the exempt duties as compared with the other types of duties, the amount of time spent performing exempt work, the employee's relative freedom from direct supervision, and the relationship between the employee's salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.

The amount of time spent performing exempt work can be a useful guide in determining whether exempt work is the primary duty of an employee. For example, employees who spend more than 50% of their time performing exempt work will generally satisfy the primary duty requirement. Time alone, however, is not the only test, and nothing in the regulations requires that exempt employees spend more than 50% of their time performing exempt work. Employees who spend less than 50% of their time performing exempt duties may meet the primary duty requirement if other factors support such a conclusion.

For example, managers in a retail establishment who perform exempt executive work such as supervising and directing other employees, ordering merchandise, managing the budget, and authorizing payment of bills may have management as their primary duty even if the managers spend more than 50% of their time performing non-exempt work such as running the cash register. However, if such managers are closely supervised and earn little more than the non-exempt employees, the managers would not satisfy the primary duty requirement.

Starbucks Decision

A case involving the Starbucks Corporation illustrates these principals. In the Starbucks case, the plaintiffs asserted that despite their "store manager" titles, they were in reality glorified "baristas" and they primarily performed the job duties of other non-exempt, hourly employees. In addition to overtime wages, the plaintiffs sought liquidated damages (four (4) years back wage liability), injunctive relief, attorney fees and related costs.

The Court ruled that even though store managers performed non-exempt, hourly work more than 50% of their workweek, that they were, in fact, exempt and therefore the case was dropped.

This important case established four tests in determining whether or not restaurant managers and similar types of "franchise" or retail managers are exempt from the FLSA and therefore are not eligible for overtime. The tests are as follows:

Relative importance of the managerial duties

In assessing managerial tasks relative to an exempt/non-exempt standard, the DOL considers the significance of the managerial tasks to the success of the facility. Functions or responsibilities such as ordering and controlling inventory, deciding whom to interview and hire for positions, training and scheduling employees, special marketing promotions, monitoring labor costs, etc. are all primary managerial duties of relative importance.

Frequency of exercise of discretion and independent judgment

The Department of Labor considers an exemption status if the Store Manager is the "highest ranking" employee in the store and if decisions are made on matters such as whom to interview and hire, whom to assign the new hires for training purposes, when to discipline employees, whom to assign certain responsibilities, considerations of promotions, establishing and improving work schedules, and conducting performance reviews and establishing pay rates. The need to comply with corporate policies and/or follow the orders of corporate managers does not dilute the exemption opportunities.

Relative freedom from supervision

It was determined that active supervision form Regional Managers and corporate management and periodic visits by Regional Managers did not eliminate the day-to-day discretion of the onsite Store Managers.

Comparative compensation

The final factor considered in the court decision was the comparative relationship between the managers' salaries and the wages paid to non-exempt employees. Where managers receive substantially more compensation, additional benefits, or perks and bonuses not available to non-exempt employees, it would be apparent that managers would be exempt.

Additional Court Rulings and Wage & Hour Opinions

A Wage and Hour Opinion Letter from September 2006 (FLSA 2006-35) addressed the question of whether a store manager must physically or in person supervise at least two full-time employees or their equivalent under the executive exemption of the Fair Labor Standards Act. The store manager was responsible for and had supervisory authority over all the store's employees (normally five (5) to eight (8) individuals). The store manager interviewed, selected, and trained employees. He determined their rate of pay and appraised their performance. He planned the work to be done, addressed complaints, and disciplined employees when necessary. The Wage and Hour Division determined that a store manager, even when not present in the store, may satisfy the requirements of the executive exemption provided he or she in fact customarily and regularly directs the subordinate employees' work.

In the court case of William L. Freni v. Republic Aviation Corporation 1947 an employee working as a supervisor of the service section, having direction and control of all other employees in the section was determined to be employed in a bona fide executive capacity and was exempted from the Fair Labor Standards Act. This service manager regularly directed the work of the employees in the service, assigned the work to be done, and saw to it that it was properly completed. He interviewed applicants for employment and recommended applicants for hiring. He also had the authority to recommend release of employment for individuals within the service section. He evaluated the performance of his subordinates and recommended increases in their compensation.

In the case of Donald H. Stein v. J. C. Penney Company 1983, the court determined that although an employee performed significant non-exempt work, it did not negate the fact that the primary duty of the employee was that of a manager. He exercised considerable discretion in this job, had limited supervision, and earned significantly more than the employees he supervised. The manager selected and trained employees, directed their work, appraised their performance, and had responsibility for his assigned departments.

In a Wage and Hour Opinion Letter from 1969 (number 978) it was determined that an assistant manager of a small meat department was not an exempt executive employee since his primary duty was not the management of a recognized unit with a continuing function of which he had charge. The letter stated that although expenditure of 50% of an employee's working time in management activities is a general rule of thumb to support a primary duty finding, it is not conclusive, and a lesser time may qualify. However, the opinion letter stated that in a small department, such as this meat department, there is normally only one department manager. An attempt to classify other workers in the department as an executive by calling him an "assistant manger" would fail since there was not sufficient supervisory or other managerial work to keep two persons occupied.

In the court case of Ray Marshall, Secretary of Labor v. Burger King Corporation, December 1980 three of the employer's eighteen assistant managers were determined to be executive employees exempt from the overtime and recordkeeping requirements of the FLSA. These employees were compensated on a salary basis exceeding the required minimum, their primary duties consisted of the management of the enterprise in which they were employed, they exercised discretion and independent judgment in performing their duties, and they directed the work of two or more fellow employees. These assistant managers were involved in making personnel decisions, including recommendations on hiring and employee terminations. They made decisions in scheduling the workforce, training hourly employees, and evaluating the performance of hourly employees.

The 1981 case of Jeffrey Lyles et al v. K-Mart Corporation ruled that two assistant store managers were employed in an executive capacity. The assistant managers routinely performed several discretionary functions. The assistant managers were responsible for over ten departments in the store. All employees in these departments were under the assistant manager's direct supervision, and he was responsible for instructing them on how to perform their job duties. The conducted pre-employment interviews and made recommendation as to hiring. They had the authority to discipline employees and they exercised this authority. Their recommendations for hiring and firing were given particular weight, and they also made suggestions on compensation for employees in their departments. The assistant managers met at least twice each day with the store manager to discuss store strategies and policies.

In Randall Guthrie et al v. Lady Jane Colleries,Inc, May 1983 five section foremen were ruled to be exempt under the executive exemption. These foremen were each in charge of a crew of six to nine men, assigned and directed the work of the crew, made disciplinary recommendations, and were responsible for the safety of men and equipment. The foremen trained the members of their crew and decided whether a new crew member was trained sufficiently to begin work. On average the supervisory activities taken together consumed 44% of each section foreman's workweek. The court stated that "if circumstances demonstrate the existence of a bona fide executive authority and functions, an employee may be properly treated as exempt even if more than 50% of his time is devoted to non-exempt activities.

Considering the complexities and continued case development of Wage-Hour compliance, it is wise for employers to have a complete audit conducted using a firm who has extensive history in Wage-Hour compliance and defending employers before the Department of Labor. It's worth your "peace of mind" to have such an audit conducted considering the significant back wage liability. Contact SESCO to schedule an audit, the country's oldest Wage-Hour consulting firm.

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