The Case for "Sleeping Dogs”

By Jathan Janove

Michael Ray, an attorney in the Chicago office of Ogletree Deakins and a member of the firm’s class and collective action practice group says Frank and Nancy present the case of an HR manager doing a great job of proactively managing risk for her employer. Unfortunately, the message is not always warmly received by upper management, who, like Frank, may want to “let sleeping dogs lie.” Given the explosion of wage and hour cases in recent years, and increased activity by the U.S. Department of Labor in the Obama administration, however, this is a dangerous course of conduct, as Nancy appropriately realized.

Nancy concluded that the job of senior customer service specialist had been misclassified because the position had become more systematic and employees in this position were no longer using the same independent thought and discretion they once did. Her analysis is dead on and raises several important points.

First, in conducting any wage and hour audit, it is essential to review the job duties that employees are actually performing, rather than simply analyzing a job description or relying on historical job duties. Indeed, exempt status is reviewed by the courts and the Department of Labor on an individual basis, meaning that some employees with a given job title may be exempt while others holding that title are not. Here, Nancy realized that the job duties that employees were performing had changed during the years and migrated away from the old job description.

Second, while analysis of the administrative exemption is not always clear-cut and often the subject of litigation, Nancy reviewed the key concepts. To that end, to be classified as exempt under the administrative exemption under federal law:

  • Employees must be paid on a salary or fee basis at a rate not less than $455 per week.
  • The employee’s primary duty must be the performance of office or nonmanual work directly related to the management or general operations or the employer’s customers.
  • The employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance.

The terms of this test require some additional explanation. An employee’s “primary duty” is the principal or most important duty the employee performs. Courts and Department of Labor officials look to the employee’s job as a whole in determining the primary duty. To qualify as administratively exempt, the employee must also service the business or its customers, as opposed to doing what the business does. For example, if the business produces widgets and the employee at issue makes those widgets, he or she will not be exempt.

The concepts of “discretion and independent judgment” and “matters of significance” are, to the chagrin of many employers, hard to precisely define. In general, courts considering whether an employee exercises discretion and independent judgment on matters of significance look at such factors as:

  • Whether an employee has the ability to formulate, affect, interpret or implement company policies.
  • Whether the employee can commit the employer in matters of significant financial impact.
  • Whether the employee performs work that affects the company’s business operations to a significant degree.
  • Whether the employee has the authority to deviate from certain company policies when the situation calls for it.

As Nancy correctly determined, if an employee largely relies on a manual or rigid procedures to perform the job—the systemization that Nancy referred to—an employee is unlikely to be construed as exempt.

Third, if faced with a lawsuit, the burden will be on the employer to show that the employees at issue have been properly classified as exempt from overtime, whether under the administrative exemption or other common white-collar exemptions such as the executive, professional and outside sales exemptions. This is different from the usual lawsuit where the plaintiff would have the burden to prove his or her case. As a result, proactive work like the kind Nancy has done here becomes essential.

With the prospect of having to pay for liquidated, or double, damages and attorneys’ fees if the misclassification matter ever went to court, Nancy emerges as the hero of this story. While reclassifying employees may cost money in the short term, such strong HR diligence will ultimately protect the employer against what could be a much bigger problem (and financial loss) in the future.

Further, once employees have been reclassified as nonexempt, employers can work to effectively manage and control overtime costs. Employees have no right to work overtime, but they do have the right to be paid appropriately for the overtime they work. Thus, the company can instruct managers to schedule employees effectively and efficiently so as to eliminate or minimize the need for overtime to be worked at all.

In addition, by employing the fluctuating workweek method, the company can ensure that the cost of the overtime worked for salaried employees is limited to half-time, as opposed to one and one-half an employee’s regular rate. To qualify for the fluctuating workweek method, there must be a clear mutual understanding between the employer and employee that the employee will be paid a fixed salary for all hours worked, whether few or many. Assuming that the employee’s regular rate always exceeds the minimum wage each week, the employer may then pay the salaried employee the half-time pay as overtime compensation. That pay equals total compensation divided by total hours worked multiplied by 0.5.

The author is a shareholder with Ogletree Deakins in Portland, Ore., and author of The Star Profile: A Management Tool to Unleash Employee Potential (Davies-Black Publishing, 2008). Write him at


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