Exempt administrative employees must perform office or non-manual work directly related to management policies or general business operations.
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Wage and Hour Update:
Staffing Company Misapplies
Administrative Exemption To Account Execs
Company Also Improperly Attempts
To Limit Employee’s Time To Sue
By Christopher W. Olmsted
When an employer classifies a group of employees as exempt under state and federal wage and hour law, that decision is subject to challenge by the employees or a government agency. The wrong decision can result in expensive litigation and huge liability. In a recent California case titled Peligrino v. Robert Half International, a California appellate court ruled that the employer had misclassified its account executives under the administrative exemption. The court also invalidated an employee agreement reducing the statute of limitations (time to sue) to six months.
Staffing Agency’s Account Execs: Exempt Or Non-Exempt?
Like many staffing companies, Robert Half International relies on account executives to conduct its business. Are those account executives exempt or non-exempt? Robert Half classified them as exempt under the California and federal white collar administrative exemptions.
To qualify for this exemption there are two tests under California and federal law: (1) the salary test; and (2) the duties test.
The salary test is simple and it wasn’t an issue in this case. The employees were paid on a salary basis, and they were paid at or above the California minimum salary amount of $33,280/year or $2,733.33/month. (The federal minimum is currently $455/week or $23,660/year)
The case came down to the duties test. Did the employees perform exempt administrative duties? The duties and responsibilities of an account executive involved recruiting, interviewing, and evaluating candidates to be placed as temporary employees; selecting and placing candidates on job orders and assisting clients with their call-in business needs; and new business development. In performing those functions, account executives were expected to follow the “recipe” established by corporate headquarters. Account executives were expected to perform the three major functions of their position on a three-week rotating basis broken down into a “sales week” or marketing week, “desk week,” and “recruiting week.”
Account executives were evaluated based on how well they met sales production minimum requirements and the number of hours that were billed to clients for services provided by candidates. A direct sale involved placing a candidate with a client. Account executives did not usually make recommendations to a client regarding how to staff projects.
The account executive’s job was to fill the orders as they came in. After placing a candidate, account executives had no role in supervising the candidate in his or her performance of services for the client. If a client desired to terminate a candidate’s services, the client would inform the account executive and the account executive would relay the message to the candidate and attempt to provide a replacement candidate. Account executives did not have the authority to hire or fire other account executives and did not supervise administrative support staff in the offices.
The Lawsuit
Six account executives sued the staffing company, alleging that they were non-exempt employees and that they had not been paid overtime or given meal and rest breaks.
Robert Half presented two primary defenses: (1) the employees were properly classified as exempt from overtime and meal/rest breaks under the state and federal administrative exemption; (2) the employees sued too late because they signed an agreement reducing the statute of limitations to only six months.
Administrative Exemption Misapplied
The appellate court upheld the trial court’s ruling that Robert Half had misclassified the account executives as exempt.
The five criteria for the administrative exemption can be found in title 8 of the California Code of Regulations, section 11040. The employee must meet all of the following:
(1) perform office or non-manual work directly related to management policies or general business operations of the employer or its customers,
(2) customarily and regularly exercise discretion and independent judgment,
(3) perform under only general supervision work along specialized or technical lines requiring special training or execute under only general supervision special assignments and tasks,
(4) be engaged in the activities meeting the test for the exemption at least 50 percent of the time, and
(5) earn twice the state’s minimum wage.
No Work Related To Management Policies Or General Operations
According to the court, the staffing agency flunked the test. The company and employees agreed that under part 1 the account executives performed office/non-manual work. But was the work “directly related to management policies or general business operations”?
No. The account execs were responsible for sales, not management policies or general operations. They were responsible for placing candidates with a client. The execs were trained on sales and given quotas. They had no role in supervising the temporary employees after they were placed and no responsibility for the administrative support staff in the account executives offices. Account executives did not form policy but followed the company “recipe,” including the three-week rotation system in performing their duties as required by headquarters.
In short, the account execs were responsible for providing the company’s service—staffing—and not responsible for policy decisions or general business operations. In fact, the company had separate operations staff—HR, legal, accounting, marketing, etc.
Because an employer must establish all five criteria for the exemption to apply, the court took its analysis no further once it determined that the company failed to meet the first criteria.
And Don’t Mess With the Statute Of Limitations
Robert Half argued that the employees sued too late. Ordinarily, an employee has three years under the Labor Code, and four years under the California Business and Professions Code, to bring claims for unpaid wages.
The employees had all signed an employment agreement which provided that the employees had only six months after termination to sue the company. They had all sued after the six month period ended. But employees alleged that they had sued in time; they argued that the contractual limitation was invalid because the right to sue for wages cannot be limited.
The court agreed. To reach this conclusion, the court examined the California Labor Code and related public policies protecting employees.
Labor Code 219 contains a provision that prohibits private agreements contravening or setting aside the right to payment of wages. That section does not specifically prohibit shortening the statute of limitations. But the court ruled that shortening the time to sue has the effect of contravening the employee’s right to sue for unpaid wages.
The court buttressed its decision with public policy considerations. The wage rights are so important, employees shouldn’t be allowed to waive them. “Overtime wages are an example of a public policy fostering society’s interest in a stable job market,” reasoned the court. The court added that “the Legislature’s decision to criminalize certain employer conduct reflects a determination [that] the conduct affects a broad public interest . . . . Under Labor Code section 1199 it is a crime for an employer to fail to pay overtime wages as fixed by the Industrial Welfare Commission.” “Moreover, the overtime laws also serve the important public policy goal of protecting employees in a relatively weak bargaining position against ‘the evil of overwork.’” So giving up wage rights is un-Californian and evil.
The court made similar findings with respect to the time to sue for meal and rest period violations.
The bottom line was that the contractual six month time limit was invalid. The staffing company “classified each plaintiff as an exempt employee and, because of that classification, did not pay overtime wages or comply with other wage and hour statutes. Enforcement of a provision, such as the limitation on claims provision in this case, would result in barring legitimate, unwaivable statutory wage and hour claims asserted by misclassified employees who were unable to discover their employer’s classification error and assert appropriate claims within six months of the date their employment ended. We conclude this provision contravenes the vindication of such statutory rights within the meaning of and in violation of section 219 and violates the fundamental public policies . . . underlying such rights.”
Accordingly, the appellate court upheld a judgment in the amount of $615,000 in favor of the six employees.
Practical Tips:
Before classifying employees as exempt under the administrative, executive, professional, or other exemption, carefully review the unique criteria applicable to each exemption.
For an overview of the exemptions, email Chris Olmsted and ask for the firm’s California and Federal Exemption Chart.
The administrative exemption requires duties related to policy making and general operations. Employees responsible for sales or production may not qualify.
Due to the high cost of mistakes, it is prudent to seek advice from an attorney regarding proper classification.
Related Articles:
California DLSE Approves Salary Reduction For Furloughed Exempt Workers
Do After-Hours Emails Create Employer Wage Liability?
Additional Resources:
Barker Olmsted & Barnier’s California and Federal Exemption Chart (request by email: cwo@barkerolmsted.com)
California DLSE Wage Orders (describing white collar exemptions)
DOL Exemption for Administrative Employees Under the Fair Labor Standards Act (FLSA)
More Legal Update articles.
Download entire March 2010 Legal Update in PDF format.
This article is intended as a brief overview of the law and are not intended to substitute as legal advice. Any questions or concerns regarding any statute or case law should be addressed to a licensed attorney. Copyright © 2010 by Barker Olmsted & Barnier, APLC. San Diego, California. All rights reserved.
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