While many staffing agencies and consulting firms may classify recruiters as exempt from overtime pay, the employer must demonstrate that the employee satisfies a three-prong test that considers the employee’s compensation and job duties in order to meet the overtime exemption for administrative employees. This article discusses under what circumstances recruiters can be classified as exempt from receiving overtime pay under federal and Minnesota wage and hour laws.
FLSA Exemption Basics
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 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. However, there are certain exemptions to the FLSA overtime requirements, including those individuals who qualify as “administrative employees.” The Minnesota Fair Labor Standards Act (“MFLSA”) also recognizes an exemption for administrative employees, but its requirements differ slightly.
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 “administrative employee” 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.”)). 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).
Three-Prong Test for Overtime-Exempt Administrative Employees
An employee falls under the FLSA administrative exemption from overtime pay when:
(1) the employee is compensated on a salary or fee basis of at least $455 per week;
(2) the employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or employer’s customers; and
(3) the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
The Recruiter’s Compensation
To satisfy the first prong, a recruiter must be compensated on a salary or fee basis of at least $455 per week, the equivalent of at least $23,660 per year, regardless of whether the recruiter places one or one hundred candidates with clients in any week. 29 C.F.R. § 541.200(a).
An employee is compensated on a salary basis when the employee regularly receives a predetermined amount, constituting all or part of the employee’s compensation, on a weekly or less frequent basis. 29 C.F.R. § 541.602(a). The compensation amount cannot be subject to reduction because of variations in the quality or quantity of work performed by the employee.
An employee is compensated on a fee basis if the employee is “paid an agreed sum for a single job regardless of the time required for its completion.” 29 C.F.R. § 541.605(a). Practically speaking, if the recruiter receives a commission for placing a candidate, the total commissions (or combination of commission and base salary) must exceed $455 per week, or $23,660 per year to meet the compensation requirement.
The Recruiter’s Primary Duty
Next, to qualify for the administrative exemption, the primary duty of the employee’s work must be directly related to the management or general business operations of either the employer or the employer’s clients. See 29 C.F.R. § 541.200(a); see also 29 C.F.R. § 541.201(c). The United States Department of Labor (“DOL”) has interpreted such work to include “work in functional areas such as . . . personnel management, human resources, employee benefits, [and] labor relations.” 29 C.F.R. § 541.201(b).
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).
In practice, the DOL has interpreted work directly related to management or general business operations to include a staffing manager at a temporary staffing agency and university technical recruiters. See Dep’t of Labor Op. Ltr., 2005 WL 3308616 (Oct. 25, 2005) (concluding that a staffing manager “performed work in the functional areas of personnel management, human resources, and labor relations” by recruiting, hiring and managing the temporary labor pool of the agency’s clients); see also Dep’t of Labor Op. Ltr., 200 WL 34444341 (Dec. 8, 2000) (finding university technical recruiters who screened, tested, and interviewed applicants for employment, and who make personnel recommendations to hiring managers, were engaged in work directly related to management policies or business operations of their employer).
Courts have also found that employees in recruiting and staffing positions perform work directly related to the management or business operations of their employers or their employer’s clients. In Andrade v. Aerotek, Inc., 700 F.Supp.2d 738, 748 (D. Md. 2010), the court held that a recruiter in the financial services industry performed work in the functional areas of personnel management and human resources for her employer’s clients, and therefore, satisfied the DOL interpretation of business operations. Likewise, in Goff v. Bayada Nurses, Inc., 424 F.Supp.2d. 816, 824 (E.D.Pa. 2006), the court found that the job of a supervisor at a provider of in-home nursing care who matched nurses to patients and was involved in “case managing to ensure that the employee retains a positive relationship with the client” was directly related to the management or business operations of the employer or its clients. Similarly, in Hudkins v. Maxim Healthcare Servs., 39 F.Supp.2d 1349, 1349-50 (M.D.Fla. 1998), the court held that the primary duty of a recruiter at a company that placed nurses in hospitals was directly related to a company’s general business operations.
According to the courts, a recruiter’s work is more likely to satisfy the “business operations” prong of the FLSA administrative exemption if the recruiter’s primary job duties include: interviewing candidates, negotiating pay (including holiday and vacation pay), and helping to manage contractors once they are hired. See Andrade, 700 F. Supp. 2d at 746. In contrast, a recruiter’s work is unlikely to satisfy the business operations prong if it can be categorized as entry level sales work not directly related to management policies. See Pellegrino v. Robert Half International, Inc., 104 Cal. Rptr. 3d, 790 (Cal. Ct. App. 2010).
The Recruiter’s Discretion and Independent Judgment
To satisfy the final prong, the recruiter’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. 29 C.F.R. § 541.200(a). The exercise of discretion and independent judgment generally “involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.” 29 C.F.R. § 541.202(a). A crucial factor in determining whether a recruiter exercises discretion and independent judgment is the “amount of selectivity exercised in matching persons seeking employment with the requirements of the job opening and in deciding which employee to send to a particular employer, as opposed to referring to the employer several prospects who generally meet the qualifications for the job.” Andrade, 700 F.Supp.2d at 747 (citing Dep’t of Labor Op. Ltr. 2005 WL 3308616); accord Dep’t of Labor Op. Ltr. 2000 WL 34444341. The Andrade court found that where the recruiter developed her own recruiting strategies, compared contractors’ skills to the applicable job descriptions, interviewed candidates, and determined whether they were a good fit based on her knowledge of the clients’ personality, that the discretion and independent judgment prong was met. Id.
Applying California law, the court in Pellegrino v. Robert Half International, Inc., 182 Cal. App. 4th at 816, found that recruiters were not exempt from receiving overtime payments where they exercise little discretion and performed their recruiting functions within the “recipe” established by corporate officials, and where they do not supervise other employees or make staffing recommendations to clients. While the Pellegrino case was decided under California law, not the federal FLSA, it illustrates the importance of ensuring that recruiters are given responsibility for making significant decisions and empowered to apply their own discretion and judgment in order to meet the overtime pay exemption test.
Where a recruiter does more than simply screen applicants based on minimum qualifications, or does more than simply send a client several prospects that meet the job qualifications, it is more likely the third prong will be met.
MFLSA Test for Exempt Administrative 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 “administrative employees,” there are some key distinctions between the criteria that apply at the federal and state level.
Individuals employed in a bona fide administrative capacity are not considered “employees” under the MFLSA. Minn. Stat. § 177.23, subd. 7(6).
The Minnesota Department of Labor & Industry (“DOLI”) has adopted its own rules for defining the administrative exemption. Unlike federal law, Minnesota law recognizes two different tests.
Administrative Test I
(1) The individual receives at least $250 per week in salary or fee (this equates to an annual salary of $13,000);
(2) The individual either performs office or non-manual work directly related to management policies or general business operations; and
(3) The individual regularly exercises discretion or independent judgment.
Minn. R. 5200.0200, subp. 1.
Administrative Test II
(1) The individual receives at least $155 per week in salary or fee (this equates to an annualized salary of $8,060);
(2) The individual either performs office or non-manual work directly related to business operations or management policies;
(3) The individual regularly exercises discretion and independent judgment and makes important decisions;
(4) The individual either:
(a) directly assists the owner or a bona fide executive or administrative employee;
(b) performs supervised work only along lines requiring special training or experience; or
(c) executes special assignments; and
(5) The individual devotes less than 20 percent of time worked, or 40 percent in retail or service establishments, to nonexempt work.
Minn. R. 5200.0200, subp. 2.
Under the MFLSA, the primary duties of the employee are determined by 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.
To date, no court has analyzed the application of the administrative exemption to a recruiter under the MFLSA. The criteria for Minnesota’s Administrative Test I, however, closely mirror the requirements of the FLSA administrative exemption. Therefore, if the recruiter receives a salary or fee of at least $13,000 per year, it seems likely that cases decided under the FLSA will also be persuasive under the MFLSA.
Based upon the current state of the law, many recruiters will fall under the overtime exemption for administrative employees under the FLSA and the MFLSA. In order to be considered exempt from overtime pay, the recruiter must, at a minimum, be compensated in excess of the FLSA and MFLSA minimum compensation requirements, the employee’s work must be related to management or general business operations of the employer or the employer’s customers, and the employee must exercise discretion and independent judgment in matters of significance.
The determination of whether a particular recruiter for a staffing agency or consulting firm qualifies under the administrative overtime exemption is a fact specific inquiry particular to each employment situation. In order for the staffing firm to minimize its potential exposure for unpaid overtime pay, the employer should attempt to follow these guidelines with respect to its recruiters:
(1) encourage the recruiter to cultivate his or her own network of potential candidates and recruiting strategies;
(2) avoid having the recruiter follow a company “recipe” for how to place candidates;
(3) encourage the recruiter to research and analyze the background of each client and independently explore the requirements of each job posting;
(4) allow the recruiter to interview candidates to see how the candidates might be a good fit for a client based upon the recruiter’s knowledge of the client’s business and expectations and provide the recruiter independence when choosing which candidates to refer to a specific client;
(5) require the recruiter to “hand pick” job candidates to present to the client and avoid having the recruiter send to the client a long list of candidates who generally meet minimum job qualifications;
(6) authorize the recruiter to negotiate compensation and benefit packages with the job candidate;
(7) require the recruiter to manage and follow-up with contractors post-placement;
(8) if appropriate, have the recruiter supervise other employees within the department;
(9) develop a written job description for the recruiter that emphasizes major areas of discretion and independent judgment; and
(10) monitor and evaluate the recruiter’s performance in areas requiring discretion and independent judgment.
For more information on the FLSA, MFLSA, and whether you or one of your employees may be exempt from receiving additional overtime compensation, contact the Minnesota wage and hour law attorneys of Trepanier MacGillis Battina PA.
For More Information About the FLSA:
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Pharmaceutical Sales Reps are Exempt From Overtime Under FLSA
Discussion of FLSA Exemption for Retail Sales Employees
Discussion of FLSA Exemption for Executive Employees