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Tuesday, February 28, 2012

Guidelines for CA Associations and Nonprofits Regarding Exempt vs Non Exempt Employees

One of the most difficult and important assessments an employer must make is whether an employee is exempt or non-exempt from wage and hour laws.

Wage and hour laws exist at both the Federal and California level.  Employers are required to comply with BOTH sets of laws.  However, California wage and hour laws are, for the most part, more onerous than Federal wage and hour laws.  Consequently, compliance with California wage and hour laws will almost always ensure compliance with Federal wage and hour laws.

California wage and hour laws are administered by the Industrial Wage and Hour Commission (IWC), which issues Wage Orders.  The applicable actual wage order for associations is almost always Wage Order #4.

Steps to Proper Classification of Employees

1. Clarify the detailed job requirements and functions of the position
2. Identify the appropriate wage order; review
3. Identify the correct category of the position (executive, administrative, professional), review
4. Determine whether all of the Wage Order exemption requirements are met

Wage Order #4

The following outline pertains to the Administrative Exemption rules:
  • A person employed in an administrative capacity means any employee:
  • Whose duties and responsibilities involve either:
  • The performance of office or non-manual work directly related to management policies or general business operations of his or her employer or his or her employer's customers, or
  • The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and
  • Who customarily and regularly exercised discretion and independent judgment; and
  • Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity, or
  • Who performs, under only general supervision, work along specialized or technical lines requiring special training, experience, or knowledge, or
  • Who executes, under only general supervision, special assignments and tasks, and
  • Who is primarily engaged in duties which meet the test for the exemption.
An administrative employee must also earn a monthly salary equivalent to no less than two times the state minimum wage for full-time employment. Full-time employment means 40 hours per week as defined in Labor Code Section 515(c).

Critical Requirements of the Wage Order

It is critical to note that an employee subject to the Administrative Exemption must be engaged primarily (more than half of the time worked) in activities that entail the regular exercise of discretion and independent judgment.   It is also critical to distinguish between “the exercise of discretion and independent judgment” and “skills and knowledge.”   These concepts are discussed in a California legal case entitled Nordquist v. McGraw-Hill Broadcasting Company, Inc. (1995), 32 Cal.App.4th 555 (available via a Google search).   The case involved a television news anchor/news director, finding that the anchor was not exempt from California wage and hour laws.  The court stated the following:

"The most frequent cause of misapplication of the term 'discretion and independent judgment' is the failure to distinguish it from the use of skills and knowledge. An employee who merely applies his or her knowledge in following prescribed procedures or in determining which procedures to follow, or who determines whether specified standards are met ... is not exercising discretion and judgment of the independent sort associated with administrative work....

A second cause of the misapplication of the term 'discretion and independent judgment' involves employees who make decisions, but not at a level appropriate to administrative work. In some sense, almost every employee is required to use discretion: the shipping clerk may decide the method of packing, the truck driver decides the route, the bookkeeper decides which ledger to post first, but none of these decisions are important enough to count as part of an administrative function. Matters of consequence are those of real and substantial significance to the policies or general operations of the business of the employer or the employer's customers. This does not mean that exemptions are limited to persons who participate in the formulation of overall policies regarding the operation of the business as a whole-the tasks may be directly related to merely a particular segment of the business, but still must have a substantial effect on the whole business.” 

The court further noted:

“The DLSE Manual provides that the use of "discretion and independent judgment" are distinguishable from the use of skills and knowledge.  An employee who merely applies his knowledge in following prescribed procedures is not exercising discretion and judgment of the independent sort associated with administrative work. (DLSE Manual, § 10.62.)”

Important Tip

More often than not associations miscategorize meeting planners, membership directors and coordinator positions as exempt probably based on their misapplication of the administrative exemption.  While these positions entail the use of critical thinking, they primarily involve the application of skills, not judgments of material importance to the organization.  These positions should be carefully analyzed to ensure they truly meet the criteria for exemption.


Unless the position falls clearly within one category or the other (exempt or not exempt), the matter should be referred to a competent advisor.  The decision concerning whether a position is exempt or not should not be made by the person holding that position.   Records should be maintained concerning the basis for the determination.

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