The administrative exemption: When is an employee owed overtime?

January 24, 2017
January 24, 2017 LI Advantage

The administrative exemption: When is an employee owed overtime?

In courts across the land, the great overtime debate — whether employees are exempt or nonexempt — shows no signs of abating. The good news for employers is that decisions such as Lutz v. Huntington Bancshares, Inc. can provide them with valuable tips for avoiding litigation in the future.

Underwriters underpaid?

In this case, the U.S. Court of Appeals for the Sixth Circuit determined whether residential loan underwriters were exempt from overtime under the administrative exemption of the Fair Labor Standards Act (FLSA). The plaintiffs, who were former residential loan underwriters for a bank, brought a class action suit against their employer alleging that the bank had failed to pay them overtime compensation in violation of the FLSA. The employees’ job duties included reviewing loan applications by confirming that the information provided was accurate and deciding whether applicants qualified for loans.

The software the employees used initially recommended whether to approve or deny a loan. They then reviewed that recommendation by applying the bank’s many guidelines and regulations. Next, they determined whether the loan would fall within their employer’s acceptable risk level. If they thought they needed to, the employees could use their personal experience or judgment to take actions beyond the bank’s guidelines.

Their employer argued that the employees were exempt from overtime under the administrative exemption. The trial court agreed and granted the employer’s motion for summary judgment. The former employees appealed.

3 elements

The appellate court affirmed that the employees were exempt because they exercised independent discretion beyond the bank guidelines and made decisions that significantly affected its business. Under the FLSA, employees are considered to be working in a bona fide administrative capacity and exempt from overtime if:

  1. They’re compensated on a salary basis,
  2. Their primary duty is the performance of office or nonmanual work directly related to the management or general business operations of the employer or the employer’s customers, and
  3. Their primary duty includes the exercise of discretion and independent judgment in significant matters.

In this case, the parties didn’t dispute that the employees satisfied the first element. However, the employees argued that they didn’t satisfy the second and third elements.

Disputed points

In considering the second element, the appellate court relied on Department of Labor regulations stating that administrative employees “perform work directly related to assisting with the running or serving of the business” and that “the work of an administrative employee is thus considered ancillary to an employer’s principal production activity.”

The court found that the employees had performed administrative work. They assisted in running and servicing the business by making decisions about when their employer should take on certain kinds of credit risk and this work was ancillary to the employer’s principal activity of selling loans.

As for the third element, the employees argued that, because they were required to adhere to guidelines and manuals, they weren’t able to exercise independent discretion and judgment. However, the court decided that, even though the employees were directed by guidelines and manuals, they could exercise discretion and judgment because those materials didn’t answer substantive questions that could arise.

In addition, the former employees argued that their exercise of discretion and judgment didn’t concern matters of significance because they didn’t bear any responsibility for financial loss. The court disagreed. It found that, while the employees didn’t dictate the bank’s overall risk, their work significantly affected the business because they determined how much risk the bank would accept for any particular loan. Therefore, the employees’ job duties fulfilled all three elements of the administrative exemption, and they were exempt from overtime.

Descriptions and duties should match

To avoid costly lawsuits related to the overtime exemption, employers need to ensure that employees’ job descriptions and job duties match. They should confirm that any employees who are labeled administrative and exempt actually exercise independent discretion and judgment in areas of great importance. Also, these employees must primarily perform nonmanual work that’s directly related to the employer’s business or its management.

Sidebar: Court finds investigators aren’t bona fide administrators

The U.S. Court of Appeals for the Fourth Circuit came to a different conclusion than the Sixth Circuit did in Lutz v. Huntington Bancshares, Inc. (see main article) regarding an employee’s administrative exemption under the Fair Labor Standards Act (FLSA). At issue in Calderon v. GEICO General Insurance Company was whether security investigators for an insurance company were exempt from overtime.

The employees worked in the company’s claims department primarily investigating potentially fraudulent claims. They brought an action against their employer alleging that it failed to pay them overtime wages. The employer argued that the security investigators weren’t eligible for overtime under the administrative exemption.

The district court granted judgment in favor of the employees on their overtime claims, finding that the employer wasn’t able to prove that the employees’ primary duty included the exercise of discretion and independent judgment. The appellate court affirmed as to liability. However, it decided that the employees didn’t meet the definition of a bona fide administrative employee because their primary duty wasn’t directly related to the management or general business operations of the company or its customers.

After being referred matters by insurance adjusters, the employees’ primary duty was to conduct investigations and determine whether claims submitted were fraudulent. They had no supervisory responsibility and didn’t develop business policies. They reported to supervisors, who then reported to managers, who in turn reported to the company’s Assistant Vice President of Claims.

The court stated that the employees’ work was important in that they assisted the adjusters in the company’s day-to-day affairs. But their work wasn’t part of the company’s management; therefore, the employer couldn’t establish that the employees were exempt from overtime under the administrative exemption.

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