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October 03, 2023
Make Sure Employees Qualify for Administrative Exemption from Overtime

by Marylou Fabbo

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Even employers with good intentions can misunderstand what it takes to legally classify employees as exempt. Unfortunately, when it comes to wage and hour violations, ignorance isn’t bliss, especially in Massachusetts. Unlike many other areas of the law, intent is irrelevant. Employers that make errors, regardless of the reason, open themselves up to costly litigation and the payment of back wages, their own and their employees’ attorneys’ fees, and costs. The most common misclassification error employers seem to make is classifying a nonexempt employee under the administrative exemption. A recent case reminds employers of those dangers.

Facts

Under federal law, when an employer willfully misclassifies an employee as exempt, often to avoid paying overtime, employees can recover damages for a longer period (three years) than if the employer were merely negligent (two years). If an employer violates Massachusetts state law, any amount owed to the employee who is misclassified is automatically tripled.

The Department of Labor (DOL)—led by Secretary of Labor and former Boston Mayor Martin Walsh—alleged that Unitil Service Corp. misclassified two categories of workers as exempt, and the agency sought overtime compensation for them. The employer argued the workers were administrative employees exempt from overtime and, therefore, not entitled to overtime payments.

The federal district court agreed and granted judgement for the employer. The DOL appealed to the U.S. 1st Circuit Court of Appeals (which covers employers in Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island).

In January 2023, the 1st Circuit disagreed with the lower court and threw out the decision. In doing so, it identified the factors that must be met to qualify an employee as exempt from overtime based on the administrative exemption:

Salary basis. The employee must be paid a salary of at least $684 per week.

Primary duty. The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers. In other words, if an employee is doing manual work, they aren’t eligible for the administrative exemption. Second, the employee must be doing something that isn’t what the business does. For example, a Director of Human Resources of a company that manufactures toasters isn’t doing what the company is in business to do: make and sell toasters. That person is considered “overhead,” i.e. needed to run the business. (Whether that person is exempt as an administrative employee may depend on the next factor.)

Authority. Under this last prong, the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. Employees’ duties must rise to a level beyond responsibility for day-to-day tasks to satisfy the administrative exemption.

On appeal, the 1st Circuit focused on the second factor—whether the employees’ primary duties were directly related to the management or general business operations of the employer or its customers. If their primary duties related to the employer’s business purpose, “in that they produce the product or provide the service that the company is in business to provide,” they aren’t eligible for the administrative exemption.

The two categories of Unitil employees at issue, dispatchers and controllers, provided operational and administrative services to the company’s subsidiaries. Although the lower court concluded they were exempt because they provided overhead-type services, it didn’t take the next step and perform a relational analysis between the services and the employer’s business.

As the 1st Circuit pointed out in its decision reversing the lower court, the services performed by dispatchers and controllers happened to be exactly what the company was in business to do—namely, provide operational and administrative services to its subsidiaries. Accordingly, the 1st Circuit determined the two categories of employees weren’t properly classified as exempt under the administrative exemption, and therefore, they are entitled to overtime under federal law.

Interestingly, the DOL pursued only violations of federal law. Massachusetts applies the same test to determine if an employee meets the administrative exemption. As a result, if the employees decide to pursue their claims under state law, they will be entitled to mandatory triple damages for any owed overtime pay, attorneys’ fees, and costs. Walsh v. Unitil Service Corp., Civ Action No. 22-1070 (1st Cir., 2023).

What Should You Do to Reduce Risk of Classification Error?

You need to have at least a basic understanding of the factors that must be met to classify an employee as exempt and what your employees are doing. The latter may seem obvious, but employees’ jobs tend to evolve over time for reasons such as accommodating changes in workflow, redistribution of work after an employee leaves, or because clients’ needs change. As a result, you should conduct an overall audit at least once every three years (and preferably annually) to assess whether employees are properly classified.

Also, if you are hiring a new employee or an employee is changing jobs at the company, the position description should be reviewed, updated, and evaluated for exempt status. Consult with employment counsel for guidance if any of your classifications could be considered questionable or for advice on how to reclassify employees if an error is discovered.

Marylou Fabbo is a partner at the firm of Skoler, Abbott & Presser, P.C., in Springfield, Massachusetts. Marylou heads the firm’s litigation team and is the firm’s immigration expert. She can be reached at 413-737-4753 or mfabbo@skoler-abbott.com.

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