FLSA and Recruiting: A Follow Up on Other's Comments

Recently a discussion of exemptions and recruiters came up in a response thread. The post was adamant in the position of recruiters being non-exempt.

In general, I agreed with the poster that recruiters will be non-exempt and are entitled to overtime premiums for time worked in excess of forty hours in the weekly pay period. This is something lost or ignored by many recruiting companies I have experienced in the past.

I have found, however, if there is one area where you can never say never then it is with the Fair Labor Standards Act (FLSA.) This is because titles have little if anything to do with exemptions. All exemptions come down to a duties test. Many exemptions include a salary test as well but all have a duties test.

While few and far between there are some recruiters who may qualify as exempt. A few who actually close deals for retained searches may qualify as exempt under Outside Sales exemption. The area a recruiter is most likely to achieve exemption through is the Administrative Exemption.

To see if a particular recruiter would qualify as exempt an employer should check the person’s pay and duties against the following Administrative Exemption test. Other tests may apply too but this is a good starting place.

The FLSA Administrative Exemption Test
To qualify for the administrative employee exemption, all of the following prongs of the test must be met:

• The employee must be compensated on a salary or fee basis (as defined in the regulations) 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.

This means you must check each individual recruiter’s pay/duties against these factors and the components that make them up. If you fail to meet a single prong of the test then the exemption would fail and overtime premiums due.

Prong 1: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week.

Provided the compensation has a base salary component administered in compliance with FLSA, a recruiter can easily meet this prong.

The DOL’s Interpretation of a Salary
"Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. [Subject to limited exceptions,] an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked." (See Fact Sheet #17C: Exemption for Administrative Employees Under t...)


Application
A recruiter that is paid completely on salary would meet this portion of the test provided the salary is a minimum of $455 per week. The recruiter could be paid a salary plus additional performance based compensation and qualify for the exemption provided the salary met the $455 minimum. Someone paid exclusively on commissions or other performance based pay, however, will not meet the test regardless of whether it exceeds the weekly minimum.

Additionally, employers should be careful in making deductions from the salary. FLSA prescribes only limited cases where deductions may be made from the salary. Improper deductions can result in the payments failing to meet the “salary basis” requirement. (A discussion on deductions is too lengthy to address here.)

Prong 2: 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.

Clearly recruiting is non-manual “white collar” in nature. Based on the application of the hiring process to other lines of work, I believe most recruiters will meet this prong.

The DOL’s Interpretation of Management or General Business Operations of the Employer’s Customers
"An employee may qualify for the administrative exemption if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. Thus, employees acting as advisors or consultants to their employer’s clients or customers — as tax experts or financial consultants, for example — may be exempt." (See Fact Sheet #17C: Exemption for Administrative Employees Under t...)

Application

Hiring is generally considered within the management or general business operations. In fact, the US DOL’s FLSA PowerPoint presentation Executive, Administrative, an... explaining the updated version of FLSA cites human resources as an area related to management and general business operations.


Prong 3: The employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.


This is the prong where most recruiters get stuck. This is because in general they do not play as active a role in the final decision and as such do not exercise discretion and judgment over matters of significance as required by the FLSA to be exempt. To meet this prong the recruiter must not only exercise discretion and independent judgment but must do so over matters of significance to the employer or the employer’s client.

The DOL’s Interpretation of the Exercise of Discretion and Independent Judgment
"In general, the 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 must be applied in the light of all the facts involved in the employee’s particular employment situation, and implies that the employee has authority to make an independent choice, free from immediate direction or supervision. Factors to consider include, but are not limited to: whether the employee has authority to formulate, affect, interpret, or implement management policies or operating practices; whether the employee carries out major assignments in conducting the operations of the business; whether the employee performs work that affects business operations to a substantial degree; whether the employee has authority to commit the employer in matters that have significant financial impact; whether the employee has authority to waive or deviate from established policies and procedures without prior approval, and other factors set forth in the regulation. The fact that an employee’s decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment. The exercise of discretion and independent judgment must be more than the use of skill in applying well-established techniques, procedures or specific standards described in manuals or other sources." (See Fact Sheet #17C: Exemption for Administrative Employees Under t...)

Application
I have not located a specific opinion letter or DOL outline addressing recruiters in the limited time I had to review the issues. Despite this, there is plenty of information about areas related or similar that can be instructive.

A recruiter that merely screens applicants for minimum qualifications and fitness for employment generally will not meet the standard because s/he makes no hiring decisions. (See the Executive, Administrative, and Professional Exemption Prese... While possibly an offensive over simplification to hard working recruiters, this interpretation of the recruiting process clearly acts against generally exempting recruiters.

On the other hand those recruiters who act in a more detailed consulting role may want to consider alternative points in arguing for exemption. For instance, the DOL handbook does not address recruiters but it does offer some insight into things an employer may use to qualify a recruiter as exempt.

A good example is a comparison of recruiters to “Field Representatives:”

"Field representatives…and similar titles are frequently given to employees who visit their customers for the purpose of advising them on the use or acquisition of their employer’s products. Where their duties involve a comparison and evaluation of alternative courses of conduct with respect to matters of significance, as for example, a determination as to the product best suited to the customer’s needs or recommendations regarding alternative uses for particular products, their work normally calls for the exercise of independent judgment and discretion within the meaning. On the other hand advising customers as to the operation, maintenance and repair of their employer’s products which calls for the application of skills in applying technigues based on experience rather than the exercise of requisite independent judgment and discretion in matters of significance." (See USDOL Field Operations Handbook 22d10)

A recruiter that plays a more integral part in the hiring project may qualify. For example, one that works with clients to actively discuss in detail the benefits of one candidate over another might be comparable to this type of consultant. Working with clients to establish minimum qualifications, backgrounds, and experience as part of the project could be also used as evidence of this.

A recruiter that has authority to commit the employer in matters that have significant financial impact may meet the standard. This could include some degree of independence over pricing, guarantees, or other financial obligations.

Having authority to waive or deviate from established policies and procedures without prior approval might indicate independent discretion sufficient to meet the standards. An example of this would be to begin a search prior to receiving a formal contract or offering a free search to bring on business.

It is important to note these duties must be part of the “primary duties” of the recruiter. A “primary duty” means the principal, main, major or most important duty that the employee performs. An employer cannot not cite individual, irregular or rare instances of performing these duties and expect to meet the standards.

The DOL’s Interpretation of Matters of Significance
The term “matters of significance” refers to the level of importance or consequence of the work performed. An employee does not exercise discretion and independent judgment with respect to matters of significance merely because the employer will experience financial losses if the employee fails to perform the job properly. (See Fact Sheet #17C: Exemption for Administrative Employees Under t...)

Application
Clearly decisions to hire are considered matters of significance to an organization. This point is supported by the DOL’s citing Human Resources in their PowerPoint as previously noted. Additionally,
“hiring” is also enumerated in the duties test of the executive exemptions.

Again, I think the poster of the comment was correct in pointing out to the forum that recruiters in general are considered non-exempt. It is an especially important point in a business where many are misclassified. My experience has been that there are two areas employers would best to be risk adverse and FLSA is one of them. The other was 1099 subcontractors vs. W-2 employees, which the poster was also generally on target.


Disclaimer: This post is not intended as legal advice. It is merely my review of the application of certain regulatory guidelines to general concepts. Individual duties, pay methods, circumstances, actions, responsibilities and other factors could impact the determination of any exemption.

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