Key Point 8-08.6. The Fair Labor Standards Act exempts employees employed in an executive, administrative, or professional capacity from the minimum wage and overtime pay provisions. To be covered by one of these exemptions, an employee must perform specified duties, and be paid a salary in excess of a specified amount.

A federal appeals court rejected a church employee’s claim that her employing church violated the federal Fair Labor Standards Act by failing to pay her overtime compensation for hours worked in excess of 40 per week. The former principal (the “plaintiff”) of a church school sued the church, claiming that it failed to (1) pay overtime wages pursuant to the FLSA; (2) notify her of her right to continuing health coverage under the Consolidated Omnibus Reconciliation Act (“COBRA”); and (3) adhere to the requirements of the Employment Retirement Income Security Act (“ERISA”) in administering the church’s pension plan. A federal district court concluded that the plaintiff was an “administrative employee” exempt from entitlement to overtime pay under the FLSA and that COBRA and ERISA requirements did not apply to “church plans” like the one the church had established. A federal appeals court affirmed the district court’s ruling.

FLSA—in general

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bonafide executive, administrative, or professional employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status.

To qualify for the administrative employee exemption, all of the following tests must be met:

• The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
• The employee’s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
• The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

The administrative exemption is also available to employees compensated on a salary or fee basis at a rate not less than $455 a week, or on a salary basis which is at least equal to the entrance salary for teachers in the same educational establishment, and whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment. Academic administrative functions include operations directly in the field of education, and do not include jobs relating to areas outside the educational field.

Department of Labor regulations clarify that employees engaged in academic administrative functions include:

• the superintendent or other head of an elementary or secondary school system, and any assistants responsible for administration of such matters as curriculum, quality and methods of instructing, measuring and testing the learning potential and achievement of students, establishing and maintaining academic and grading standards, and other aspects of the teaching program;
• the principal and any vice-principals responsible for the operation of an elementary or secondary school;
• department heads in institutions of higher education responsible for the various subject matter departments;
• academic counselors and other employees with similar responsibilities.

Having a primary duty of performing administrative functions directly related to academic instruction or training in an educational establishment includes, by its very nature, exercising discretion and independent judgment with respect to matters of significance.

The duties requirement

The court agreed with the church that the plaintiff’s employment responsibilities met the “duties” requirement of an exempt academic administrative employee:

She exercised the discretion of a principal on a daily basis and made important decisions related to instruction. She spent a significant amount of time supervising the school’s teaching staff and providing teaching evaluations. She also called staff development meetings, chose to implement a different standardized testing system than had previously been used in the school, interviewed candidates for teaching positions and made hiring recommendations to the Senior Pastor, recruited new students, prepared proposed budgets, taught classes in the core subjects, and made decisions related to student discipline. That [the church’s senior pastor] possessed general supervisory authority over the school does not mean [that she] lacked discretion to make decisions in her own right and is instead consistent with the regulations’ recognition that decisions of exempt employees may be “reviewed at a higher level.”

The “salary” requirement

The plaintiff insisted that she was not exempt, and therefore entitled to overtime pay, because she did not satisfy the salary requirement. Her weekly pay exceeded $455, but she insisted that she nonetheless failed the salary test because her pay was “subject to reduction because of variations in the quality or quantity of the work performed.” She cited the following Department of Labor regulation:

An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. (emphasis added)

The regulations clarify that a salary deduction of one or more full days in response to an employee’s absence for personal reasons will not affect his or her status as an exempt employee.

The plaintiff claimed that her pay was subject to reduction because of variations in the quality or quantity of the work she performed, and cited (1) an incident in which the church imposed a pay deduction after she missed a day of work for personal reasons; and (2) the pastor’s threat to dock school employees’ pay based on uniform infractions. The court ruled that neither of these incidents resulted in a violation of the salary test. With regard to the first incident, the court noted that this did not demonstrate an actual practice of compensating her on a non-salary-basis, especially since the FLSA regulations provide that a salary deduction of one or more full days in response to an employee’s absence for personal reasons will not affect his or her status as an exempt employee. Nor does a single deduction amount to a clear policy.

In rejecting the plaintiff’s second argument, the court noted that “there was no evidence that any salary deductions actually occurred on that ground, and [the pastor’s] isolated statements fall well short of establishing a clear and particularized policy” as required by the regulations.

COBRA and ERISA

The court rejected the plaintiff’s COBRA and ERISA claims: “It is not in dispute that [the church] established its health and pension plans and that it is a church that possesses 501(c)(3) tax exempt status. The plans are therefore church plans that are not subject to COBRA and ERISA requirements.”

Application. Many churches have adopted policies that permit employee salaries to be reduced based on variations in the quality or quantity of the work performed. Church leaders should recognize that such policies may result in the loss of exemption of church employees from the FLSA’s overtime pay requirements, and this leads to unexpected and unbudgeted liability for unpaid overtime compensation. This risk is especially acute if a church’s employee or policy manual was not reviewed by an attorney familiar with the FLSA.

Department of Labor regulations list several situations in which reductions in pay will not affect the exempt status of employees. One of these (deductions from pay when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability) was referred to by the court in this case. Other exemptions include

• deductions from pay may be made for absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bonafide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability;
• while an employer cannot make deductions from pay for absences of an exempt employee occasioned by jury duty, attendance as a witness or temporary military leave, the employer can offset any amounts received by an employee as jury fees, witness fees or military pay for a particular week against the salary due for that particular week without loss of the exemption.
• deductions from pay of exempt employees may be made for penalties imposed in good faith for infractions of safety rules of major significance.
• deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to a written policy applicable to all employees.
• an employer is not required to pay the full salary in the initial or terminal week of employment;
• an employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.

This case illustrates the importance of having your employee or policy manual reviewed by an attorney who is familiar with the FLSA. 2009 WL 1298525 (2nd Cir. 2009).

This Recent Development first appeared in Church Law & Tax Report, September/October 2009.