In a recent U.S. Court of Appeals for the First Circuit decision, Walsh v. Unitil Service Corporation, the court reminded employers of the necessary fact-intensive analysis that employers must use before classifying an employee as overtime exempt under the Fair Labor Standards Act’s (FLSA) administrative exemption.
Employers governed by the FLSA must pay their employees overtime unless the employee falls into one of the statute’s overtime exemptions. The burden of proof regarding proper employee classification and exempt status rests with the employer. To properly classify an employee as exempt under the administrative exemption, the employer must establish that an employee:
- earns a salary or fee basis at a rate of at least $684.00 per week;
- has the primary duty of:
a. performing office or non-manual work directly related to the management or general business operations of the employer; OR
b. performing office or non-manual work directly related the employer’s customers; and
- exercises discretion and independent judgment with respect to matters of significance and in performing their primary duty.
Employers must satisfy all three elements above.
In Walsh, the First Circuit’s focus was on the second prong of the administrative exemption. The lower court previously held that the employees’ (dispatchers and controllers) primary duties were aligned with functional areas (e.g., regulatory compliance, quality control, and health and safety) listed in FLSA regulations, and therefore, they had been properly classified as salaried employees under the administrative exemption.
The First Circuit disagreed, finding that the lower court applied the incorrect test and failed to consider the relationship between the employees’ job duties and the business purposes of the employer’s customers. In reversing the lower court’s decision, the First Circuit held that employers must satisfy the “relational analysis test” to comply with the second prong of the administrative exemption.
Under the applicable relational analysis test, employers must establish that:
- an employee’s primary duty is directly related to the management of the business as opposed to the delivery of the product or service provided by the business; OR
- an employee’s primary duty is directly related to the management or general operations of its customers.
When reviewing the employees’ job descriptions, the First Circuit held that the dispatchers and controllers did not perform functions “directly related to the management” of the business—but questions of fact remained as to whether the primary duties were directly related to the management or general operations of the employer’s customers. As such, the case was remanded to the lower court to determine: a) whether the employees’ primary duties relate to the running or servicing of the employer’s customers; and if so, b) the scope or “generality” of their roles.
The Walsh decision is instructive. It reminds employers that to properly classify employees as salaried under the administrative exemption, employers must compare the employees’ primary duties with the business purposes of the employer or its customers. If an employee’s primary duties directly relate to the management or general business operations of the employer or its customers, the administrative exemption may apply (if the other criteria are satisfied). If, however, the employee’s primary duties relate to the day-to-day work of the employer or its customers, the second prong of the administrative exemption may not be satisfied, and the employee may not be properly classified as a salaried employee under the administrative exemption (although a different exemption may apply).
Classification decisions cannot be made in a vacuum. Employers should be aware that classification decisions are fraught with peril; employers also are encouraged to pay close attention to an employee’s job description, the employee’s duties in practice, and the employee’s duties in relation to the management of the employer’s business and the general operations of the employer’s customers.
Improper classification may result in costly damages and time-consuming litigation. To that end, employers should regularly review and reassess their employee classification decisions, and ensure that job descriptions, essential functions for each position, and general operations of the employer’s customers are taken into account.
We will continue to monitor developments regarding the Walsh decision and related employee classification issues to provide additional updates. Business entities or individuals with questions are encouraged to contact an employment attorney at Kenney & Sams.
 FLSA regulations list the following functional area examples: tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations, government relations; computer network, internet and database administration; legal and regulatory compliance; and similar activities.
This alert is for informational purposes only and may be considered advertising. It does not constitute the rendering of legal, tax or professional advice or services. You should seek specific detailed legal advice prior to taking any definitive actions.