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Navigating the Nuances of the 'Executive' Exemption

April 10, 2006

New Jersey Law Journal

Small and large employers have been the targets of wage and hour lawsuits

Over the past decade, there has been a nationwide increase in wage and hour lawsuits as well as administrative investigations conducted by the United States Department of Labor (USDOL) and the New Jersey Department of Labor and Workforce Development (NJDOL) based upon the failure of employers to pay overtime in accordance with federal and state law. Both small and large employers have been the targets of these wage and hour lawsuits and administrative investigations. In fiscal year 2005, the DOL recovered more than $166 million in back wages, a 26 percent increase over the back wages collected in fiscal year 2001. U.S. Department of Labor, Wage and Hour Collects $166 Million in Back Wages for 241,000 Employees in Fiscal Year 2005, 2005 Statistics Fact Sheet, available at http://www.dol.gov/esa/whd/statistics/200531.htm.

The NJDOL similarly has reported an exorbitant increase in claims filed by employees for alleged unpaid wages during fiscal years 1999 through 2004. See New Jersey Department of Labor and Workforce Development, 2004 Annual Statistical Review, September 2005, p. 41. While the wage and hour laws have been ignored for decades, these types of lawsuits have now surpassed other employment discrimination lawsuits filed in federal court. See Wage-Hour Actions Surpassed EEO in Federal Courts Last Year, Survey Shows, Daily Lab. Rep. (BNA) (March 22, 2002).

Pursuant to the Fair Labor Standards Act, 29 U.S.C. §201 et seq. (FLSA), all employees, other than those falling within narrowly tailored "white collar" exemptions, are guaranteed overtime pay at one and one-half times the regular rate of pay for all hours worked over 40 hours in a work week. 29 U.S.C. §207(a)(1). Under federal law, an employee is exempt from the overtime requirement only if the employee is a bona fide executive, administrative, professional, outside salesperson or computer employee. 29 U.S.C. § 213(a); 29 C.F.R. §541. The New Jersey Wage and Hour Law, N.J.S.A. 34:11-56a4-56a30 (NJWHL), likewise mandates that employers pay employees overtime for hours worked in excess of 40 "unless the employer establishes the right to an exemption from the overtime obligation based upon the employee's salary, duties and work." N.J.S.A. 34: 11-56a4.

Many employers are vulnerable to liability under the federal and state wage and hour laws because they misunderstand or misinterpret the complex and confusing regulations regarding payment of overtime. In fact, because many employers lack a sophisticated understanding of these laws, they do not engage in the complex salary and job duties analysis required to determine if a specific position should be designated as exempt or nonexempt. Analyzing whether a particular employee or class of employees should be designated as exempt from overtime has never been an easy task for employers. For one thing, until recently, the principal guidance available to employers in conducting this analysis were outdated federal regulations promulgated more than fifty years ago. 29 C.F.R. §§ 541.0-.602 (1949). It was only in August 2004 that the DOL substantially revised these archaic regulations to clarify the "white collar" exemptions. See 29 C.F.R. §§ 541.0-541.602 (2004). The modification and simplification of the federal regulations, however, may not eliminate the confusion for New Jersey employers, since the New Jersey regulations interpreting the NJWHL have yet to be amended and, in at least one instance, now differ from the federal regulations. Compare N.J.A.C. 12:56-7.1(a)5 to 29 C.F.R. § 541.1.

A recent Appellate Division decision highlights both the intricate analysis required in classifying employees for overtime purposes and the existing tension between federal and state law. In Marx v. Friendly's Ice Cream Corporation, 380 N.J. Super. 302 (App. Div. 2005), the first published decision interpreting New Jersey's "executive" exemption under N.J.S.A. 34:11-56a4 and N.J.A.C. 12:56-7.1, several general managers from various Friendly's restaurants instituted suit under the NJWHL challenging the classification of their position as exempt from overtime. See Marx, 380 N.J. Super. 302. Although the managers conceded during a bench trial that they were responsible for the overall operation of the restaurant and had the authority to hire and fire restaurant employees, they claimed they were improperly classified as exempt because they allegedly devoted less than 20 percent of their working time to managerial responsibilities. Id. at 308. Significantly, the plaintiffs testified that they regularly performed ministerial jobs, such as cleaning, vacuuming and cooking. Id. The plaintiffs testified that they were required to perform these tasks ostensibly because Friendly's limited their ability to schedule nonexempt staff members to perform these tasks. Id. at 308.

In analyzing whether the general managers were "executives" exempt from overtime under N.J.A.C.12:56-1, the court examined six factors, including the employee's compensation, managerial responsibility, authority to direct staff, authority to select and retain staff, authority to exercise discretion and percentage of actual work devoted to management. Id. at 311; see also N.J.A.C. 12:56-7.1. In the absence of any precedent interpreting the New Jersey regulation, the court looked to the federal regulations under the FLSA for guidance. Although the federal regulations were identical to the New Jersey regulations in most respects, the Marx decision hinged on one significant distinction between the federal and state regulations. Pursuant to New Jersey's regulation, N.J.A.C.12:56-7.1(a)5, an employee of a retail or service establishment will qualify as an exempt "executive," if the employee devotes less than 40 percent of his workweek to nonexempt work. Id. at 317; N.J.A.C. 12:567.1(a)(5). The regulation, which is broader than its federal counterpart, effectively serves as an "independent basis for excluding an employee from the 'executive' exemption" because it required a "quantitative review of time spent on non-exempt work." Id. at 319.

In construing the New Jersey regulation, the court noted that the different language reflected an intention to depart from the federal standard and to afford greater protection to New Jersey employees. Id. at 318-319. Nonetheless, to discern the reason for the deviation, the court analyzed the corresponding federal regulation, 29 C.F.R. 541.1(e), which is applicable to retail establishments. Interestingly, the "quantitative analysis" called for in the former federal regulation, in contrast to the New Jersey regulation, had limited application. According to the court, the "quantitative analysis" only came into play in those circumstances where an employee of a retail establishment earned less than $250 per week. Id. at 318. Where an executive was paid more than the $250 threshold, the employer could evaluate the exempt status of the position under a "short test" which did not include a determination of the percentage of work devoted to nonexempt duties. Id. Further, the court observed that the federal regulation, unlike the New Jersey provision, expressly stated that it did not apply where the employees, such as the plaintiffs, were "in sole charge of an independent establishment." Id. at 318 (quoting 29 C.F.R. 541.1(e)).

The court noted, however, that in revising the federal regulations, the DOL dispensed with the "quantitative analysis" component because it required employers to conduct a "moment-to-moment" examination of an exempt employee's duties - an analysis the DOL had concluded was unworkable from both a practical and legal standpoint. Id. at 320. In fact, the court noted that the DOL had rejected this analysis because it required employers to establish monitoring mechanisms designed to track an executive's daily activities. Id.

Consequently, the Marx court concluded that it was inconceivable that New Jersey's Commissioner of Labor intended New Jersey employers to perform a "moment-to-moment" analysis of an executive's work week in order to claim the exemption, particularly since New Jersey law does not require employers to maintain such records. Id. at 321.

In interpreting the New Jersey regulation, the court weighed the competing interests between the employer and the employee, focusing on the expectations of the employer and the ability of the employee to fulfill those expectations. Balancing these interests, the Appellate Division held that a retail or service establishment will satisfy its burden entitling it to the executive exemption, where the employer adduces evidence that: a) the managerial duties of the position, if properly performed by the employee, will require, at a minimum, more than 60 percent of the employee's workweek; and b) the projected staffing levels are adequate to meet the demands of the business without requiring substantial assistance of exempt managerial employees to accomplish those tasks. Id. at 324. Finding that there was ample evidence introduced at trial demonstrating that Friendly's had, in fact, made appropriate staffing available to the managers, and given the trial court's refusal to credit the plaintiff's testimony that they spend 80 percent of their time on nonexempt duties, the Appellate Division affirmed the trial ruling that the managers were exempt from overtime.

As Marx demonstrates, the inconsistencies between the federal and state wage and hour laws will undoubtedly lead to further confusion for New Jersey employers attempting to classify employees. Thus, New Jersey practitioners counseling employers must have a thorough understanding of both and federal and state wage and hour laws to assist clients in navigating the nuances of these complex and confusing laws. Attorneys representing employers should urge their clients to conduct a thorough employment audit of their pay roll practices, including a review of whether positions have been properly classified as exempt under both federal and state law.

This article is reprinted with permission from the APRIL 10, 2006 Issue of the New Jersey Law Journal. ©2006 ALM Properties, Inc. Further duplication without permission is prohibited. All rlghts reserved.

Catherine P. Wells cwells@wolffsamson.com is a member of the employment law group and Jennifer R. Jacobus jjacobus@wolffsamson.com is an associate in the litigation department at Wolff & Samson PC of West Orange.