California Administrative Exemption Guide
03 Jan 2018
The administrative exemption in California is the most common weapon used by employers to deny employees essential labor rights such as overtime and minimum wages. Most of the time it is properly asserted, but often employees are illegally misclassified, leading to liability and steep penalties for employers. Deadlines (called statutes of limitations) exist for victims of wage theft to make these wage and hour claims. Failure to make such claims in a timely fashion can mean a substantial loss of back wages and overtime owed. This is why it is crucial for workers to move fast in determining whether they are truly exempt under California labor law.
So as an employee how do you know if the administrative exemption applies to you? California uses a qualitative and quantitative test (more on this below) to determine an employee’s status. First, the employee in question must meet a minimum salary requirement. Second, the employee must perform job duties that are considered by California labor law to be administrative. The five-step test discussed in the next section will help you determine whether you have been improperly classified as an exempt employee.
Under Wage Order 1-2001, the test works like this:
- Step 1: Is the employee paid on a salary basis and does he/she earn a monthly salary equivalent to at least twice the state minimum wage for full-time employment? If No, the exemption does not apply, if Yes => go to Step 2;
- Step 2: Does the employee perform “office or non-manual work directly related to management policies or general business operations of the employer or the employer’s customers?” OR Does the employee perform functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision of those, in work directly related to the academic instruction or training carried on in the system, establishment or institution? If No, the exemption does not apply, if Yes => go to Step 3;
- Step 3: Does the employee customarily and regularly exercise discretion and independent judgment? If No, the exemption does not apply, if Yes => go to Step 4;
- Step 4: Do any of the factors below describe the circumstances of the employee? If No, the exemption does not apply, if Yes => go to the Final Step;
- Does the individual regularly and directly assist a proprietor or employee employed in a bona fide executive or administrative capacity; OR
- Does the individual perform specialized or technical work requiring special training, experience, or knowledge, under only general supervision; OR
- Does the individual execute special assignments and tasks under only general supervision?
Final Step: Does the employee spend more than 50% of his/her work time engaged in the exempt work described above? If No, the exemption does not apply, if Yes => the exemption applies.
What Rights Am I Exempt From?
Any employee meeting the requirements of the test discussed in the summary above is exempt from state minimum wage and overtime requirements. Other white-collar exemptions include the professional and executive exemptions. If you don’t know what an exemption is then check out our basic guide on exemptions.
More About The Test
In determining the exempt status of a worker, courts utilize the test outlined in California Code Of Regulations Title 8, Section 11010 (summarized above). The test is composed of a quantitative monthly salary component, as well as qualitative job duties component, which is explained in detail below
Employees are presumed to be non-exempt
One thing that workers must understand is that right off the bat it is an uphill battle for the employer in trying to assert that a particular employee is exempt. This is because exemptions generally speaking are narrowly construed under both FLSA and California law. ( Abshire v. County of Kern (9th Cir. 1990) 908 F2d 483, 485-486 (“Employers who claim that an exemption applies to their employees …must show that the employees fit ‘plainly and unmistakably within (the exemption’s) terms’”)). Further, it is the employer’s burden to prove the necessary facts establishing an exemption, which means they must present evidence.
Finally, under 29 CFR § 541.2, the job title of an employee alone of a worker is not sufficient to establish the exempt status. This is because employers, as a common practice, provide their employees fancy titles that are often not correlated with the actual type of work they perform, and therefore it would be inherently unfair to give the title great weight.
Minimum monthly salary
An exempt administrative employee must receive “a monthly salary of at least twice the state minimum wage for full-time employees.” The exemption applies only to employees receiving a fixed salary independent of hours worked. Any employee paid hourly cannot under any circumstances be considered to meet the standards of this exemption.
Also, this fixed salary must equal at least twice California’s minimum wage for full-time employees (40 hours per week). As of January 1, 2019, the minimum wage is $12 an hour for employers with more than 26 employees, and $11 for employers with 25 employees or less. Therefore, the minimum salary requirement for exempt status for those who work for company with twenty-five employees or less is $45,760 per year ($3,813.33 per month), and $49,920 per year ($4,160 per month) for those who work for employers with twenty-six employees or more. However, this is set to increase on January 1, 2020, per California’s minimum wage law.
Employers may deduct full (8-hour), unpaid vacation days from the employee’s salary without affecting exempt status. However, salary deductions made for partial unpaid vacation days or any other reason may cause the employee to be considered nonexempt.
It is important to note that the California courts may rely on whichever law provides the most protection to California workers. Federal laws currently require a lower monthly salary to be considered an exempt administrator. Therefore, California courts choose to utilize the state standard which provides more significant benefits and protections to employees.
“Office or nonmanual work…”
Step 2 of the test above references the “performance of office or nonmanual work directly related to management policies or general business operations of the employer or the employer’s customers.” What exactly does this mean?
Office or nonmanual work: This means that the employee performs work which utilizes the mind rather than the hands. Repetitive, routine tasks such as filing, cleaning, or sorting office supplies would tend to be classified as manual.
Directly related to management or general business operations: This language refers to the type of work that the worker performs. The worker must perform work directly related to assisting with the servicing or running of business operations, which can be distinguished from production (i.e., manufacturing) or sales work. The objective of this language is to determine whether the work is administrative.
The California Supreme Court in the case of Harris v. Superior Court (2011) 53 C4th 170 explained that for work to be directly related it must be qualitatively administrative, and second, qualitatively, it must be of substantial importance to the management or operations of the business. Therefore, according to the court, the particular facts must be considered on a case by case scenario.
“Perform functions in the administration of a school system…”
Step 2 of the test also provides an alternative path to exemption if an employee performs functions “in the administration of a school system, or educational establishment or institution, or of a department or subdivision of those, in work directly related to the academic instruction or training carried on in the system, establishment or institution.” This means that an employee whose primary duties fall into one of the categories of the test for exemption, but who is employed in a school/educational institution setting rather than an office, can still be considered an exempt administrator.
Instead of relating duties to “management policies or general business operations,” the Wage Orders define the duties of an exempt educational administrator as: “work directly related to the academic instruction or training carried on in the system, establishment or institution.” Examples of this can include the administrative assistant to a school’s dean, or principal, or an employee who manages a database of academic software provided for students. It is important to note that this qualification refers only to administrators, and not to teachers, even if they may perform some administrative duties. Teachers may, however, be considered exempt under the professional employee exemption.
Discretion and independent judgment
In making a determination of whether an employee “customarily and regularly exercise[s] discretion and independent judgment” (Step 3, above), the court may take into consideration the following non-exhaustive factors (a yes answer to the questions below would likely indicate that the employee does have the necessary discretion and independent judgment):
- Does the employee carry out major assignments in conducting the operations of the business?
- Does he or she perform work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business?
- Does the employee have authority to formulate, affect, interpret or implement management policies or operating practices; or to waive or deviate from established policies and procedures without prior approval; or to commit the employer in matters that have a significant impact?
- Does the employee provide consultation or expert advice to management?
- Is the employee involved in planning long or short-term business objectives?
- Does he or she investigate and resolve matters of significance on behalf of management?
- Does the person represent the company in handling complaints, arbitration, disputes, and resolving grievances?
Step 4 of the test provides three options that characterize the duties of the worker. These are in addition to the other requirements set forth in the previous steps. Only one of the requirements must be satisfied for the requirement to be fulfilled in favor of the administrative exemption. The employee must (1) Regularly and directly assists a proprietor or employee employed in a bona fide executive or administrative capacity; or (2) Performs specialize or technical work requiring special training, experience, or knowledge, under only general supervision; or (3) Execute special assignments and tasks under only general supervision.
In Comb v. Skyriver Communications, Inc. (2008) 159 Cal4th, 1242, the court held that a computer network operator was administratively exempt. It determined that the operator met the duties test, and found that his resume which touted his high-level duties while employed by the defendant (which is considered powerful evidence) showed that he performed primarily exempt work.
Primarily engaged in duties that meets the test of exemption
Under Federal law, the amount of time spent performing exempt work helpful but not definitive in determining an employee’s primary duty. Under state law, on the other hand, the time spent on the exempt work is a critical factor required for finding an employee administratively exempt in California. Employees must be primarily engaged in exempt duties, meaning that more than half of their work time must be devoted to such duties. (Lab.C. § 515(e); 8 Cal.C.Regs.§ 11010 et seq.)
If more than half (50%) of the work time is not spent on these duties, the entire test fails, the employee is considered non-exempt and entitled to overtime, breaks, and minimum wage. Because the federal version of the rule is less protective, courts apply the state standard in determining whether overtime requirements apply. (See Pacific Merchant Shipping Ass’n v. Aubry (9th Cir. 1990) 918 F2d 1409, 1426-1427).
Examples of Work Considered Exempt:
The following are examples of employees who may be exempt because they have primary duties that are “directly involved” with the “general business operations” of their employer, and who may also “exercise discretion and independent judgment.” It is important to note that the facts of each worker must be examined, so consult with an employment attorney for help.
Insurance Claims Adjusters
Insurance adjusters whose duties comprise of inspecting damage to property, interviewing potential witnesses, making and evaluating coverage claims, negotiating settlements, and making recommendations regarding litigation, are considered exempt for purposes of Federal law. (29 CFR § 541.203(a)). Under California law, however, insurance claims adjusters are whose primary duties are investigating and settling routine claims are non-exempt production employees entitled to overtime pay. (See below for Bell. Here are some cases that touched on the facts on both laws:
- FLSA: Hogan v. Allstate Ins. Co. (11th Cir. 2004) 361 F3d 621, 627: Insurance agents who spent majority of their work time servicing existing customers were found to be “administrative” employees because their duties directly related to managing of the business: i.e. promoting sales, advising insureds, applying/adapting policies to customers needs, deciding on advertising budgets and techniques, training and hiring staff and determining their pay.
- State Law: Bell v. Farmers Ins. Exch. (2001) 87 Ca4th 805, 820: Claims representatives who handled both auto and homeowners insurance claims were “production” employees because claims adjusting was in the employer’s line of business and they had limited authority to work on routine every day claims. They were therefore entitled to overtime pay.
Financial services employees
Employees working in the financial services industry whose work duties include “collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products” are exempt under the FLSA. (29 CFR § 541.203(b)). Employees whose primary duty is selling financial products do not qualify for the exemption. (Id.).
Company team leaders
Those whose primary duty involves leading teams of other employees and purchasing, selling or closing all or part of a business, or involves negotiating a real estate transaction or collective bargaining agreement are exempt under 29 CFR § 541.203(f).
Human resources managers
Human resources personnel who formulate, interpret and implement employment policies are exempt under 29 CFR § 541.203(e). But personnel who just screen employment applicants generally do not meet the duties requirement. (Id).
Executive or administrative assistants
Those who assist (through delegation of authority) a business owner or senior executive of a large business on matters of significance are exempt. (29 CFR § 541.203(d).