Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500
Trepanier MacGillis Battina P.A. 8000 Flour Exchange Building 310 Fourth Avenue South Minneapolis, MN 55415 612.455.0500

Certain Bona Fide Executives May Be Exempt from Overtime Pay under the FLSA and MFLSA

Both federal and Minnesota law require employers to pay overtime pay to certain employees. There are exemptions, however, for employees holding certain types of positions. Two such exemptions are those covering “bona fide executives” and certain “business owners.” This article summarizes the requirements of these exemptions.

The Federal and Minnesota Fair Labor Standards Acts
Pursuant to the federal Fair Labor Standards Act (“FLSA”), covered employees in the United States generally must receive at least the federal minimum wage of $7.25 an hour for all hours worked, up to forty hours per week. Further, covered employers may not allow any of its employees to work more than forty hours per workweek unless such employee receives compensation for his or her overtime hours at a rate not less than one and one-half times the regular rate at which he or she is employed. 29 U.S.C. § 207(a)(1). In plain English, an employer covered by the FLSA generally cannot have an employee work more than forty hours per workweek without providing overtime pay equal to one and one-half (1.5) times the employee’s regular rate of pay (a.k.a., “time and a half”) for the overtime hours. Some employers will not be covered by the federal FLSA, typically because they fall under an exempt industry or because they are too small or do not operate in interstate commerce. In such cases, the Minnesota Fair Labor Standards Act (“MFLSA”) has similar overtime provisions, but overtime pay is not required unless the employee works more than forty-eight hours per workweek. Minn. Stat. § 177.25.1.

Despite the general obligation to provide overtime pay to employees who work more than the specified number of hours per workweek (40 hours under the FLSA and 48 hours under the MFLSA), the law recognizes certain “exemptions” for positions falling into certain well-defined criteria. Two of these exemptions, which are the subject of this article, apply to “bona fide executives” and certain “business owners.”

FLSA Exemption of Bona Fide Executives and Business Owners
The general test for a bona fide executive contains four criteria under the FLSA. Qualifying exempt executive employees (1) are compensated on a salary basis pursuant to 29 C.F.R. §§541.600; (2) have a primary duty of managing the enterprise or a department or subdivision of the enterprise; (3) customarily and regularly direct the work of two or more employees; and (4) have the authority to hire and fire employees, or whose suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees are given particular weight. 29 C.F.R. § 541.100(a). A detailed summary of the FLSA exemption for bona fide executives can be found in the following article from our website: Discussion of FLSA Exemption for Executive Employees.

A simplified test for equity owners of a business, however, may apply. Specifically, an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which he or she is employed, regardless of the type of business organization (e.g., corporation or partnership), and who is actively engaged in its management, is considered a bona fide exempt executive without regard to the other criteria listed in 29 C.F.R. § 541.100(a). See 29 C.F.R. § 541.101.

Further, the “salary basis of pay” requirement generally applicable to exempt employees does not apply to business owners who satisfy the equity owner test described above. 29 C.F.R. § 541.101. The exemption for business owners is very significant because employers can choose not to pay overtime to such business owners regardless of whether they otherwise satisfy the criteria for executives or receive a fixed guarantee salary.

MFLSA Exemption for Bona Fide Executives
MFLSA has two tests to determine if the employee is a bona fide executive but does not explicitly exempt business owners. The first test closely mirrors the bona fide executive test of the FLSA. Under the first test, an employee is an executive if he or she: (1) receives at least $250 per week in salary; (2) manages the enterprise by which the person is employed or a recognized department or subdivision thereof; and (3) customarily directs the work of two or more other employees. Minn. R. 5200.0190 Executive Tests. Importantly, the first test does not require the employee to regularly exercise discretion in order to satisfy the exemption.

The second test for a bona fide executive applies to business owners and applies if:

  • 1. The employee receives at least $155 per week in salary;
  • 2. The employee manages and supervises a department of at least two other full-time people;
  • 3. The employee has authority to hire or fire or suggest changes in employees’ status;
  • 4. The employee regularly exercises discretionary powers; and
  • 5. The employee either:
    • a. Devotes less than 20% of time worked or 40% in retail or service establishments to nonexempt work;
    • b. Owns 20% or more of the business; or
    • c. Has sole charge of an independent or branch establishment.

If an employee does not meet the criteria for the second test for a bona fide executive, the employee still might be exempt under the first test. Minn. R. 5200.0190 Executive Tests. Similarly, the employee might fall under a completely different exemption (e.g., professional, administrative, or outside sales) beyond the scope of this article.

CONCLUSION
In order to safely characterize a Minnesota business owner as “exempt” from overtime under both federal and state law, it appears the employer must demonstrate the employee (1) owns at least a bona fide 20-percent equity interest in the enterprise in which he or she is employed; (2) is actively engaged in its management; (3) receives at least $155 per week in salary; (4) manages and supervises a department of at least two other full-time people; (5) has authority to hire or fire or suggest changes in employees’ status; and (6) regularly exercises discretionary powers.

The consequences to an employer for misclassifying workers as exempt under the FLSA can be severe, including liability for back unpaid overtime, liquidated damages in an equal amount, and paying the plaintiff’s reasonable attorney’s fees and court costs. Accordingly, Minnesota employers should carefully evaluate the requirements of the federal and state exemptions for business owners and “bona fide executives” before classifying them as exempt.

If you or your company is seeking legal representation regarding the applicability of the FSLA overtime exemption for bona fide executives, or litigating a claim involving unpaid overtime pay in the State of Minnesota, contact one of the Minnesota employment lawyers of Trepanier MacGillis Battina P.A.
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About the Author:
Minnesota employment attorney Craig W. Trepanier represents employers and employees in matters involving wage and hour regulations, overtime pay, and misclassification under the FLSA and MFLSA. Craig also regularly represents highly compensated executives, business owners, and professionals regarding their job offers, employment contracts, and unpaid compensation. Craig may be reached at 612.455.0991 or craig@trepanierlaw.com. Trepanier MacGillis Battina P.A. is a Minnesota wage and hour law firm located in Minneapolis, Minnesota.
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