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The Impact of Exemption Misclassifications

We often discuss independent contractor misclassification and the major risk it can present to employers. Today we’ll cover another significant form of misclassification that often occurs: exemption misclassification. Just like with issues stemming from the misclassification of workers labeled as independent contractors when they should have been classified as W2 employees, there are significant negative repercussions to mislabeling an employee as exempt when they should in fact be classified as non-exempt.

A non-exempt employee is one that is paid for overtime at time and half their hourly wage for any hours worked over 40 in a week. In California, for example, this rule is more stringent, and overtime pay also takes into account anything worked over 8 hours in one day. There are exceptions to the overtime rules, and that is what is called “exempt”, meaning workers who fit these criteria are exempt from overtime pay.

The main exemptions in our industry are Executive, Administrative, Professional, and Computer Professional. It is mandatory that a worker meet all of the requirements in at least one of these exemptions in order to be considered exempt, to not be eligible for overtime pay.

This brings us to what is happening today in California with a putative class action lawsuit against office supply retailer Staples, Inc. (Staples) with the accusation that Staples is failing to provide overtime pay and required meal and rest breaks through improper worker classification. The misclassification in question is that employees hired as General Managers are classified as exempt rather than non-exempt. Because of the work being performed, it is assumed that the General Manager was classified as exempt under the administrative exemption criteria.

In the class action filed, the plaintiffs are stating that more than 50% of the General Manager’s day-to-day activities are to routinely perform non-managerial duties like those that non-exempt employees perform, including customer service, stocking of store shelves, and the taking out of trash. Because it is being argued that these duties are more than 50% of the employee’s day-to-day activities, there is cause for concern as the employee’s exemption classification is based on duties that they are primarily engaged with.

In California, an exempt employee must spend more than one-half of his or her time engaged in exempt work. This means that more than 50% of the exempt employee’s day-to-day actives must meet the exempt criteria. (As an aside, it is worth noting that the “50% rule” in California is also a criteria presented in the new proposed changes to Federal Overtime rules.)

The next factor is a great illustration of how difficult these determinations can be: In addition to the 50% rule, it is also being argued that the General Manager’s role does not meet the exemption status because they are not allowed to make decisions in “matters of significance”. Even though the employee’s title is General Manager, this group of employees was not allowed to do things that are managerial in scope for a position at that level; the hiring and firing of personnel when necessary. However, it is important to note that “matters of Significance” does not mean deciding when to do a task, for example, just because a General Manager decided to complete a task tomorrow instead of today does not imply any discretion of independent judgement, but rather, the independent judgment needs to have a direct impact on management policies or general business operations in order to be actually significant in order to meet the exemption criteria.

The Administrative exemption has very specific criteria that must be met, and since 1947, the Supreme Court has held that the employer must prove every point of an exemption in order for it to be applicable.

The administrative criteria:

  • The employee primarily performs non-manual work directly related to the general business operations of the organization.
  • The employee is able to regularly exercise discretion and independent judgement.
  • The employee has obtained special training, experience or knowledge.
  • The employee devotes more than 50% of time to these activities.
  • The employee meets the minimum salary test.

Let’s revisit the scenario with Staples: It appears that the General Managers do not meet all of the criteria required for the administrative exemption, and should be classified as non-exempt and be eligible for overtime pay as well as provided the same meal and rest breaks given to other non-exempt employees. Despite having the title of General Manager, more than 50% of the day-to-day work being performed is the same as non-exempt employees, and there are no independent decisions being made in “matters of significance”.

It is not enough that the employee mostly meets all of the requirements, as even if there is only one small piece of the exemption criteria that is not met, then the employee is considered non-exempt. Because of this, it is possible that Staples could be found to have been misclassifying General Managers as exempt, and that these employees should be eligible for overtime pay as well as mandated meal and rest periods. Because Staples has determined the exemption status of their General Managers, it is now their responsibility to prove it. There is a not-so-well-kept-secret in employment law: Every government agency that cares about worker classification has an unwritten rule; their bias is that every worker is a non-exempt employee unless the employer can prove otherwise. This doesn’t mean that you can’t classify a worker as an independent contractor, or classify an employee as exempt. It just means that if you do it, you must follow the applicable federal and state guidelines, and be prepared to defend the decision if you’re called out on it.

As IC compliance and engagement experts, TalentWave home page makes worker classification decisions every day for hundreds of employers across the US. We make sure direct-sourced flexible workers are vetted and engaged properly so that our clients can quickly deploy them to work on vital projects.

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