Understanding the Latest Wage and Hour Update: Say Hello to the 'Relational Analysis' Test!

Beth Dean 02.24.23
Nextep Blog Graphic - 2023-02-24 Compliance Alert - relational analysis

Your Guide to the Latest Court Ruling on the FLSA Administrative Exemption

If you’re an employer in Maine, Massachusetts, New Hampshire, Rhode Island, or Puerto Rico, listen up! The 1st US Circuit Court of Appeals has clarified the Fair Labor Standards Act’s (FLSA) administrative exemption, and it could be a game-changer for your business. In the recent case of Walsh v. Unitil Service Corporation, the court introduced a “relational analysis” test for determining whether a worker is an “administrative” employee.

Administrative exemption cheat sheet

So, what does this mean for you? Most employees are entitled to overtime pay for working over 40 hours in a single workweek. However, the “administrative” exemption allows some employees to be exempt from this requirement. To qualify for this exemption, the individual must meet three criteria: 

  1. Salary of at least $684 per week
  2. Primary duty is related to the management or general business operations of their employer
  3.  Exercising discretion and independent judgment over significant matters

Now, the tricky part, and where many employers get it wrong, is figuring out whether an employee’s job duties truly meet all three criteria. The second prong, in particular, can be challenging to navigate. The US Department of Labor (DOL) has issued regulations defining key terms and providing examples of work that might be considered administrative. However, it’s still up to employers to determine whether an employee’s job duties meet the criteria.

Misclassifying employees as exempt when they don’t meet the criteria can lead to severe consequences. For example, the employee could be entitled to back pay for any overtime they worked but didn’t receive. They could also be entitled to liquidated damages, an additional amount equal to the back pay owed.

So how about this new litigation?

The court’s decision in Walsh v. Unitil Service Corporation focused on the second criterion of the administrative exemption, that of the employee’s primary duties. The court clarified that determining whether this criterion is met requires a “relational analysis” between the employee’s job duties and the employer’s business purpose. In other words, the relational analysis must consider whether the employee’s primary duties relate to “running or servicing” the business operations of their employer or its customers and the scope of their role.

The court found that the dispatchers’ and controllers’ duties could be considered “administrative” as they related to the “running and servicing” prong of the administrative exemption. Ultimately, though, the court found that the employee’s “routine” work was not sufficiently high-level to qualify for the exemption under the scope of the role since they were not engaged in the management or impact of general business operations.

This decision is an important reminder to employers that there are gray areas when complying with federal overtime regulations. As an employer, you must tread carefully when designating employees as exempt. Consult with your HR Business Partner or outside counsel when determining whether an employee is exempt from overtime compensation.

If you operate in one of the states mentioned above, paying attention to this ruling is particularly important. However, this decision may also guide employers in other parts of the country. So, take note and ensure that you comply with the FLSA’s administrative exemption and other overtime regulations. Your employees (and company coffers) will thank you for it!

Be aware that where there is overlap between federal, state and/or local law, complying with the law that offers the greatest rights or benefits to the employee will generally apply.

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