Administrative Exemption from Overtime in California

“[U]nder California law, exemptions from statutory mandatory overtime provisions are narrowly construed.  Moreover, the assertion of an exemption from the overtime laws is considered to be an affirmative defense, and therefore the employer bears the burden of proving the employee’s exemption.”  Ramirez v. Yosemite Water Co. (1999) 20 Cal.4th 785, 794–795 (internal citations omitted).  California Labor Code section 510(a) requires employers to pay overtime compensation—that is, to compensate its employees at a higher rate for hours worked over eight in a day or forty in a week.  Lab. Code § 515(a) gives the Industrial Welfare Commission (“IWC”) the authority to establish exemptions from the overtime pay requirement.  The IWC promulgated Wage Order No. 4, which relates to “professional” and “technical” employees.  Cal. Code Regs., tit. 8, § 11040.  The wage order establishes four exemptions from the overtime requirement: the (1) executive, (2) administrative, (3) professional, and (4) computer professional exemptions.  Id. at subd. 1(A).  Pursuant to the Wage Order, in order to be exempt, an employee must perform exempt duties more than fifty-percent of the time. 

The administrative exemption applies to an employee:

Whose duties and responsibilities involve . . . the performance of office or non-manual work directly related to management policies or general business operations of his/her employer . . . [w]ho customarily and regularly exercises discretion and independent judgment . . . and [w]ho executes under only general supervision special assignments and tasks.  The activities constituting exempt work and non-exempt work shall be construed in the same manner as such terms are construed in the following regulations . . . 29 C.F.R. Sections 541.201-205, 541.207-208, 541.210, and 541.215.

8 CCR § 11040, subd. 1(A)(2).

“Work qualifies as ‘directly related’ if it satisfies two components.  First, it must be qualitatively administrative.  Second, quantitatively, it must be of substantial importance to the management or operations of the business.”  Harris v. Sup. Ct. (2011) 53 Cal.4th 170, 181 (citing 29 C.F.R. § 541.205(a) (2000)).  “Administrative operations include work done by “white collar” employees engaged in servicing a business.  Such servicing may include, as potentially relevant here, advising management, planning, negotiating, and representing the company.”  Id. at 182 (citing 29 C.F.R. § 541.205(c)).  “Substantial importance to the management or operations of the business” is not necessarily the same as the affect of an employee’s job on the company’s bottom line or the importance of the employee’s job generally speaking.  As 29 C.F.R. § 541.205(c)(2) explains:

A messenger boy who is entrusted with carrying large sums of money or securities cannot be said to be doing work of importance to the business even though serious consequences may flow from his neglect.  An employee operating very expensive equipment may cause serious loss to his employer by the improper performance of his duties.  An inspector, such as, for example, an inspector for an insurance company, may cause loss to his employer by the failure to perform his job properly.  But such employees, obviously, are not performing work of such substantial importance to the management or operation of the business that it can be said to be ‘‘directly related to management policies or general business operations’’ . . . .

29 C.F.R. § 541.205(c)(2)

29 C.F.R. § 541.201(a) provides a number of examples of areas of work that would constitute work “directly related to management or general business operations”:

[T]ax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, internet and database administration; legal and regulatory compliance; and similar activities

29 C.F.R. § 541.201(a)

Regarding the “discretion and independent judgment” requirement, 29 C.F.R. § 541.207(a) (2000) provides:

[T]he exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. The term as used in the regulations in subpart A of this part, more over, implies that the person has the authority or power to make an independent choice, free from immediate direction or supervision and with respect to matters of significance.

29 C.F.R. § 541.207(a) (2000)

The regulations distinguish between exercising discretion and independent judgment, on the one hand, and using “skills and procedures” on the other:

Perhaps the most frequent cause of misapplication of the term “discretion and independent judgment” is the failure to distinguish it from the use of skill in various respects. An employee who merely applies his knowledge in following prescribed procedures or determining which procedure to follow . . . is not exercising discretion and independent judgment . . . .

29 C.F.R. § 541.207(c)(1) (2000)