Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

The FLSA’s professional exemption has two subcategories: the “learned professional” (those who perform work requiring the use of advanced knowledge customarily acquired through prolonged academic instruction), and its sibling, the “creative professional” (those engaged in the “performance of work requiring invention, imagination, originality or talent in a recognized field of artistic or creative endeavor"). See 29 C.F.R. § 541.302(a). This week, the federal Court of Appeals for the Ninth Circuit reviewed one of the few decisions analyzing the applicability of this exemption, and affirmed the lower court’s ruling that the defendant newspaper’s reporters did not meet its requirements.  Wang v. Chinese Daily News, 2010 U.S. App. LEXIS 19929 (9th Cir. 2010)

The Ninth Circuit focused on the DOL’s regulation addressing the potential applicability of the exemption to journalists. That regulation distinguishes between work requiring “invention, imagination, originality or talent” from work which depends primarily on “intelligence, diligence and accuracy.” 29 C.F.R. § 541.302(d). In affirming, the Circuit Court concluded that the materials submitted on summary judgment made clear that newspaper’s articles did not have the sophistication of the national-level papers, where there might be a “small minority of journalists who are exempt.” Moreover, the Court held the intense pace at which newspaper reporters worked precluded them from engaging in sophisticated analysis. Their primary duties did not involve "conducting investigative interviews; analyzing or interpreting public events; writing editorials, opinion columns or other commentary," even if they engaged in these activities some of the time, the Court held.  The Court concluded that characterizing journalists as exempt would therefore be “inconsistent with the Department of Labor's intent that ’the majority of journalists . . . are not likely to be exempt,’ and with the requirement that FLSA exemptions be construed narrowly.” Chinese Daily News, 2010 U.S. App. LEXIS 19929 at * 13-15 (internal citations omitted). 

When the district court granted summary judgment to the plaintiffs it noted that as of that date there was only one case where a court found a newspaper reporter to be exempt. Lynne Wang v. Chinese Daily News, Inc., 435 F. Supp. 2d 1042, 1053 (C.D. Cal. 2006) citing Sherwood v. Washington Post, 871 F. Supp. 1471 (D.D.C. 1994)(exempting Washington Post bureau chief assigned to cover Mayor Marion Barry and later the vice presidential campaign). 

The Ninth Circuit’s decision, along with two earlier Circuit opinions it cites, is a cautionary tale regarding the narrow scope of the creative professional exemption, particularly as applied to journalists. Employers, especially those in the newspaper, magazine and related industries, must ensure that any individual treated as an exempt creative professional utilizes the requisite “invention, imagination, originality or talent” in performing his/her job duties. New media content providers must also be aware that - technological differences notwithstanding - authors and producers of Internet content will be analyzed under the same framework.

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As FLSA and other wage lawsuits continue to be prevalent, one threshold issue that often arises with small and/or local businesses, as well as non-profit entities, is whether the employer is an enterprise covered by the FLSA. This issue is relevant because in order for the FLSA to be applicable, either the individual employee must be engaged in interstate commerce (individual coverage) or the defendant employer must be an enterprise engaged in interstate commerce (enterprise coverage). Enterprise coverage is triggered where an employer: 1) "has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person"; and 2) has at least $500,000 of "annual gross volume of sales made or business done." 29 U.S.C. § 203(s)(1)(A).

Recently, the United States Court of Appeals for the Eleventh Circuit  analyzed the applicability of enterprise coverage in six consolidated cases brought against employers who asserted they were local businesses not covered by the FLSA. In its decision, the court clarified what constitutes “goods or materials that have been moved in or produced for commerce” for purposes of establishing enterprise coverage. Polycarpe v. E & S Landscaping Serv., 2010 U.S. App. LEXIS 18171 (11th Cir. Fla. Aug. 31, 2010). 

Specifically the court held that whether the employees, who performed different jobs for the several defendants, including “landscapers, security-system technicians, and construction workers, among other [occupations]”, were covered by the FLSA turned on whether they used any materials in conducting their employers’ business which had shipped in interstate commerce. Materials, held the court, should be read for FLSA purposes to mean “tools or other articles necessary for doing or making something.” The court specifically rejected the so-called “coming to rest” doctrine, wherein goods or materials shipped in interstate commerce ceased to be identified as such once they “come to rest within a state before intrastate purchase by a business.” The court reversed the dismissals at the district court level, remanding five of the six the cases for application of its “materials” test.  The sixth case was affirmed based on uncontroverted evidence that the employer did not meet the $500,000 annual revenues test. 

While a highly technical decision, Polycarpe stands for a very straightforward proposition: FLSA enterprise coverage (at least in the Eleventh Circuit based on the court’s definition of “materials”) is broad. Employers with $500,000 in gross revenues within the Circuit (encompassing Florida, Georgia and Alabama) must carefully analyze potential FLSA liabilities. 

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As discussed here and here, the FLSA provides an exemption for employees who 1) are employed by a “retail or service establishment”; 2) earn at least 1.5 the minimum wage for all hours worked; and, 3) earn more than 50% of their compensation in a representative period from commissions. In July 2009, a federal district court in Pennsylvania applied this “7(i)” exemption and found that commission-compensated sales associates of NutriSystem’s weight loss and weight management products were not entitled to overtime under the FLSA. Parker v. NutriSystem, Inc., 2009 U.S. Dist. LEXIS 66597 (E.D. Pa., July 30, 2009). This week, the Court of Appeals for the Third Circuit upheld this decision. Parker v. NutriSystem, Inc., 2010 U.S. App. LEXIS 18691 (3d Cir. Sept. 7, 2010).

On appeal, Plaintiff challenged the district court’s ruling that NutriSystem’s compensation plan established a "bona fide commission rate" and was therefore a "commission" within the meaning of the FLSA and the 7(i) exemption. In upholding the payments in question as commissions, the Third Circuit first noted the paucity of appellate case law defining a commission for purposes of the FLSA. Relying on Judge Posner’s opinion in Yi v. Sterling Collision Centers, 480 F.3d 505 (7th Cir. 2007), the Third Circuit concluded that the NutriSystem compensation plan, wherein “a flat rate fee is not paid unless a sales associate completes a sale . . . [and the fee is] is tied to both the time the sale is made and whether it is based on an incoming or outgoing call”, constituted the payment of bona fide commissions, even though the commission was not calculated as a flat percentage of customer costs. The Court observed that this method of compensation both incentivized the sales associates to make more sales calls, and, importantly, "decoupled [compensation] from actual time worked."

Employers utilizing piece rates, job rates, sales commissions or other forms of incentive pay should be aware of the potential applicability of this exemption. Of course, applicable state law also must be reviewed.

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Recently, a federal judge in Minnesota analyzed whether the confounding administrative exemption applies to investigators employed by a “full-service investigative firm specializing in insurance defense investigations.” Ahle v. Veracity Research Co., 2010 U.S. Dist. LEXIS 88250 (D. Minn. Aug. 25, 2010). In an opinion which addressed numerous other issues in the litigation, including rejecting the applicability of two other FLSA exemptions to the investigators (outside sales and motor carrier), Judge Ann Montgomery concluded that, while the investigators did perform work relating to the general business operations of Veracity and its customers (meeting the first prong of the administrative exemption test), they did not exercise sufficient discretion and independent judgment in performing that work, and thus could not qualify for the exemption.

Relying on the Seventh Circuit’s analysis in Roe-Midgett v. CC Services, Inc., 512 F.3d 865 (7th Cir. 2008), Judge Montgomery observed that even though the plaintiff investigators “produced” Veracity’s product (the investigations themselves), potentially making them “production” workers as opposed to administrative workers, the administrative/production dichotomy was of little use in analyzing a service business such as defendant’s, and, more importantly:

the core business function of Veracity's clients is not to produce investigations. For example, Veracity's insurance company clients are in the business of writing and selling insurance policies. The duty of conducting claims investigations is merely ancillary to producing and selling insurance policies, and thus falls on the administrative side of the "administrative-production dichotomy”

Ahle, 2010 U.S. Dist. LEXIS 88250 at * 11 citing Roe-Midgett, 512 F.3d at 872.

Judge Montgomery then turned to the final prong of the analysis: whether the investigators exercised discretion and independent judgment under the Department of Labor regulation 29 C.F.R. § 541.202. Analyzing Veracity’s investigators in light of previous FLSA decisions concerning insurance industry investigations, the Court ruled that no material issue of fact existed as to the presence of discretion and independent judgment because, “(1) Veracity's written guidelines explain in great detail how claims investigators should conduct an investigation, (2) the claims investigators are required to obtain all the facts regardless of their impact, and (3) the claims investigators do not include their own opinions, conclusions, or recommendations regarding the decision whether to pay or deny the claim.” This absence of independent analysis rendered the investigators employees who simply made “choices among established techniques, procedures or specific standards described in manuals or other sources." Thus, they could not qualify for the administrative exemption. 

The administrative exemption is a persistent source of confusion, and litigation. Employers must apply its multiple-pronged exemption test with care and ensure exercise of sufficient discretion and independent judgment as to matters of significance.

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