Pursuant to the federal Fair Labor Standards Act (“FLSA”), covered employees in the United States generally must be paid at least the federal minimum wage of $7.25 an hour for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. There are certain exemptions to the FLSA overtime requirements, including individuals who qualify as “bona fide executives.” The Minnesota Fair Labor Standards Act (“MFLSA”) also recognizes an exemption for bona fide executives, but its requirements differ slightly. This article discusses the requirements for the bona fide executive exemption under the FLSA and Minnesota law.
FLSA Exemption Basics
Under the FLSA, no employer shall employ any employee, engaged in commerce or in the production of goods for commerce, for a workweek longer than forty hours unless the employee receives compensation for his or her employment in excess of forty hours at a rate not less than one and one-half times his or her regular rate. 29 U.S.C. § 207(a)(1).
This provision does not apply, however, to a “bona fide executive, administrative or professional employee.” 29 U.S.C. 213(a)(1). The Eighth Circuit Court of Appeals, which governs employers in Minnesota, generally follows U.S. Department of Labor regulations interpreting the FLSA exemptions – such as the “bona fide executive” exemption. Fife v. Bosley, 100 F.3d 87, 89 (8th Cir. 1996) (citing Murray v. Stuckey’s, Inc., 50 F.3d 564 (8th Cir.), cert. denied, 516 U.S. 863 (1995) (“Under the FLSA, to determine whether an employee is an exempt ‘executive, administrative, or professional’ employee, a court must apply Department of Labor regulations that have been judicially construed in over fifty years of litigation.”)).
Federal FLSA Test for Exempt Executive Employees
One of the most important exemptions under the FLSA covers employees who are employed in a “bona fide executive capacity.” 29 U.S.C. 213(a)(1).
According to the U.S. Department of Labor (“DOL”) regulations interpreting the FLSA, the term “employee employed in a bona fide executive capacity” means any employee:
- Compensated on a salary basis at a rate of not less than $455 per week, exclusive of board, lodging or other facilities;
- Whose primary duty is management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof;
- Who customarily and regularly directs the work of two or more other employees; and
- Who has the authority to hire or fire other 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.
The employer has the burden to prove that its employee is an executive and therefore exempt from the FLSA’s overtime pay requirements. Fife v. Harmon, 171 F.3d 1173, 1174 (8th Cir. 1999). The Eighth Circuit Court of Appeals, has held that exemptions to the FLSA are narrowly construed to protect workers. See, e.g., Spinden v. GS Roofing Prods. Co., 94 F.3d 421, 426 (8th Cir. 1996) (citing McDonnell v. City of Omaha, Neb., 999 F.2d 293, 295 (8th Cir. 1993), cert. denied, 510 U.S. 1163 (1994) (“Employers have the burden of proving that the exemption applies, and they must demonstrate that their employees fit ‘plainly and unmistakably within [the exemption’s] terms and spirit.’”)).
The applicability of an exemption turns on the duties actually performed by the employee rather than the terms of a job description. The Office of Personnel Management has promulgated a regulation requiring that “the designation of an employee as FLSA exempt or nonexempt must ultimately rest on the duties actually performed by the employee.” 5 C.F.R. § 551.202(e). The Eighth Circuit has found this regulation instructive even though it is not binding. Madden v. Lumber One Home Center, Inc., 745 F.3d 899 (8th Cir. 2014).
$455 Weekly Salary
A bona fide executive must be compensated on a salary basis at a rate of not less than $455 per week, exclusive of board, lodging or other facilities. 29 C.F.R. § 541.100(a)(1).
Primary Duty is Management of the Enterprise or Department
A bona fide executive must hold a primary duty of management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof. 29 C.F.R. § 541.100(a)(2).
The DOL has defined “primary duty” as the principal, main, major or most important duty that the employee performs. Determination of an employee’s primary duty must be based on all the facts in a particular case, with the major emphasis on the character of the employee’s job as a whole. Factors to consider when determining the primary duty of an employee include, but are not limited to, the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee. 29 C.F.R. § 541.700(a).
According to the DOL, “management” includes, but is not limited to, activities such as interviewing, selecting, and training of employees; setting and adjusting their rates of pay and hours of work; directing the work of employees; maintaining production or sales records for use in supervision or control; appraising employees’ productivity and efficiency for the purpose of recommending promotions or other changes in status; handling employee complaints and grievances; disciplining employees; planning the work; determining the techniques to be used; apportioning the work among the employees; determining the type of materials, supplies, machinery, equipment or tools to be used or merchandise to be bought, stocked and sold; controlling the flow and distribution of materials or merchandise and supplies; providing for the safety and security of the employees or the property; planning and controlling the budget; and monitoring or implementing legal compliance measures. 29 C.F.R. § 541.102.
In Berscheid v. Northwest Respiratory Services, Civil No. 09-3392 (D. Minn. Mar.18, 2011), the Minnesota federal district court found that a branch manager satisfied the executive exemption because his primary duties included many of the management duties defined by the Department of Labor under 29 C.F.R. § 541.102, such as employee training, approving employee overtime and leave, recommending changes in employee’s salaries, scheduling and apportioning work, designing delivery routes, conducting annual employee reviews, handling employee grievances, maintaining branch inventory, approving office expenses, providing for the safety and security of employees and the premises, attending annual planning sessions, and providing input into the goals and direction for the company.
Department or Subdivision
According to the DOL, the phrase “a customarily recognized department or subdivision” is intended to distinguish between a mere collection of employees assigned from time to time to a specific job or series of jobs and a unit with permanent status and function. A customarily recognized department or subdivision must have a permanent status and a continuing function. For example, a large employer’s human resources department might have subdivisions for labor relations, pensions and other benefits, equal employment opportunity, and personnel management, each of which has a permanent status and function. 29 C.F.R. § 541.100(a)(3).
The DOL further notes that if an enterprise has more than one establishment, the employee in charge of each establishment may be considered in charge of a recognized subdivision of the enterprise. 29 C.F.R. § 541.103(b).
Customarily Directs Two or More Employees
As noted above, a bona fide executive must customarily and regularly direct the work of two or more other employees. 29 C.F.R. § 541.100(a)(3).
The DOL has defined the phrase “customarily and regularly” as greater than occasional but less than constant; it includes work normally done every workweek, but does not include isolated or one-time tasks. 29 C.F.R. § 541.701.
According to the DOL, the phrase “two or more other employees” means two full-time employees or their equivalent. For example, one full-time and two half-time employees are equivalent to two full-time employees. 29 C.F.R. § 541.104(a).
The supervision can be distributed among two, three or more employees, but each such employee must customarily and regularly direct the work of two or more other full-time employees or the equivalent. For example, a department with five full-time nonexempt workers may have up to two exempt supervisors if each supervisor directs the work of two of those workers. 29 C.F.R. § 541.104(b).
An employee who merely assists the manager of a particular department and supervises two or more employees only in the actual manager’s absence does not meet this requirement. 29 C.F.R. § 541.104(c).
Hours worked by an employee cannot be credited more than once for different executives. Thus, a shared responsibility for the supervision of the same two employees in the same department does not satisfy this requirement. However, a full-time employee who works four hours for one supervisor and four hours for a different supervisor, for example, can be credited as a half-time employee for both supervisors. 29 C.F.R. § 541.104(d).
Authority to Hire or Fire or Make Personnel Decisions
A bona fide executive is any employee who has the authority to hire or fire other 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)(4).
According to the DOL, factors to be considered in determining whether an employee’s recommendations as to hiring, firing, advancement, promotion or any other change of status are given “particular weight” include, but are not limited to, whether it is part of the employee’s job duties to make such recommendations, and the frequency with which such recommendations are made, requested, and relied upon. 29 C.F.R. § 541.105.
Generally, an executive’s suggestions and recommendations must pertain to employees whom the executive customarily and regularly directs. It does not include an occasional suggestion with regard to the change in status of a co-worker. An employee’s suggestions and recommendations may still be deemed to have “particular weight” even if a higher level manager’s recommendation has more importance and even if the employee does not have authority to make the ultimate decision as to the employee’s change in status. 29 C.F.R. § 541.105.
The Eighth Circuit Court of Appeals has recently provided some clarification of this requirement. In Madden v. Lumber One Home Center, Inc., 745 F.3d 899 (8th Cir. 2014), the court noted that “many different employee duties and levels of involvement can work to satisfy” the particular weight requirement. However, “informal input, solicited from all employees” does not. For this reason, the Court held that two supervisors did not qualify for the “bona fide executive” exemption because their only input in hiring and firing decisions was responding to requests for informal recommendations from all staff members when management was considering whether to hire a new employee.
Exemption of Business Owners
As discussed previously, the general test for a bona fide executive contains four criteria. A simplified test, however, applies to the equity owners of a business. 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.
Also of importance, 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.
Highly Compensated Employees
Just like certain business owners are automatically exempt under the regulations, certain highly compensated executives are also exempt. Specifically, employees performing office or non-manual work and paid total annual compensation of $100,000 or more (which must include at least $455 per week paid on a salary or fee basis) are exempt from the FLSA if they customarily and regularly perform at least one of the duties of an exempt executive, administrative, or professional employee identified in the standard tests for exemption. 29 C.F.R. § 541.601.
According to the DOL, the exemption for highly compensated employees applies only to employees whose primary duty includes performing office or non-manual work. Thus, for example, non-management production-line workers and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers and other employees who perform work involving repetitive operations with their hands, physical skill and energy are not exempt under this section no matter how highly paid they might be. 29 C.F.R. § 541.601(d).
Minnesota MFLSA Test for Exempt Executive Employees
In addition to the federal FLSA, most employers with employees in the State of Minnesota must also follow the Minnesota Fair Labor Standards Act (“MFLSA”). While the MFLSA recognizes an exemption for “bona fide executives,” there are some key distinctions between the criteria that apply at the federal and state level.
Individuals employed in a bona fide executive capacity are not considered “employees” under Minnesota’s FLSA. Minn. Stat. § 177.23, subd. 7(6).
The Minnesota Department of Labor & Industry (“DOLI”) has adopted rules defining the bona fide executive exemption. Unlike federal law, Minnesota law recognizes two different tests for such executives as outlined below.
Executive Test I (see Minn. R. 5200.0190, subp. 1)
A. The employee receives at least $250 per week in salary (this equates to an annualized salary of $13,000);
B. The employee manages the enterprise by which the person is employed or a recognized department or subdivision thereof; and
C. The employee customarily directs the work of two or more other employees.
Executive Test II (see Minn. R. 5200.0190, subp. 2)
A. The employee receives at least $155 per week in salary (this equates to an annualized salary of $8,060);
B. The employee manages and supervises a department of at least two other full-time people (a full-time employee is defined as one who works at least 35 hours in a workweek);
C. The employee has authority to hire or fire or suggest changes in employees’ status;
D. The employee regularly exercises discretionary powers; and
E. The employee either:
(1) devotes less than 20 percent of time worked, or 40 percent in retail or service establishments, to nonexempt work;
(2) owns 20 percent or more of the business; or
(3) has sole charge of an independent or branch establishment.
Under the MFLSA, the primary duties of the employee are determinative of his or her status under the exemption. Only where the employee’s primary duties meet all the criteria under a particular test may the employer consider the employee to be exempt from the overtime wage provisions. Minn. R. 5200.0180, subp. 1.
Definition of Manage
Under the MFLSA, the term “manage” means to control and direct the business operations of a given enterprise, department, or branch establishment. Duties involved in managing must involve the making of decisions and the issuance of directions to other employees which involve skill and judgment. The term includes those employees that act primarily and principally in a directive capacity as opposed to those who primarily do the actual work. Minn. R. 5200.0180, subp. 2.
The Minnesota rules interpreting the MFLSA indicate that the thrust of this criterion is to distinguish between those employees empowered to independently commit their employers on matters of importance and those employees who merely make day-to-day decisions which, although necessary to the daily operations of the employer’s business, are routine, or follow prescribed procedures, or involve a determination of whether specific standards are met, or are lacking in substantial importance to the employer’s business as a whole. Minn. R. 5200.0180, subp. 3.
According to the Minnesota Department of Labor & Industry, one test which should be utilized in determining whether an employee exercises discretionary powers is to ask whether the decisions being made involve a discretion as to company policy or procedure or commit the employer on matters of substantial importance. Mere recommendations with respect to policies and procedures are not sufficient unless it can be shown that the employer consistently accepted and followed those recommendations. Minn. R. 5200.0180, subp. 3.
Only one employee per enterprise, department, or branch establishment may be considered to be in sole charge regardless of the number of work shifts per day. Minn. R. 5200.0180, subp. 4.
Determination of Exempt and Nonexempt Work
In determining exempt and nonexempt work, work directly related to executive work may be included if the executive work which it relates to is actually performed by the employee. It is not sufficient to claim certain work is exempt where the executive function it might be directly related to is not performed by the employee. Minn. R. 5200.0180, subp. 5.
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 “bona fide executives” before classifying managers and supervisors 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.
U.S. Department of Labor
Minneapolis District Office
Wage & Hour Division
Tri-Tech Center, Suite 920
331 Second Avenue South
Minneapolis, MN 55401-2233
Phone: 612.370.3341 or 1.866.487.9243
Minnesota Department of Labor and Industry
443 Lafayette Road N.
St. Paul, MN 55155
Phone: 651.284.5005 or 1.800.342.5354
About the Author
Minnesota employment law attorney Craig W. Trepanier has extensive experience representing employers and employees in matters involving wage and hour regulations, overtime pay, and misclassifications under the FLSA and MFLSA. Craig may be reached at 612.455.0502 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota wage and hour law firm located in Minneapolis, Minnesota.
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