What’s in a Name? How Manager Misclassification Can Be Costly for Employers

Many Oklahoma employers are still climbing out from under the unfortunate predicament that the pandemic left in its wake. A labor shortage and the threat of a recession forced some employers to work with less than a full staff. Although some may argue that the return to normalcy is upon us, wage and hour legal risks abound, and employers should take heed to ensure compliance with the laws.

The Fair Labor Standards Act

One of the hot-button issues in today’s climate is the misclassification of supervisors and managers. Promoting employees is usually a positive step and a moral booster. However, before employers make that move, they should understand the ways in exemptions work. Starting with the basics, the Fair Labor Standards Act (“FLSA”) governs federal wage and hour law. It requires that employees be paid the federal minimum wage of $7.25 per hour and overtime pay at one and one-half times the hourly rate for any hours worked over 40 in a workweek.  These employees are referred to as non-exempt, meaning that they are not exempted from being paid overtime and that they must be paid time and a-half when applicable. On the other hand, an exempt employee is one that is exempt from overtime, meaning that they are not paid overtime for working over 40 hours in one workweek. This is because the exempt employee is paid on a salary basis. There are many exemptions, several of which are known as white collar exemptions under the FLSA. This advisory will focus on one of the exemptions that is often litigated due to an allegation of manager misclassification.

The Executive Exemption

To qualify for the executive exemption, several requirements must be met: The employee must receive a salary of at least $684 per week; the employee’s primary duty must be managing the enterprise or a recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of at least two other full-time employees or the equivalent; and the employee must have the authority to hire and fire other employees, or have his or her suggestions and recommendations regarding the hiring, firing, promotion, or other changes of employment status be given particular weight.
Primary Duty of Management

Management includes activities such as interviewing and training employees, setting rates of pay, directing work, handling employee complaints, disciplining employees, planning and controlling the budget, and monitoring or implementing legal compliance measures. Of course, this list of duties is non-exhaustive but it illustrates the higher-level functions of a true management employee. The term “primary duty” means the main or most important duty that employee performs. Whether the duty is primary requires  a consideration of the character of the employee’s job as a whole. Factors to consider include the relative importance of the main duty as compared to other duties; the amount of time spent performing the main duty; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to others (such as subordinates) for performance of similar work. A manager typically earns more than his employees. A manager that is paid the same amount as those he supervises will be viewed in disfavor when evaluating the exemption.

Management of Two or More Full-time Employees

Managing two or more full-time employees may be calculated in several ways. For instance, one full-time and two half-time employees meet the requirement. Four half-time employees also meet the equivalent of two full-time employees. However, an employee who merely assists the manager of a department and supervises at least two employees only in that manager’s absence does not meet the requirement.

Authority to Hire and Fire or Recommendations Given Particular Weight

An employee that has the actual authority to hire employees and terminate their employment has easily satisfied this factor of the executive exemption test. The ambiguity lies where the employee does not have the actual authority. For instance, the employee informs upper management of a problem employee and suggests that the employee be fired. The employee’s suggestion or recommendation must be given particular weight, meaning that such recommendations are part of that employee’s duties as a manager, are done with frequency, and are actually relied upon by the company in making the hiring or termination decision. An occasional suggestion to hire or fire an employee will not suffice.

Avoiding the Pitfalls

When employers are faced with low staffing or repeated callouts, employers have the best of intentions to keep the business running as smoothly as possible. Trying to cover all shifts, take care of customers and clients, and keep loyal employees happy and employed may be a trap for the unwary employer. If a manager slips into performing non-exempt tasks, the employer may be at risk for losing the exemption (depending upon the amount of non-exempt work that is performed), which may result in a payment of back wages and liquidated damages to the employees in the same role/classification. Employers should pay special attention to the duties the manager is performing and not rely solely on job descriptions which may be outdated. Regular audits of exempt managers’ duties are beneficial to employers because the employer can determine whether the manager is properly classified or whether the employee may need to be converted to a non-exempt employee.

If you have questions about this topic, contact Tanya Bryant or another member of the Labor & Employment Practice Group.

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Labor & Employment