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

As the volume of FLSA lawsuits remains high, the frequency of collective action trials – once unheard of – has correspondingly increased. On January 5, 2012, following a bench trial, Judge Edmund Sargus, Jr. of the United States District Court for the Southern District of Ohio ruled that 91 current and former “special investigators” for defendant Nationwide Mutual Insurance Company were exempt from minimum wage and overtime under the FLSA’s administrative exemption. Foster, et al. v. Nationwide Mutual Insurance Company, 2012 U.S. Dist. LEXIS 1384 (S.D. Ohio Jan. 5, 2012).

In the Court’s lengthy Order, the Court summarized the evidence presented at trial and applied it to the most commonly disputed component of the administrative exemption test -  whether the investigators’ work required the exercise of discretion and independent judgment with respect to matters of significance. In making such determination, the Court first sought, consistent with FLSA jurisprudence and guidance, to define the investigators’ “primary duty” in their work for Nationwide. The Court ultimately identified the primary duty “conduct[ing] investigations into suspicious claims with the purpose or goal of resolving indicators of fraud present in those claims.” In coming to this conclusion, the Court rejected Plaintiffs’ assertion that their primary duty was to “investigate suspicious claims by gathering and reporting facts” as too “narrow”, since it failed to account for the resolution of fraud indicators in the conduct of an investigation.

This distinction made all the difference to the Court’s ultimate determination, namely that the investigators exercise discretion and judgment because they were “tasked with resolving indicators of fraud” and had “nearly unilateral discretion in referring claims to law enforcement and the [National Insurance Crime Bureau].” In regard to resolving fraud indicators, the Court noted that “‘truth’ is not an entirely objective concept” and the investigator’s decision required factual determinations, the reaching of which “necessarily requires judgment and discretion.” This discretion was “significant” because in making factual determinations the investigators had “undisputed influence on Nationwide's decisions to pay or deny insurance claims.” These investigators were thus unlike the investigators addressed in other recent FLSA opinions.

The insurance industry has a decade-long history of misclassification claims involving investigators, adjusters and other “white collar” employees, as exemplified by Foster (a complaint from 2008). Misclassification litigation continues to weigh on employers, and the risks of such litigation should be considered by all counsel, business leaders and risk managers in determining classifications and formulating and refining underlying business models. 

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In recent weeks, we have discussed challenges to FLSA exempt status brought by employees many might assume to be properly exempt, such as a Director for the Red Cross. In another recent rejection of a claim of this type brought by the the aggressive plaintiffs’ bar, a federal court in Pennsylvania has ruled, following a bench trial, that the Supervisor of the Toxicology Laboratory for Wilkes-Barre Hospital properly was classified as an exempt "learned" professional.  Hockenbury v. Wilkes-Barre Hosp. Co., LLC, 2011 U.S. Dist. LEXIS 141001 (M.D. Pa. Dec. 8, 2011).

Judge Edwin M. Kosik found that Plaintiff Hockenbury, who supervised fifteen technologists in the lab, possessed the requisite “educational degree and expertise in toxicology” to qualify as a learned professional under 29 C.F.R. § 541.301 (e)(1). The Court also concluded that Plaintiff was paid on a salary basis because he conceded that “he received in every single pay period the minimum of eighty hours pay, which was never reduced based on the number of hours he worked.”

Hockenbury represents another employer victory in a single FLSA plaintiff’s challenge to his or her exempt status. However, such scattered district court cases do little to alleviate the continued threat of FLSA litigation, and nothing to obviate the need for position-specific analysis of FLSA classification by all employers. In general, to qualify for the “learned” professional exemption, in addition to being paid on a salaried or fee basis, the employee must have a specific job-related advanced degree that is necessary for the performance of the job. State law also must be reviewed as some states, such as California, impose higher standards for exemption. 

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Assisting Lady Gaga with her day-to-day needs may be a dream to many, but does it make one exempt from overtime pay? Under DOL regulations, an administrative assistant who is paid on a salaried basis and exercises significant independent discretion and judgment is exempt under the "administrative exemption." 29 CFR § 541.203(d). This is the same exemption that applies to others who exercise significant independent discretion and judgment in performing "office or non-manual" work (as demonstrated by regulation 541.203), such as certain Human Resources employees. Challenges to the applicability of the exemption to executive or personal assistants are not new; the fact that the individual being assisted is a prominent professional in his or her industry is not determinative. Some courts applying the DOL’s regulation have expressed reluctance to rule that well-compensated individuals providing such assistance do not exercise "discretion and independent judgment, but case law remains unclear. See   Seltzer v. Dresdner Kleinwort Wasserstein, Inc., 356 F. Supp. 2d 288 (S.D.N.Y. 2005)(executive assistant to president of defendant investment bank qualified for exemption); Malena v. Victoria's Secret Direct, LLC, 2010 U.S. Dist. LEXIS 121320 (S.D.N.Y. Nov. 16, 2010)(denying summary judgment as to whether defendant's good faith belief that executive assistants performed exempt work precluded liability).

In a new challenge, a former personal assistant to chart-topping entertainer Lady Gaga has filed suit, alleging that she essentially worked around the clock in exchange for a fixed salary, and thus did not receive hundreds of thousands of dollars in premium overtime pay due under the FLSA and state law. O'Neill v. Mermaid Touring Inc., Civil Case No. 11-9128 (Southern District of New York, Dec. 14, 2011)(Jones, J). 

Employers and individuals retaining personal or executive assistants to perform similar services should be aware of the employment risks associated therewith. At the least, in addition to ensuring such employee is paid on a salaried basis, the employer must ensure that the assistant utilizes independent discretion in judgment in performing job duties.

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Quantifying the necessary “discretion and independent judgment” required to qualify for the administrative exemption continues to divide courts, and the conclusion is often in the eye of the judicial beholder. This is especially so where discretionary authority must be measured without reference to monetary benchmarks or limits, such as those applicable to insurance adjusters or purchasing agents. See Roe-Midgett v. CC Servs., 512 F.3d 865 (7th Cir. 2008)(insurance adjusters with sufficient discretion to approve claims qualified for exemption); see also 29 CFR § 541.203(f)(regarding purchasing agents). With that said, USDOL regulations and district courts interpreting the exemption have identified certain duties (often varying by industry) which constitute the hallmark of such discretion. In a new decision, one federal judge in New York State rules that a Director of Emergency Services for the Red Cross met this test. Raffe v. Am. Nat'l Red Cross, 2011 U.S. Dist. LEXIS 137340 (N.D.N.Y Nov. 30, 2011).

Plaintiff Raffe challenged the applicability of the exemption via the common technique of citing the repeatability of certain processes integral to his job, despite admitting “to having significant budgetary and fiscal responsibilities, including reallocation of emergency services funds, submitting grant applications, handling procurement, overseeing equipment and inventory, and authorizing purchases” (id. at * 37) and further admitting to “developing  and evaluating the [Red Cross] Chapter's Continuity of Operations Plan.” Id. at * 37-8. Plaintiff argued that his consultation with (and obtaining the approval of) the Chapter’s Executive Director or Board prior to the implementation of major decisions undercut his discretion and independent judgment. Rejecting this argument, the Court rightly observed that “[t]he fact that Raffe did not have sole or final authority to make decisions does not disqualify him from satisfying the conditions necessary for the administrative exemption.   Id. at * 38 citing 29 C.F.R. § 541.202(c). Because Raffe also met the other prongs of the administrative exemption test (including being paid on a salary basis), he qualified for exemption from minimum wage and overtime. 

Raffe is a positive result for employers in New York and the other jurisdictions within the Second Circuit, but also highlights the reality that director-level employees such as Raffe can mount expensive legal challenges to their exempt classification. The potential direct and indirect costs of such challenges must be factored into employers’ classification decisions and risk management plans.   A full understanding of the current judicial view of the scope of exemptions within each region in which each organization operates is vital to fully understand all potential risks.  

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As we reported here, the Wage and Hour Division of the U.S. Department of Labor previously announced it would propose a rule regarding the applicability of the companionship exemption to the FLSA's minimum wage and overtime requirements. This longstanding exemption was the subject of a rare Supreme Court opinion on FLSA issues, in which the Court upheld the exemption's historic application to individuals employed by third party agencies who provide care in a private home. Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007). According to news reports, Labor Secretary Hilda Solis will announce the Department's rulemaking proposal today. 

If enacted, the proposed rules will likely eliminate or eviscerate the exemption, bringing many if not most home health aides and other domestic workers within the ambit of FLSA protection. This regulatory change would pose difficult fiscal challenges to individuals who require such services on a regular, sometimes round-the-clock basis, and to agencies which are in the business of providing such services to Medicare or Medicaid-eligible individuals, and which are reimbursed for providing those services at a fixed rate.

Industry employers should review the proposed rule closely and prepare to participate in the mandatory 60-day notice and comment period which will follow its announcement, as the comment period will provide the employer community with its first and likely best opportunity to influence the rule. 

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We have repeatedly addressed the FLSA administrative exemption’s requirement that an employee exercise discretion and independent judgment, a concept which has confounded some courts and at times, led to inconsistent rulings. In a new decision, the Court of Appeals for the First Circuit (encompassing Rhode Island, Massachusetts, New Hampshire and Maine) has ruled that sales managers for an employer providing “high-end wedding receptions and other social functions” at banquet facilities in Boston and in Newport, Rhode Island exercised the requisite discretion and independent judgment to qualify for this exemption. Hines v. State Room, Inc., 2011 U.S. App. LEXIS 23680 (1st Cir. Nov. 28, 2011).

Hines concerned two plaintiffs who served as the “primary client contact on behalf of the event venues.” Their role was to “secure event business” by, among other tasks, speaking on the phone and in person with potential clients, touring the facilities, determining scheduling and analyzing what minimum charges would apply. As is customary in such a role, the purpose of these efforts was to “commit a prospective client to a contract for an event.” Plaintiffs also engaged in “broader sales efforts”, including attending Chamber of Commerce or other organizational meetings as a representative of the defendant. The Court observed that these duties “extended beyond securing the basic sale and event contracts,” and that the plaintiffs “stayed” with clients for the life of their relationship with the employer, working out all the details of their event, preparing internal paperwork relating to these details and attending events to ensure coordination of clients’ wishes. “The picture that emerges from the record,” in the Court’s view was “one in which the primary role of sales managers was to secure a steady stream of business by selling each prospective client on a package of options…and by ensuring that each event so planned was a success.” The Court did note that “within the course of navigating these options and client expectations, the plaintiffs had virtually no authority to make…financial decisions.” 

In applying the administrative exemption test to these duties, the Court first acknowledged and endorsed the parties’ agreement that the work performed by the sales managers was administrative, and related to defendant’s ”general business operations.” The Court stated the “sales aspect of the defendants’ businesses, although necessary to their success, is clearly ancillary to the principal function of…providing the banquet services.” Determination of exempt status thus turned on the parties’ dispute as to whether there was sufficient exercise of discretion and independent judgment. The Court rejected plaintiffs’ assertion that they exercised no discretion due to the limitations placed on their involvement in the employer’s “finances and contractual obligations.” Relying on its previous precedents analyzing the administrative exemption, the Hines court determined that the plaintiffs had a “primary duty of engaging potential clients in assisting them and selecting from various options.” Because they did not do so within a prescribed sales technique or pitch, but rather exercised discretion within the general guidance of the employer’s handbook, the Court determined that this required a “significant degree of ‘invention, imagination and talent.’” Finally, the Court determined that the discretion exercised by the sales managers pertained to matters of significance, as they were the “face” of the business to prospective clients, and their worked determined the attractiveness of the venues to the employer’s clients.

This decision bolsters the employer community’s position that those engaged in sales and marketing tasks who perform a mixture of direct sales activities and more generalized marketing duties, and who are not closely supervised or scripted in their sales and marketing work and interaction with customers and potential customers, are exercising discretion and independent judgment and thus qualify for exemption. However, employers must continue to analyze the applicability of this exemption on a case-by-case and jurisdiction-by-jurisdiction basis.  

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The Supreme Court's web site confirms that the nation's highest court has granted the petition for certiorari filed by the pharmaceutical sales representative (PSR) plaintiffs in Christopher et al. v. SmithKline Beecham Corporation.  The Court will now review the Ninth Circuit's ruling in Christopher that SmithKline properly classifies its pharmaceutical sales representatives as "outside sales" employees, despite the FDA regulations precluding PSRs from receiving money from the medical practitioners they visit.  Absent unforeseen delays, the parties (and the industry at large) should expect a ruling prior to end of the Court’s 2011/2012 term. 

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As the pharmaceutical community eagerly awaits the Supreme Court’s decision whether to grant certiorari in Christopher v. SmithKline Beecham Corp., courts within the Third Circuit (encompassing Pennsylvania, New Jersey and Delaware) continue to conform to the appeals court’s previous holding in Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), that pharmaceutical representatives meet the test for the administrative exemption under federal and Pennsylvania law. See Ibanez v. Abbott Labs., Inc., 2011 U.S. Dist. LEXIS 131945 (E.D. Pa. Nov. 14, 2011).

In Ibanez, as in previous cases such as Smith and Baum v. AstraZeneca LP, 372 Fed. Appx. 246 (3d Cir. 2010), the court determined that “plaintiff regularly exercised discretion and independent judgment in all aspects of his job, including pre-call planning, interactions with physicians, territory business planning, and the planning of events.” rejected plaintiff’s reliance on U.S. Department of Labor guidance concerning the applicability of the administrative exemption to positions and duties allegedly analogous to the PSR position. Some courts, relying on this guidance, have narrowly interpreted the exemption to apply principally (if not solely) to operational employees such as Human Resources, Accounting or Information Technology. ]

The continuing “wave” of wage-and-hour litigation seeking to find PSR’s non-exempt presents an important case study for employers in other industries, where assumptions about the exempt status of particular classifications of employees persist. A preventive audit is often the only way to detect potential wage-and-hour exposures (individual and/or class-wide) and make changes before they are identified via costly litigation.  As to PSR’s, the issue only will be resolved if the Supreme Court grants certiorari and provides guidance to the industry as to the applicability of both the administrative and outside sales exemptions.

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This summary of recent motor carrier exemption case law was written by Jackson Lewis partner Jeff Brecher.

The motor carrier exemption is one of the original exemptions contained in the 1938 Fair Labor Standards Act.   But seventy years later courts continue to clarify its contours. In just the past few months, several decisions have addressed the exemption—some addressing basic threshold issues and others addressing changes made by dizzying legislation passed between 2005-2008 affecting the exemption and its applicability.  As a general proposition, the motor carrier exemption applies to employees who transport property in interstate commerce. But the devil is in the details.

The first case we discuss addresses a basic threshold issue: in determining whether a vehicle meets the 10,001 lb. weight requirement needed to establish the applicability of the exemption, does the weight include only the vehicle, or can it also include the trailer it is carrying? In Albanil v. Coast 2 Coast, Inc., 2011 U.S. App. Lexis 20842 (5th Cir. October 13, 2011), the Fifth Circuit held the combined weight is what counts.

A little background to understand why this dispute arose: from 1938 until August 10, 2005, the motor carrier exemption applied regardless of the weight of the vehicle. But after passage of SAFETEA-LU on August 10, 2005, the motor carrier exemption applies only to “commercial motor vehicles” (subject to a safe harbor provision extending coverage of smaller vehicles through August 10, 2006). A “commercial motor vehicle” is defined as a “self-propelled or towed vehicle used on the highways in interstate commerce to transport passengers or property, if the vehicle has a gross vehicle weight rating or gross vehicle weight of at least 10,001 lbs, whichever is greater (the definition also includes vehicles used to transport more than eight passengers or hazardous materials). 

Plaintiffs were employed as “chippers” who were responsible for removing hardened concrete from the inside of concrete mixer drums and other enclosed spaces. They traveled in pickup trucks with a trailer and attached compressor. While the pickup truck and trailer each were less than 10,000 lbs, when combined, the total weight exceeded 10,000 lbs.  Finding the statutory definition ambiguous, the Court relied on a Department of Transportation regulation, 49 C.F.R. § 390.5, defining a commercial motor vehicle to include the combined weight of the vehicle. 

The Court also explained this construction was consistent with the purpose of the Motor Carrier Act, since it brought heavy vehicles within the jurisdiction of the Department of Transportation, making safety regulations applicable. The Court noted that that Plaintiffs’ construction would allow coverage of a pickup truck that was 10,001 pounds and a trailer that was 10,001 lbs., but not a pickup truck weighing 10,000 lbs towing a trailer weighing 10,000 lbs (20,000 lbs combined) even though such a vehicle implicates the same, if not greater, safety concerns. Because it was undisputed the combined weight of the vehicles exceeded 10,001 lbs, the Court affirmed the grant of summary judgment.    

Two cases, one decided in September and the other October, address another basic threshold issue—under what circumstances does the exemption apply to “loaders”? In Lewis v. Eskridge Trucking, Co., Inc., 2011 U.S. App. Lexis 20476 (11th Cir. October 6, 2011), the Eleventh Circuit held an employee who was responsible for filling trailers with wood shavings and ensuring that the loads were balanced, weighing the trailers, and inspecting them for maintenance, was a loader covered by the exemption, and therefore affirmed the grant of summary judgment to the employer. The Court held that while the motor carrier exemption is most often applied to drivers of motor vehicles, it also applies to “loaders”—employees who duties include the proper loading of motor vehicles so that they may be safely operated on the highways and who exercise judgment and discretion in planning and building a balanced load or in placing, distributing, or securing the pieces of freight in such a manner that the safe operation of the vehicles on the highways in interstate or foreign commerce will not be jeopardized.

Similarly, in Graham v. Town & Country Disposal of Western Missouri, Inc., 2011 U.S. Dist. Lexis 106798 (W.D. Mo. September 20, 2011), the Court found plaintiffs who worked as “throwers,” responsible for loading garbage trucks with trash, were also exempt under the motor carrier exemption as “loaders” since they too exercised discretion and judgment in placing, distributing, and securing trash in such a manner to permit the safe operation of the vehicles on the road, and granted summary judgment to the employer.

Finally, in Johnson Jr. v. Hix Wrecker Service, Inc., 651 F.3d 658 (7th Cir. 2011), the Seventh Circuit addressed the issue of when the exemption applies to employees who travel only intermittently in interstate commerce. The Court adopted a “four-month” rule, set forth by the Department of Transportation, but reversed the grant of summary judgment to the employer finding the evidence submitted was insufficient to satisfy the employer’s burden of proving the applicability of the exemption. 

Relying on a 1981 Notice of Interpretation issued by the Department of Transportation, the Court held that for the motor carrier exemption to apply, the carrier must be shown to have engaged in interstate commerce within a reasonable period of time prior to the time at which jurisdiction is in question, and if jurisdiction is claimed over a driver who has not driven in interstate commerce, evidence must be presented that the carrier has engaged in interstate commerce and that the driver “could reasonably have been expected to make one of the carrier's interstate runs”.  Adopting the Notice of Interpretation, the Court held that evidence of driving in interstate commerce or being subject to being used in interstate commerce should be accepted as proof that the driver is subject to jurisdiction of the Department of Transportation for a 4-month period from the date of the proof.

In this case, however, the Court held the evidence submitted by the employer (an affidavit) was “inconclusive and ambiguous” regarding the extent to which the employer engaged in interstate commerce prior to the time in which it sought to rely on the exemption or that the employee was “subject to begin used in interstate commerce”, and therefore summary judgment was improper.  

While these cases add some clarity to the application of the motor carrier exemption, they highlight that this exemption, even though it has been part of the FLSA since 1938, still has many twists and turns that must be navigated.  Further, as with all exemptions, employers also must analyze applicable state law to ensure the exemption is applicable under state law, with or without any tangents.

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Most commonly, where an employee challenges his or her classification by his or her employer as exempt in an FLSA lawsuit, the defendant seeks summary judgment (opposed by plaintiff), arguing that the employer can establish as a matter of law based on the undisputed factual record that the exempt classification was appropriate. Less often, a plaintiff will move for summary judgment, arguing the evidence produced in discovery regarding the classification demonstrates as a matter law that the individual was non-exempt. A court recently rejected one such plaintiff’s motion, finding questions of fact as to applicability of the administrative exemption. Caveness v. Vogely & Todd, Inc., 2011 U.S. Dist. LEXIS 98144 (M.D. Tenn. Aug. 30, 2011)

Caveness concerned the job duties of plaintiff, a former estimator for the defendant body shop, which repaired and restored damaged vehicles. Plaintiff characterized her duties as being rote, and ministerial in nature, consisting of reviewing the visible vehicle damage, inputting the damage into a computer program, generating reports and following-up to ensure that the work was completed and that defendant was paid for its services. The body shop disputed this characterization of the duties, asserting that plaintiff “decided whether to: repair or replace damaged parts and components; use new, used, or refurbished parts; use parts manufactured by the original manufacturer or a third party; and, override computer software estimates regarding labor hours).” In rejecting plaintiff’s motion, the court found a questions of fact as to whether plaintiff’s work was “production” work (i.e., related to the body shop’s product of repairing vehicles), or rather related to the “general business operations” of the defendant. The court observed that defendant was in the business of repairing vehicles and plaintiff did not perform such repairs. The court also found questions of fact as to whether plaintiff exercised discretion and independent judgment in performing her work (as defendant alleged she did in determining whether to override computer estimates and also in independently determine the scheduling and prioritization of repair work), and whether plaintiff in fact worked more than 40 hours per week.

Caveness is yet another federal district court decision highlighting the highly specific and at times unclear analysis regarding the applicability of the administrative exemption. This analysis is especially murky when focused on whether a position is related to production (and accordingly outside the administrative exemption as a matter of law) or general business operations. It also points out that not tracking hours worked by exempt can create an additional trial issue and potentially subject the employer to liability based on the plaintiff’s assertions of hours worked. All employers should consider tracking hours for exempt employees in situations where the classification of exempt and non-exempt is not clear from court or agency precedent.

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The highly technical requirements of the FLSA’s learned professional exemption often result in findings that employees traditionally considered to be professionals are non-exempt. In order to satisfy the exemption, the employee must utilize advance knowledge that is “customarily acquired through prolonged academic instruction” when performing their primary duties In a new decision highlighting this analysis (as well as its deviation from the “common sense” understanding of a learned professional), Judge Michael Telesca of the Western District of New York applied the exemption on summary judgment to a funeral director. Rowe v. Olthof Funeral Home, Inc., 2011 U.S. Dist. LEXIS 118182 (W.D.N.Y. Oct. 12, 2011).

Plaintiff Rowe served as a licensed funeral director for defendant for four years. Prior to becoming so employed, Plaintiff completed a one year residency with defendant in conjunction with his obtaining his license from New York State. His primary duties included “removing bodies of deceased persons from the locations of their deaths, transporting bodies to [defendant’s premises], embalming bodies, dressing embalmed bodies and placing them in caskets, and cremating bodies.” The parties dispute hinged upon interpretation of a DOL regulation stating that “licensed funeral directors and embalmers who are licensed by and working in a state that requires successful completion of four academic years of pre-professional and professional study, including graduation from a college of mortuary science…generally meet the duties requirements for the learned professional exemption.” 29 C.F.R. § 541.301(e)(9). Plaintiff contended that “because the State of New York requires only an Associates’ degree to become a licensed funeral director, funeral directors in New York are not exempt [under this regulation].” The court rejected a formulaic application of the “four year” guideline contained in this regulation, instead observing that the proper determination of exempt or non-exempt status turned upon “the duties performed by plaintiff in the course of his employment, and [a determination of] whether the duties performed are those of a learned professional.” Id. at *10.  The court then ruled that plaintiff’s primary duties, as discussed above, required the use of the advance knowledge Rowe acquired through his academic background and licensing process. 

Rowe represents a win for employers particularly in the funeral home community, as the court rejected a draconian reading of the exemption requirement as set forth in the DOL regulations. Employers applying the learned professional exemption must continue to ensure that advanced knowledge in a field of science or learning is a prerequisite to perform the work, not simply a preference.  The absence of a specific job-related degree can doom the exemption argument.

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Confusion continues to reign throughout the federal district courts as to the scope of the administrative exemption as set forth in the regulations at 29 C.F.R. §§ 541.200-202. In a decision highlighting this lack of clarity, Federal District Judge Kevin Castel of the Southern District of New York recently denied cross-motions for summary judgment as to the applicability of the exemption to “research associates” for Gerson Lehrman Group, a company devoted to assisting clients to “find and engage experts in various industries and disciplines.” Cohen v. Gerson Lehrman Group, Inc., 2011 U.S. Dist. LEXIS 104551 (S.D.N.Y. Sept. 15, 2011).

The parties could agree only that Plaintiffs’ duties as Research Associates related to “interview[ing] clients and match[ing] them with appropriate experts, and perform[ing] research tasks delegated by more senior employees.” Observing that the parties submitted a record “laden with factual disputes,” the Court ruled that while certain disputes were “little more than disagreements about seemingly irrelevant jargon” others were “integral toward determining the application of the administrative exemption.” The Court identified numerous factual disputes relating to the primary duties of Research Associates, and whether they exercised independent judgment and discretion in performing such duties, which in the Court’s view rendered it impossible to determine on summary judgment whether they met the test for the administrative exemption. In short, the Court could not determine whether the duties were exempt duties related to the “general business” of Gerson Lehrman and its clients (and thus potentially eligible for exemption) or were “production” work as defined in Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009). Nor could the Court determine whether the requisite discretion and independent judgment was present. 

Cohen, like last year’s sister court decision in Henderson v. Transp. Group, 2010 U.S. Dist. LEXIS 66109 (S.D.N.Y. July 1, 2010), highlights the uncertainty in applying the administrative exemption to junior white collar professionals in numerous industries. While these employees have college degrees, possess substantial skills, and often are assigned important client responsibilities, the plaintiffs’ bar asserts that they are simply “producing” the white collar employer’s product, and that, as junior employees, they cannot possibly be involved in decision-making with respect to those clients requiring discretion and independent judgment. Unless and until the Supreme Court provides clarity regarding the scope of the exemption (by addressing one of the Circuit splits developing in particular industries), employers must continue to apply the exemption cautiously after review with counsel and with a full understanding of potential liabilities.

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Disputes regarding the application of the FLSA’s “learned” professional exemption can arise where many – but not all or even “most” – holders of a given position possess specific or substantially-job related academic credentials, but others do not. This is so due to some courts’ narrow interpretation of the learned professional exemption’s requirement that the position require advanced knowledge customarily acquired by a “prolonged course of “specialized intellectual instruction.” With the exception of a few universally-acknowledged professions such as doctors, lawyers and accountants (an industry which itself has been subject to challenge), litigation often centers on whether the requirements for an employer’s specific job are customarily based on academic instruction, or work experience. One such position is that of social worker. Recently, the Ninth Circuit, reversing the lower court’s grant of summary judgment, held that social workers employed by the State of Washington did not satisfy the exemption’s requirements. Solis v. Washington, 2011 U.S. App. LEXIS 18668 (9th Cir. Sept. 9, 2011).

Washington concerned a challenge to the state Department of Social and Health Services’ (DSHS) classification of its social workers as exempt. The district court agreed with DSHS’ position that the academic credentials of its social workers – who were required to hold a “[b]achelor's degree or higher in social services, human services, behavioral sciences, or an allied field," - were sufficiently specialized and related to their social work to establish the credential and academic instruction as a prerequisite to hold the job of social worker. In the district court’s view, the DSHS requirement that social workers have eighteen months’ social work field experience, along with the imposition of mandatory continuing education requirements, “weighed in favor of a finding of specialized training” and thus exempt status.

Reversing, the Ninth Circuit analyzed Department of Labor opinion letters concerning related positions and observed that “the ‘learned professional’ exemption applies to positions that require ‘a prolonged course of specialized intellectual instruction,’ not positions that draw from many varied fields. While particular coursework in each of the acceptable fields may be related to social work, DSHS admits that it does not examine an applicant's coursework once it determines that the applicant's degree is within one of those fields.” Id. at * 21 (emphasis in original). Because individuals with diverse academic training could hold the position, based on their professional experience, the Court reasoned that no specialized academic instruction could possibly be a prerequisite for the job. In the Circuit Court’s view, DSHS’ 18-month on-the-job training requirement further militated against exempt status because DOL regulations “state clearly that the exemption does not apply to ‘occupations in which most employees have acquired their skill by experience.’”    

This narrow application of the learned professional exemption creates a dilemma for employers: namely, hire the best candidates to perform a given position, regardless of the source of their superior qualifications, or limit employees hired in job titles classified under the learned professional exemption exclusively to those holding specific narrow degree prerequisites. This concern is underscored in certain professions such as social work by the limited monies provided by funding entities to compensate employees. Absent such a “hard line stance” with respect to this formal requirement, or a very academic, lengthy training program, employers are exposed to a risk of challenge of such a classification.  

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The FLSA’s learned professional exemption provides an exemption from overtime for employees who have academic credentials in a field of “science or learning customarily acquired prolonged academic instruction” and who utilize this formal educational training in the performance of their job duties. Typical examples include doctors, lawyers, and certified public accountants, and doctors and lawyers need not even be paid on a salary basis. States with wage and hour laws generally have a similar exemption.

Historically, overtime disputes regarding the use of this exemption have centered in particular fields, such as engineering or, more recently, accounting. In a recent appellate decision from California, the Court of Appeal for the First Appellate District considered and rejected a challenge to the application of the California Labor Code’s learned professional exemption in the legal field. Zelasko-Barrett v. Brayton-Purcell, LLP, 2011 Cal. App. LEXIS 1080 (Cal. App. 1st Dist. Aug. 17, 2011).

In Zelasko, the Defendant firm utilized law students and law school graduates who had not yet passed the bar in the positions of Law Clerk I and Law Clerk II, respectively. Plaintiff held the Law Clerk II position prior to his admission to the bar for approximately 2 years, then moved on to the position of Associate Attorney. The Marin County Superior Court held that the plaintiff was properly classified as exempt when he held the position of Law Clerk II. 

Observing that the “federal regulations after which [the California learned professional exemption] was explicitly patterned . . . condition the learned professions exemption under federal law upon completion of an advanced course of education, not upon licensure,” the appellate Court ruled that possession of the degree, along with Defendant’s undisputed evidence that a Law Clerk II was required to perform all the same duties as a junior attorney, satisfied the exemption’s requirements.

Zelasko is an encouraging result for legal industry employers, which simultaneously highlights the broad scope of potential wage and hour liability. Industry employers must ensure that all employees classified as exempt are properly classified under federal and state law.  

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As often discussed in this space and elsewhere, Courts continue to widely differ in their analysis as to whether the administrative and/or outside sales exemptions are applicable to pharmaceutical sales representatives. Now, the Supreme Court will have another opportunity to weigh in on the applicability of the outside sales exemption to such employees, as the plaintiffs in Christopher v. SmithKline Beecham Corp., 635 F.3d 383 (9th Cir. 2011) have petitioned the Court to review the Ninth Circuit’s decision finding them to be properly classified as outside salespersons. Christopher, et al. v. SmithKline, Supreme Court Docket No. 11-204.

While acceptance of the petition and a ruling from the high court would hopefully provide welcome clarity in this area, even a resolution by the Supreme Court of the circuit split between Christopher and the Second Circuit’s decision in In Re Novartis will not resolve all outstanding issues relating to the classification of these employees, as Courts continue to differ on the applicability of the administrative exemption.

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As noted in our recent article regarding proposed amendments to the FLSA, individuals providing care to the infirm or elderly in a private home are exempt from the minimum wage and overtime requirements pursuant to the companionship exemption, an exemption which was reviewed by the Supreme Court in its 2007 decision Long Island Care at Home, Ltd. v. Coke, 551 U.S. 158 (2007). Recently, the Court of Appeals for the Eleventh Circuit rejected a plaintiff’s allegation that the exemption did not apply because more than 20% of her time was devoted to “ordinary housework” as opposed to exempt care as a companion. Rodriguez v. Jones Boat Yard, Inc., 2011 U.S. App. LEXIS 15509 (11th Cir. July 26, 2011).

The plaintiff in Rodriguez worked as a “live-in domestic” providing companionship and household services for an elderly woman in Coral Gables, Florida. The Aide worked from 7:00 am until 11:00 pm every day, assisting her client/employer getting out of bed, bathing, dying and combing her hair, and helping her ambulate. She also provided constant care “throughout the day” such as preparing all meals, assisting with dressing, buying necessary medicines, testing and administering her insulin, and assisting in meals. Plaintiff also performed other duties related to her employer’s medical care, including feeding and personal and residence hygiene. Analyzing plaintiff’s deposition testimony, the District Court concluded (and the Circuit Court affirmed) that the duties which were arguably of a general household nature (such as meal preparation, walking the dog, and cleaning the apartment) were incidental duties and did not come close to exceeding 20% of the total hours worked each week, which could jeopardize the applicability of the exemption. The Court also ruled that although the client’s son placed the Aide on his company’s payroll for the purposes of processing payments for these companionship services, this payroll arrangement did not make the son or the son’s corporation (Jones Boat Yard) plaintiff’s employer within the meaning of the FLSA.

The DOL is considering changes to the FLSA which would impact the applicability of the companionship exemption in cases such as Rodriguez. Previously, legislation has been proposed which would eliminate the exemption and reverse the impact of the Coke decision (though such legislation was not passed). Industry employers – and even individuals and their families employing in-home care such as that addressed in Rodriguez – should pay close attention to these developments. Many state laws also provide wage and hour protection to domestic workers.

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As discussed in prior postings, a central issue in determining the application of the FLSA’s “7(i)” exemption is whether the payments to the employee constitute bona fide commissions.  In early July, Judge Gregory Frost of the Southern District of Ohio issued another ruling on this issue, finding that the compensation paid to managers and assistant managers at certain Mr. Tire Auto Service Centers constituted bona fide commissions for purposes of the exemption.  McAninch v. Monro Muffler Brake, 2011 U.S. Dist. LEXIS 71827 (S.D. Ohio July 5, 2011). 

McAninch involved a compensation scheme under which a manager or assistant manager received a percentage of the controllable profit for the store if the store met budgetary targets.  When the store deviated in performance from the precise budgetary figure set for the store, the manager’s compensation was recalculated pursuant to a detailed formula which considered monthly fluctuations in store performance, labor costs and controllable expenses.  In addition, the Company provided managers with a weekly guaranteed draw, designed to ensure continuity in their compensation, which was reconciled when calculating commissions earned.  The court rejected arguments that: (i) the draw negated the Company’s assertion that the commission plan was “bona fide”; (ii) tying the commission rate to store profits as opposed to store sales rendered the payments non-bona fide commissions; and (iii) the managers’ frequent failure to exceed the guaranteed draw affected the analysis.  Since the question of whether the payments based on the percentage of controllable profit consisted “bona fide commissions” was the sole prong of the 7(i) exemption (requiring also payment of time and one-half the minimum wage for all hours worked and employment at a “retail or service” establishment) raised by plaintiffs, summary judgment for defendants was appropriate. 

Use of commission and other forms of incentive compensation continues to be widespread among employers across all industries.  Employers contemplating implementation of a 7(i) compliant commission plan should consult with counsel and closely scrutinize applicable federal and state law.

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We previously discussed New York courts applying the FLSA’s executive exemption, which exempts employees whose primary duty is management (and who are paid on a salary basis) from minimum wage and overtime pay obligations. Recently, Judge Berman of the Southern District upheld the application of the exemption to a group of warehouse “Captains.” Ramos v. Baldor Specialty Foods, Inc., 2011 U.S. Dist. LEXIS 66631 (S.D.N.Y. June 16, 2011)(Berman, J).

Ramos concerned warehouse captains who oversee a team of 3-6 “pickers,” the employees responsible for compiling orders of merchandise within defendant’s warehouse and loading that merchandise onto trucks for delivery to defendant’s customers. Relying heavily on the testimony of plaintiff Jose Barranco, whom the parties stipulated would serve as the representative deponent for all eight Captain plaintiffs, the court observed that this testimonial evidence (along with other affidavits submitted by defendant from other Captains) established that each Captain was “in charge” of his pickers because captains:

·         Ensured that pickers arrive to work on time;

·         Ensured that pickers performed their job duties correctly and at an acceptable productivity level;

·         Counseled pickers who worked too slowly or made too many mistakes;

·         Gave particular assignments to specific pickers based on his or her belief that that individual picker could carry out the assigned task (i.e., obtain the correct product for the order);

·         Participated in the performance evaluations for those on their team and served as the primary source of information for the night warehouse manager (the Captains’ own supervisor) concerning pickers’ performance;

·         Could request transfer of pickers away from his or her team;

·         Had the authority to issue a warning to a picker; and,

·         Completed a picker production report for every picker on his team each night, and conducted a final sign-out and inspection of the pickers equipment. 

Calling these tasks “clearly managerial,” the court ruled, in line with DOL regulations, that these managerial tasks constituted the pickers primary duty and that each captain’s team constituted a recognized “department or subdivision” over which that captain had managerial control. Finally, the court found that while the credible evidence established that a Captain could hire or fire pickers, such finding was not determinative as “courts uniformly reject arguments that an employee cannot be an exempt executive if he cannot make hiring or firing decisions.” Id. citing Pollard v. GPM Invs., LLC, 2011 U.S. Dist. LEXIS 24199 (E.D. Va. Mar. 10, 2011) (collecting cases).

This decision highlights the fact- intensive inquiry necessary to determine if an individual is an exempt executive, especially if the individual is a “front line” supervisor responsible for hands-on review of the work performed by non-exempt employees. Employers must continually analyze the appropriateness of their classification of managers as exempt executives under both federal and state law. 

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The applicability of the FLSA’s “administrative” exemption continues to be a primary issue in a significant percentage of the cases comprising the ongoing wave of wage and hour litigation. Recently, two appellate courts, the Courts of Appeals for the Seventh and Third Circuits, issued new opinions endorsing a broader interpretation of this exemption. 

In Verkuilen v. MediaBank, LLC, No. 10-3009, 2011 U.S. App. LEXIS 10666 (7th Cir. May 27, 2011), the Seventh Circuit held that a customer account manager who worked at client sites managing custom software contracts  is “a picture-perfect example of a worker for whom the act’s overtime provision is not intended.” In reaching its conclusion, the court stated that while the DOL regulations explaining the exemption provide insufficient guidance as to its meaning, overtime requirements should not apply to employees who cannot be supervised and would be tempted to inflate hours, especially when the employee – consistent with the exemption’s requirements – is required to exercise independent judgment regarding management or general business operations. The Court found that the account manager was not merely responsible for fielding random technical calls, but was the “go-to” customer contact, responsible for managing the client’s expectations and ensuring that the software developers were tailoring their software programs appropriately. The Court emphasized that the employer would essentially be unable to determine how many hours the employee would need to perform her required tasks, and concluded that in this modern day, there is a “congeries of specialists” who will be exempted from the FLSA’s overtime provisions.

The Third Circuit’s conclusion in Swartz v. Windstream Communications, Inc., No. 10-3313, 2011 U.S. App. LEXIS 10593 (3d Cir. May 25, 2011), adopted similar reasoning. In Swartz, the Court held that a telecommunications account manager, responsible for developing and tailoring custom telephone platforms for an employer’s major clients, was an exempt administrative employee. The Court concluded that the account manager’s work related to “management and general business operations” and required “independent judgment with respect to matters of significance” since the employee was responsible for custom tailoring complex telephone systems for the company’s most significant clients.

While these decisions are favorable for all companies, even those in unrelated businesses,  employers should continue to take appropriate measures to ensure all employees are properly classified as exempt or non-exempt from overtime requirements in order to avoid costly wage and hour claims.

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The “retail or service exemption” to the FLSA, sometimes referred to as the “7(i) exemption”, noting the location where it is codified, 29 U.S.C. Section 207(i), has three requirements. While the first requirement, to pay time and one-half the minimum wage for all hours of work, is straightforward, the other two prongs—that an employee receive 50% of his or her income in the form of “bona fide commissions” and that the individual be employed by a “retail or service establishment”—sometimes lead to litigation. Recently, a district court in Vermont addressed these two prongs as applied to a cable installer. 

In Owopetu v. Nationwide CATV Auditing Servs., Inc., 2011 U.S. Dist. LEXIS 24948 (D. Vt. Mar. 11, 2011), the court held that a cable installer working for a subcontractor of the cable provider who was paid a percentage of the amount billed to the provider by the subconstractor received bona fide commissions. The court held a bona fide commission existed because his “ability to earn income fluctuated based upon the volume of customer work orders, he was paid a percentage of the value of each service performed, and he was provided performance-based incentives to increase his income.”   The court relied on several cases that have held a compensation system that creates an incentive to work faster and more efficiently is consistent with the existence of a bona fide commission. It was immaterial that the individual was not engaged in sales.

Nevertheless, the court denied summary judgment because the defendant had not produced evidence regarding whether the plaintiff was employed by a “retail or service” establishment. While the company established that it provided services that are not for resale (installation of cable at customer’s homes), which is one requirement need to satisfy the definition of a “retail or service establishment”, no evidence was presented regarding whether the services are “recognized as retail in the industry,” the other requirement.   The Defendant will have to establish that evidence at trial or seek permission to move for summary judgment on a fuller record.

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In a case exemplifying that salary alone does not make an employee exempt, a district court in Idaho denied summary judgment to an employer in an overtime case brought by a Labor Manager earning $130,000/year. Wood v. Kinetic Sys., 2011 U.S. Dist. LEXIS 11221 (D. Idaho Feb. 4, 2011).

While it was undisputed the Plaintiff was paid $130,000 on a salary basis, questions of fact remained as to whether the Plaintiff performed primarily non-exempt duties, including working at times as a Project Superintendent, a non-exempt position he had previously held.  Noteworthy in this decision is the Court’s failure to afford any weight based on the employee’s high compensation. Curiously, the Court’s decision contained no reference to exemption to “highly compensated employees,” applicable to those earning more than $100,000 per year, where the duties test is easier to meet. 29 CFR § 541.601.  

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Despite the Circuit split created by this month’s decision from the Ninth Circuit, holding that pharmaceutical sales representatives are outside sales employees within the meaning of the FLSA, the Supreme Court has declined to take up Novartis’ appeal of the adverse ruling it received on this issue from the Second Circuit.  The Supreme Court’s ruling was contained in its Order List for February 28, and does not provide any insight into the Court’s thinking. 

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On February 14, 2010, the United States Court of Appeals for the Ninth Circuit held GlaxoSmithKline's pharmaceutical sales representatives (“PSRs”) are exempt from the FLSA's minimum wage and overtime requirements under the outside sales exemption, rejecting a contrary decision from the Second Circuit, and an amicus brief filed by the United States Department of Labor.  Christopher v. SmithKline Beecham Corp., 2011 U.S. App. LEXIS 2834 (9th Cir. Feb. 14, 2011).  The Ninth Circuit refused to defer to the DOL, finding the amicus brief was merely a new “reinterpretation” of the exemption by the DOL, set forth only in its amicus brief, not in any regulations, and constituted a break from pharmaceutical industry standards regarding what constitutes sales, which the DOL had not objected to since the FLSA’s inception decades ago.   According to the Ninth Circuit, “[i]n this industry, [a] ‘sale’ is the exchange of non-binding commitments between the PSR and physician at the end of a successful call. . . . [F]or all practical purposes, this is a sale.”  Id. at * 35 (emphasis added). 

Based on this Circuit split and the existing split between the Second and Third Circuits over the application of the administrative exemption to PSRs (not at issue in the Ninth Circuit decision), the Supreme Court may be more likely to weigh in on this issue.

We will continue to monitor developments surrounding this evolving issue.

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The 7(i) exemption from overtime is not limited to “local” retail or service establishments, and applies to employers who sell nationwide via phone or the internet, a Utah district court has held, rejecting DOL regulations, and finding them antiquated. See Selz v. Invest Tools, Inc., 2011 U.S. Dist. LEXIS 93604 (D. Utah, Jan. 27, 2011). 

Plaintiffs were employed as sales representatives at a call center and were responsible for selling, via phone, products and services to educate individual investors on how to personally invest in exchange markets on-line. In response to a suit for alleged unpaid overtime initiated by sales representatives, the employer moved for summary judgment based on the 7(i) exemption, which applies to employees who earn than 1.5 times the minimum wage, make over 50% of their income in commissions and are employed in a “retail or service establishment.” The court rejected plaintiff’s argument that the exemption could not apply because defendant sold their products nationally, not locally, finding the persuasive value of the DOL’s regulations defining a retail or service establishment to be “minimal,” noting they were drafted for the repealed 13(a)(2) exemption formerly applicable to all retail and service employees. The court further noted the regulations have not been updated to reflect the impact of the Internet. “The internet has fundamentally changed what is considered a retail or service establishment and insofar as the Department of Labor regulations do not take this into account, they are not a persuasive interpretation of the FLSA,” the court held.

In evaluating whether the call center was a “retail or service establishment,” the court examined whether the establishment sold goods to the general public, served the everyday needs of the community, was at the end of stream of distribution, and whether it took part in the manufacturing process, all of which the court held were satisfied. Further, the court held even though the employer did not have a physical location accessible by the public, it was accessible via phone and internet and thus, had an establishment available to the public that met its everyday needs. 

While the court granted summary judgment to the employer regarding its status as a “retail or service establishment,” the court denied summary judgment as the applicability of the exemption, finding a fact issue whether the employees earn 1.5 times minimum wage for each hour worked, one of the other requirements needed to establish the exemption.

The case reflects a growing trend of district courts recognizing that Department of Labor regulations defining a “retail or service establishment” are antiquated and are of limited use in interpreting the 7(i) exemption, given the changes in how business is now conducted, particularly through phone sales and the internet. Employees who sell via phone or internet should evaluate the applicability of the 7(i) exemption in light of this decision. Of course, state law also must be consulted.

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As discussed here and here, the availability of the FLSA’s administrative exemption continues to be a hotly-contested issue in wage and hour litigation. One of the many areas of dispute in applying the exemption concerns whether an employee performs a “production” role (rendering the exemption inapplicable) or an administrative role with duties related to the “general business operations” of the employer. 29 C.F.R. § 541.200(a)(2). Last week, a federal district court in Minnesota ruled that three employees who provided consulting services regarding the use and configuration of the Defendant’s enterprise resource planning software satisfied the administrative exemption. See Cruz v. Lawson Software, Inc., 2011 U.S. Dist. LEXIS 8184 (D. Minn. Jan. 27, 2011).

Plaintiffs in Cruz were Systems Consultants, Business Consultants and Technical Consultants of Lawson, who all spent approximately 80% of their time travelling to various sites and interfacing with Lawson’s clients regarding implementation of Lawson’s sophisticated software, designed to improve the client’s business operations. The court rejected Plaintiffs’ argument that they were “production line workers” who simply applied rote processes to perform the same task over and over again (in this case, the upgrading of software product), and instead held Plaintiffs were “consulting to assist in configuring the software in order to improve efficiency in whatever particular area they are working in for the client - HR, procurement, etc.”—an administrative task, not a production task. Id. at * 34.   The court determined that the Plaintiffs’ manual work necessary to implement a solution they developed (i.e., installing actual hardware or software) demonstrated the “prominence of the problem solving, planning and purchasing duties” the Plaintiffs performed for Defendant’s clients Id. at * 36. Interpreting DOL regulations, the Cruz court took an employer friendly view in defining Defendant’s “product” as the software suite itself, consistent with the regulation indicating that an employee who performs work relating the general business operations of the employer or the employer’s customers is an administrative employee. 29 C.F.R. § 541.200(a)(2). Thus, Plaintiffs were not “producers” of Defendant’s product, but rather administrative advisors as to how to best utilize that product. 

The court also concluded that Plaintiffs satisfied the other requirement of the administrative exemption—“the exercise of discretion and independent judgment with respect to matters of significance”—because they assisted Defendant’s clients with training, troubleshooting and modifications.   Id. at * 38 citing Verkuilen v. MediaBank, LLC, 2010 U.S. Dist. Lexis 77407 (N.D. Ill. July 27, 2010).

This decision provides helpful guidance for businesses whose employees provide services, specifically technology based services, for its customers. However, as this is a fact-sensitive analysis, employers must assess on a case-by-case basis the type of work performed and whether it entails the necessary discretion and independent judgment with respect to matters of significance.

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In the latest decision addressing the applicability of the FLSA’s administrative exemption to claims-handling employees (such as adjusters), last week the Court of Appeals for the Fifth Circuit, affirmed a District Court’s grant of summary judgment, rejecting the assertion of an American Risk Insurance (“ARI”) adjuster that ARI misclassified him as exempt. Talbert v. Am. Risk Ins. Co., 2010 U.S. App. LEXIS 25889 (5th Cir. Dec. 20, 2010).

The Court’s review focused on whether Plaintiff exercised discretion and independent judgment in the performance of his duties. Id. at * 10-15. While ARI argued that Plaintiff’s responsibilities in making recommendations concerning coverage and settlement of claims rendered him exempt, Plaintiff attempted to minimize his involvement in coverage analysis by arguing that close supervision by his supervisor undermined any ability to exercise discretion or independent judgment. Id. The Court sided with ARI, noting that, under DOL regulations, the requirement of supervisory approval for Plaintiff’s claims recommendations does not preclude a finding that he exercised discretion and independent judgment in making those recommendations. Id. 

Though the Talbert opinion does not directly cite to authority from other circuit courts, it is consistent with other appellate authority regarding the classification of adjusters and similar industry positions as exempt. See Robinson-Smith v. Gov't Emples. Ins. Co., 590 F.3d 886, 897 (D.C. Cir. 2010)(collecting cases). Nevertheless, continued uncertainty (and litigation) regarding the proper application of the administrative exemption means that all employers must apply or rely upon the exemption with care.  And, of course, certain state laws with higher exemption standards, potentially muddy the waters.

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A Pennsylvania company that sells Sprint cellular phones, service plans, and cell-phone accessories is a “retail or service establishment” under the 7(i) exemption, a Pennsylvania district court holds, granting partial summary judgment to the employer.  Haskins v. VIP Wireless LLC 300, 2010 U.S. Dist. LEXIS 106205 (W.D. Pa. Oct. 5, 2010).  A sales representative employed by VIP Wireless alleged that he and over 100 other sales representatives were misclassified as exempt because they did not meet the requirements of the administrative exemption (due to a failure to exercise independent discretion and judgment) or the executive exemption (since they did not supervise two or more people).  But he and his counsel failed to consider the applicability of the “7(i)” exemption. 

Unlike many FLSA exemptions, the 7(i) exemption does not depend on the duties of the employee, but rather on his or her compensation and the business of the employer.  The exemption applies to employees of a “retail or service establishment” who earn at least 50% of their compensation from commissions and at least one and one-half times the minimum wage for all hours worked. Often, as here, the issue in cases applying the exemption is whether the particular establishment meets the definition of a “retail or service establishment.”   

Citing Department of Labor regulations, the Court held a retail or service establishment is one that typically sells goods and services to the general public (as compared to the wholesale market); sells goods or services that meet the everyday needs of the community; provides for the “comfort and convenience of the public” in the course of its daily living; and sells goods and services at the end of the distribution stream. The Court had little difficultly in concluding the cell-phone stores met this standard—noting that in this day and age, cell phones certainly meet an “everyday need”, they are sold to the general public, and they are not purchased by consumers or businesses with the intent of reselling them. 

Relying on a DOL list of entities lacking a retail concept contained in the FLSA regulations, the Plaintiff argued the cell-phone retailer was not a “retail or service establishment” but rather a “telephone company”, an entity specifically identified by the DOL as lacking a retail concept. The Court rejected this argument. “VIP Wireless was a type of ‘exclusive distributor,’ ‘authorized agent’ or other form of contractor whose function was to solicit customers for Sprint and Nextel cell phones and service plans and to provide a retail outlet for those products. . . . VIP Wireless was an outlet for Sprint/Nextel, a telecommunications or telephone company, but it was not itself such a company,” the Court held. It cited, among other things, the “Preferred Retailer” agreement VIP Wireless entered into with Sprint as support.

Although the Court’s decision only resolved whether one prong necessary to establish the exemption had been met, the employer argued that given the individualized inquiry necessary to assess the other two prongs (50% commissions and 1.5 times the minimum wage), the collective action allegations should be dismissed.  The Court found, however, that it was too soon to determine whether individual inquires would predominate, and a determination whether the case could proceed collectively would have to await further discovery and would be resolved when the plaintiff made a motion for conditional certification.      Employers in the retail and service industries with commissioned employees should carefully analyze the potential applicability of the 7(i) exemption.

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In the latest installment of the ongoing litigation over whether pharmaceutical sales representatives are exempt from overtime under the FLSA (see earlier post here), a district court in Indiana declined to reconsider its decision holding that PSRs do qualify for the outside sales exemption. See Schaefer-Larose v. Eli Lilly & Co., S..D. Ind. Docket No. 07-CV-1133, Order dated Sept. 29, 2010. 

The Court observed that “a substantial amount of activity has occurred in courts throughout the country with regard to the question of whether pharmaceutical sales representatives are exempt under the FLSA [since the court issued its decision holding that outside sales exemption applies].” Order at 2; Schaefer-Larose v. Eli Lilly & Co., 663 F. Supp. 2d 674 (S.D. Ind. 2009). While acknowledging that some of these rulings “do not correspond with our analysis” – including the Second Circuit’s recent Novartis decision – absent guidance from the relevant appeals court (the Seventh Circuit), the Court stated that its decision on the issue “cannot be a swinging pendulum, vacillating back and forth as each new ruling addressing this question is handed down by some court or another across the nation.” Id. at 3. 

The resolution of whether PSRs qualify for the outside sales or administrative exemption likely will ultimately need to be resolved by the United States Supreme Court.

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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 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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The “salary basis” test is by far the most straightforward component of the white collar overtime exemptions, requiring only a fixed salary of $455/week (subject to state law) paid in compliance with the requirements of 29 CFR § 541.602. However, an employer’s use of an unusual compensation or bonus structure can still result in allegations that this requirement is not met. Such claims can arise even when the weekly payment in question far exceeds the minimum salary requirement. This was the nature of the Plaintiffs’ unsuccessful attempt to assert that the employer failed to satisfy the salary basis requirement in Bell v. Callaway, 2010 U.S. App. LEXIS 17981 (11th Cir. Aug. 26, 2010).[1]

In Callaway, the employer hired approximately 100 “bookkeeper/accountants” to assist Callaway in the restatement of a single company’s books (HealthSouth). Their compensation arrangement is summarized below:

Plaintiffs received a guaranteed weekly salary of $1600 or more that did not depend  on the quality or quantity of the work performed. This weekly salary was reduced by one-fifth of the weekly salary for every full day a Plaintiff took off from work for personal reasons during the normal workweek without substituting Paid Time Off ("PTO") [Ed.: a lawful deduction under 541.602]. But, a Plaintiff could work fewer than eight hours during any given workday without any reduction in his or her weekly salary. Second, Plaintiffs were eligible to receive additional incentive compensation (a "bonus") paid at a straight-time hourly rate based on the cumulative number of billable hours that Plaintiffs worked. Any bonus to be awarded was determined based on how many additional hours over forty a Plaintiff worked in a given week minus any "deficit" hours a Plaintiff had accumulated in past weeks. For example, if a Plaintiff worked seven and not eight hours on each regularly-scheduled workday in a given week, thus totaling 35 hours of work, he or she still earned the full predetermined weekly salary, but would not earn a bonus in a subsequent week until he or she made up the bonus-hour deficit of five hours and then worked more than 40 hours in a given week.

Id. at * 1-2. 

The Eleventh Circuit, affirming the district court, rejected Plaintiffs’ claim that they were “not paid on a salary basis because the amount of their bonuses fluctuated based on the cumulative number of hours worked.” Id. at * 4. The Court noted the DOL’s regulation which allows an employer to “provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly-required amount paid on a salary basis.” Id. at * 5 citing 29 C.F.R. § 541.604(a). Because the salary basis was met, exempt status was preserved, and the additional compensation was of no moment. The fact that the bonus was based on hours worked and subject to adjustment based on hours worked was irrelevant to the court’s analysis of salary basis compliance.

While Callaway is in line with other Circuit decisions addressing similar plans (See e.g. Havey v. Homebound Mortg., Inc., 547 F.3d 158 (2d Cir. 2008)(the fact that [plaintiff’s] overall compensation for quarter could be decreased due to quality errors does not render [plaintiff] a non-salaried employee if, under the employer's policy, the adjustments do not affect a "predetermined amount" [compliant with the salary basis test]), employers devising exempt compensation plans must beware of compensation arrangements that could result in assertions that rather than applying a proper FLSA exemption, they are attempting to circumvent the Act’s overtime requirement. See generallyAdams v. Department of Juvenile Justice, 143 F.3d 61 (2d Cir. 1998).

This decision points out the need for all employers to ensure that compensation programs for white collar-exempt employees are in full compliance with the salary basis requirements of the FLSA. 

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The subject of many FLSA actions is store managers and whether they are properly classified as exempt employees. In a recent victory for the employer community, Judge Glenn Suddaby of the Northern District of New York held as a matter of law that Express Mart properly classified its store manager in Cato, New York as exempt. Guinup v. Petr-All Petroleum Corp., 2010 U.S. Dist. LEXIS 86280 (N.D.N.Y Aug. 23, 2010).

Plaintiff Guinup was the store manager for Store 360, a combination convenience store and gas station. In her claim for overtime, she did not dispute that three of the four requirements for the executive exemption were met: namely, that she; 1) was paid on a salary basis and earned at least $455 per week; 2) customarily and regularly directed the work of two or more employees; and 3) had the authority to hire or fire employee or in the alternative make recommendations as to hiring and firing which received particular weight. Id. at * 17-18. Rather, Plaintiff argued that as a store manager she did not meet the requirement that her “primary duty [be] management of the enterprise in which the employee is employed or of a customarily recognized department or subdivision thereof.” Id. citing 29 C.F.R. § 541.100. 

The Court then reviewed the four factors utilized to determine whether an employee’s primary duty is management: “[1] the relative importance of the exempt duties as compared with other types of duties; [2] the amount of time spent performing exempt work; [3] the employee's relative freedom from direct supervision; and [4] the relationship between the employee's salary and the wages paid to other employees for the kind of nonexempt work performed by the employee.” Id. In holding that each factor militated in favor of exempt status  the Court observed that Plaintiff’s duties included:

interviewing and hiring new employees, scheduling, training, writing performance evaluations, reporting employee and customer injuries to corporate, discussing sales performance and promotions with corporate, conducting surveys of competitors' gas prices and convenience store business, and controlling "shrink." Plaintiff was also responsible for making recommendations to corporate regarding product ordering and pricing, new hire pay rates, employee discipline and termination, and certain Store 360 security measures. Furthermore, Plaintiff accepted phone calls at home from her subordinates at Store 360 regarding incidents that arose at Store 360 when she was not working.

Id. at * 21. 

Based on these duties, the Court observed that “Store 360 could not have operated successfully unless Plaintiff performed her managerial functions.” As the most senior on-site employee, the Court found she was relatively free from supervision on a day-to-day basis even if she had an “active” Area Supervisor because, inter alia, the Area Supervisor was responsible for ten stores. Finally, based on the Court’s estimate of the compensation of Plaintiff’s assistant manager, Plaintiff was paid approximately 31.7% more than that employee, her highest-ranking subordinate.

While the Guinup decision is favorable to employers, the applicability of the executive exemption continues to be a fact-sensitive, highly technical analysis with divergent court opinions. Whenever a managerial employee is not the highest ranking on-site employee (as Guinup was), particular care must be taken in assessing applicability of the exemption.  And even if the employee is the highest rank on-site there must be significant exercise of managerial duties. All retail employers must focus on this issue.

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In a much-awaited decision, earlier this week  the U.S. Court of Appeals for the Second Circuit reversed a New York District Court and held that pharmaceutical sales representatives are not exempt outside sales or administrative employees.  In re Novartis Wage & Hour Litig., No. 09-0437-cv, 2010 U.S. App. LEXIS 13708 (2d Cir. July 6, 2010). The Court concurred with and deferred to the position of the U.S. Secretary of Labor, who appeared as amicus curiae or “friend of the court” at the appellate stage, and stated that  “the Secretary of Labor’s interpretations of her regulations are entitled to “‘controlling’ deference unless those interpretations are ‘plainly erroneous or inconsistent with the regulation.’”   In essence, the Second Circuit held that the representatives do not meet the outside sales exemption because “where [an] employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it[,] . . . it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.” In a similarly narrow interpretation of the FLSA, the Second Circuit, again deferring to the Secretary’s view, held that the representatives’ duties do not demonstrate the necessary exercise of independent discretion and judgment as to matters of significance for application of the administrative exemption, and performance of those duties required only skills gained through training

A petition for review likely will follow and the scope of the exemptions may need to be resolved by the U.S. Supreme Court, in light of conflicting authority including the Third Circuit’s contrary decision applying the administrative exemption to pharmaceutical sales representatives.  See Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010)

For a more detailed analysis of the Second Circuit’s decision, click here. 

[UPDATE].  On July 19, 2010, another district court within the Third Circuit relied on the Johnson & Johnson decision to hold that pharmaceutical sales representatives qualify for the administrative exemption.  Jackson v. Alpharma, 2010 U.S. Dist. LEXIS 72435 (D.N.J. July 19, 2010).  The ever-growing and sharply divided body of authority regarding applicability of the administrative exemption in the pharmaceutical industry make In Re Novartis a candidate for Supreme Court review.  We will continue to monitor developments in the case. 

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One commonly held misconception in wage-and-hour law is that all investment professionals in the financial industry are categorically exempt from overtime pay. In a decision contrary to such assumption, Judge Denise Cote of the Southern District of New York recently denied summary judgment to a boutique investment bank as to the exempt status of a financial analyst, and conditionally certified a class of similarly situated financial analysts, permitting the Plaintiff to invite them to join the case. Henderson v. Transp. Group, 2010 U.S. Dist. LEXIS 66109 (S.D.N.Y., Jul. 1, 2010).

As a financial analyst, Plaintiff Henderson worked as the junior member of an investment team consisting of financial analysts, associates and vice presidents. Financial analysts, although the junior members of the bank’s deal teams, participated in all major tasks, including “(1) making telephone calls and sending emails to prospective investors in order to market transactions, (2) assisting in the development of financial models using Microsoft Excel spreadsheets, and (3) developing term sheets to finalize a deal.” Henderson received a starting salary of $35,000 per year, sufficient to satisfy the “salary basis” prong of the exempt status test.

The Court acknowledged throughout the opinion that these tasks could give rise to the requisite discretion and independent judgment necessary to qualify for the administrative exemption, but denied the motion based on the bank’s failure to provide specific evidence of how financial analysts exercised discretion in carrying out these tasks. The Court wrote:

“The defendants have not, however, submitted evidence describing the specific tasks performed in providing that support and assistance and in creating term sheets. Similarly, with respect to financial modeling, the defendants' witness opines that ‘[p]utting together such a file is a sophisticated and dynamic process changing frequently in reaction to market and investor demand.’ But the witness does not describe, for example, what, if any, alternatives, variables, or considerations must be weighed to create or apply the model, how an analyst is expected to react to "market and investor demand," or what authority analysts possess to decide any matter of significance.”

Because this evidence of the nature and extent of the analysts’ discretion was lacking, the court denied summary judgment. This decision is consistent with other authority within the Circuit finding summary judgment inappropriate in applying the administrative exemption to analysts. See e.g. DiFilippo v. Barclays Capital, Inc., 552 F. Supp. 2d 417 (S.D.N.Y. 2008)(denying summary judgment as to applicability of administrative exemption to Government Clearance Analysts). 

Henderson is the most recent in a series of decisions pointing out concerns with a uniform exempt classification of financial services employees. Industry employers should review their current classifications of financial professionals as exempt or non-exempt as litigation of classification issues in the industry is expected to continue. 

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Litigation regarding what constitutes a “retail or service establishment,” under the “7(i)” or “retail sales” exemption continues. We recently reported a district court decision applying the exemption to employees selling precious metals. See La Parne v. Monex Deposit Co., 2010 U.S. Dist. LEXIS 59768 (C.D. Cal. Apr. 29, 2010).  Just a couple of months later, another district court analyzed the applicability of the exemption, this time to a company that provides window washing services primarily to commercial high rise buildings that are paid for by a management company, not the individual tenants. Alvarado v. Corporate Cleaning Service, Inc., 2010 U.S. Dist. Lexis 62378 (N.D. Ill. June 21, 2010).

The Court explained that to fall within the definition of a retail or service establishment, two requirements must be met: (1) the establishment cannot earn more than 75% of its revenue from goods or services that are provided for resale; and (2) it must be recognized as retail in the particular industry. Plaintiffs argued the window washing services were resold (and not retail) because the defendant did not contract directly with the commercial or residential tenants to provide the service, but instead, with management companies, who then recovered the cost of such work either through rent, property management fees, or assessments. Therefore, the services were bought by the management company and then resold to the tenants.  The Court rejected this assertion, and held the building management companies were “merely conduits,” or agents facilitating the purchase of window washing services, not middlemen reselling window washing services. 

The Court also found the services were “recognized as retail in the industry” because they were sold to the general public (even though most of their customers were commercial clients, not residential clients, rejecting plaintiffs’ argument that the exemption only applies to residential sales); the services met the “everyday needs of the community”; the services were provided at the end of the stream of distribution; and the defendant did not engage in manufacturing. The Court also held the mere fact the services were sold to corporate accounts with multiple buildings (as opposed to individual owners or those with a single building), did not transform the sale to a “wholesale” transaction. The Court also rejected plaintiffs’ argument that providing proposals to customers estimating the cost of the services were not “retail” transactions, finding such proposals are not akin to competitive bidding (which Department of Labor regulations state are not recognized as retail).

Nevertheless, despite holding plaintiffs were employed by a “retail or service establishment,” the Court denied summary judgment to the employer finding a question of fact existed whether plaintiffs satisfied another requirement necessary to establish the exemption—being paid more than 50% in commissions. Plaintiffs were paid using a point system, whereby they were compensated based on the number of jobs completed. Each job was assigned a number of points based on the number of windows washed. Thus, the quicker and more efficiently the plaintiffs worked, the more they earned per hour.  The Court held a commission exists when there is some relationship or correlation between compensation paid to the employees and the amount charged to the customers. The court found questions of fact remained regarding whether a true nexus existed between pay received and the amount charged to the customer based on evidence produced by the plaintiffs that on occasion, the labor cost charged to a customer did not fluctuate based on the number of points.   

Employers relying on the 7(i) exemption under federal law should review the relevant regulations and cases to ensure that the business qualifies as a “retail or service establishment” and that the compensation it provides is a “commission” as defined in the case law.

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In a case involving retailer Dollar General, another federal judge has refused to hold as a matter of law that a retail store manager is an overtime-exempt “executive” for purposes of the FLSA.  Judge James Jones denied summary judgment to Dollar General in Hale v. Dolgencorp, Inc., 2010 U.S. Dist. LEXIS 62584 (W.D. Va. June 23, 2010) based upon his “fact-intensive inquiry as to each prong of the five-factor [exemption] test.”  Id. at * 8. 

Plaintiff Hale had served as a full-time clerk and then an assistant store manager before her promotion to store manager.  Even though the parties agreed that as store manager Hale satisfied the salary basis test for exemption, and that “her work included the regular direction of two or more employees,” Plaintiff testified that she spent only ten percent of her time – six hours per week – on managerial tasks and the remainder of her time “performing menial labor: cleaning restrooms, scrubbing floors, checking out customers, and stocking shelves.” Id. at * 9. She further claimed that Dollar General’s policy of limiting her quota of labor hours for non-exempt employees forced her to run the store by herself or with a skeleton crew a large percentage of the time.

Consistent with the Eleventh Circuit’s similar decision in Morgan v. Family Dollar Stores, Inc., 551 F.3d 1233, 1257-58 (11th Cir. 2008), the Court determined that “[b]ased upon the applicable five-prong test, a reasonable juror could determine that Hale's primary duty was not management.”  This test examines: (1) "the amount of time spent in performance of  [*6] managerial duties"; (2) "the relative importance of the managerial duties as compared with other types of duties," (3) "the frequency with which the employee exercises discretionary powers"; (4) "his relative freedom from supervision"; and (5) the relationship between the employee's "salary and the wages paid other employees for the kind of nonexempt work performed by the supervisor." Id at * 5-6 citing Morgan.  On this last issue, the Court observed that based on Plaintiff’s testimony that she worked 60-70 hours per week, a factual question existed as to whether the “effective rate” at which she was paid was actually less than that paid to the non-exempt employees who reported to her.

This highly technical attack on the use of the executive exemption in retail stores has divided courts, but highlights both the technical nature of the exemption and the need to ensure that for purposes of the FLSA an exempt “executive’s” primary duty is management and that such primary duty is reflected by documents such as evaluations and disciplinary notices.

[UPDATE]  On July 8, 2010 a second district judge echoed the reasoning in Hale, denying Dollar General’s motion for summary judgment in another misclassification case brought by a store manager in Missouri.  Kanatzer v. Dolgencorp, 2010 U.S. Dist. LEXIS 67798 (E.D. Mo. July 8, 2010).  In Kanatzer, the judge found material issues of fact as to all four factors set forth in 29 C.F.R. § 541.700(a).

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The Fair Labor Standards Act contains an exemption from overtime for employees of a “retail or service establishment” who earn at least 1.5 the minimum wage for all hours worked and more than 50% of their compensation from commissions. This exemption is often referred to as the “retail sales exemption” or “7(i) exemption,” referencing the section in which it is codified. Often the difficulty in applying the exemption lies with determining which establishments fall within the definition of a “retail or service establishment” and which do not. Department of Labor regulations provide a long list of retail non-retail establishments, but several courts have noted the list does not provide any rationale for distinguishing retail and non-retail and is of limited assistance. See e.g., Martin v. The Refrigeration School, Inc., 968 F.2d 3, 7 n. 2 (9th Cir. 1992). 

Recently, a California District Court was faced with the question of whether account executives responsible for selling precious metals (e.g., gold and platinum) to customers via phone were employed by a “retail or service establishment,” and thus exempt from overtime under the 7(i) exemption.  Parne v. Monex Deposit Co., 2010 U.S. Dist. Lexis 59768.  Relying on the definition of a “retail or service establishment” contained in the 13(a)(2) retail and service exemption [now repealed], the Court explained a retail or service establishment is one that (1) does not earn more than 75% of its revenue from goods or services that are provided for resale; and (2) is recognized as retail in the particular industry. 

In applying this definition, the Court first held that even though customers typically bought metals for investment purposes with the ultimate goal of reselling them for a profit (some customers did not even take possession of the metal), the precious metals were not goods provided for “resale,” as contemplated by the statute, because the metals were not sold with the understanding the metals would be immediately resold. Second, despite competing evidence regarding whether the industry viewed the Defendant as a retail seller (plaintiffs argued the Defendant was similar to a brokerage house), the Court held that summary judgment was still proper because the Defendant satisfied the standard courts have used in determining whether a particular establishment is “recognized as retail”—it sold goods to the general public; it did not take part in the manufacturing process; it provided a product that served the everyday needs of the community; and, it sold goods at the end of the stream of distribution. The factor that presented a “close[] question,” according to the Court, was whether selling precious metals served the “everyday needs of the community”. After noting that cases lack a unified approach in answering this question, the Court held “everyday needs” means “basic” or “integral” needs of members in the community, and collecting and investing metals fell within this standard.

As wage and hour cases continue to be an active area of litigation, the different prerequisites for application of the 7(i) exemption, including which services and goods also meet the “basic” or “integral” needs of the community, will likely continue to be litigated.  Before utilizing the exemptions, employers relying on the 7(i) exemption, should review the relevant regulations and case law to ensure that their business qualifies as a “retail or service establishment”.

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In light of other case law, a recent pro-employer decision from the Eleventh Circuit Court of Appeals, holding that a salaried dispatcher for a crane rental company qualified as an exempt administrative employee, adds credence to a question often asked by legal and human resources professionals: is the administrative exemption in the eye of the beholder? Rock v. Ray Anthony Int'l, LLC, 2010 U.S. App. LEXIS 10775 (11th Cir. Fla. May 26, 2010).

At the trial court level, the district court found that Rock’s duties as dispatcher included “customer communication, choosing the appropriate crane for specific jobs, assigning operators to cranes, overseeing other employees, preparing and reviewing job tickets, and maintaining the crane rental schedule . . . He was also responsible for selecting the type of materials, supplies, machinery, equipment, and tools that were needed to meet the customers' needs.” Id. at * 5-6. The trial court concluded that these duties “related to servicing or running [defendant’s] general business operations”, rendering him eligible for the administrative exemption. Id. at * 6.

On appeal, Rock argued that the recently issued DOL Administrative Interpretation regarding loan officers (discussed here), which opined that employees performing sales work generally are engaged in “production” and not eligible for classification as exempt “administrative” employees, supported a non-exempt finding, as his responsibilities were “more akin to sales and retail.”

The Eleventh Circuit, relying on precedent within the Circuit, observed that “even when employees engage in sales, their duties are administrative if the majority of their time is spent advising customers, hiring and training staff, determining staff pay, and delegating matters to staff.” Id. at * 9 citing Hogan v. Allstate Ins. Co., 361 F.3d 621, 627 (11th Cir. 2004). Because the trial court found that Rock’s duties “went beyond mere sales” and included management of the crane division, the administrative classification was upheld.  Id.

Rock is welcome news for employers within the 11^th Circuit’s purview of Florida, Georgia and Alabama. However, the general lack of clarity as to what constitutes “administrative” work is highlighted when the Rock decision is juxtaposed with a recent decision involving dispatchers issued by a New York federal court. In Iaria v. Metro Fuel Oil Corp., 2009 U.S. Dist. LEXIS 6844 (E.D.N.Y. Jan. 30, 2009), the court denied the employer’s motion for summary judgment as to its classification of a dispatcher as an exempt administrative employees. In part, the Court’s decision in Iaria was premised on crediting the plaintiffs’ testimony that their duties did not involve supervisory or management responsibilities, but were limited to “monitoring drivers' deliveries, responding to drivers' problems, handling some customer service calls, routing, entering data in the computers, and checking the drivers' logs.” Id. at * 3.  The Court stated that these dispatcher plaintiffs’ “duties relate more directly to the service and product that [defendant] provides -- the delivery of fuel for heating -- than they do to servicing the business.” Id. at * 11.   

Employers utilizing the administrative exemption, especially with sales and quasi-sales position, must closely review the DOL’s current position and the applicable law in their Circuit, as well as applicable state law, to ensure understanding of all potential risks.

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The FLSA’s administrative exemption requires the party claiming exemption to establish that the employee was engaged in “administrative” work, as opposed to “production” work (the so-called administrative/production dichotomy). Determining whether an employee meets the administrative exemption can be challenging.   This determination is even more difficult in white-collar industries, where unlike in manufacturing, it is not so easy to differentiate between production and administrative work.

In 2009, the Second Circuit reversed a District Court and held an underwriter for Chase J.P. Morgan did not meet the administrative exemption since the employee “produced” the bank’s product, and did not service the business (like an accountant, Information Technology professional or human resources professional).   The Supreme Court yesterday declined to review the SecondCircuit’s decision.   Davis v. J.P. Morgan Chase & Co., 587 F.3d 529, 536 (2d Cir. 2009) cert denied 559 U.S. ___ (Supreme Court Case No. 09-1160, May 3, 2010). Therefore, in the Second Circuit white-collar employers need to evaluate the position in light of this decision before classifying employees as exempt administrators. This concern is underscored by the fact that the Second Circuit’s decision supports an argument that the exercise of independent discretion and judgment is not relevant to this analysis – if the employee is deemed to perform production work, a Court need not reach the question of the existence or lack of discretion and independent judgment.

This is a disappointing decision for employers hoping that the high court would grant cert and reverse Davis by holding that: 1) the District Court’s determination that the exemption applied in the case at bar was the proper one; and 2) the administrative/production dichotomy is of “limited assistance outside the manufacturing context.” Savage v. Unite Here, 2008 U.S. Dist. LEXIS 32219 (S.D.N.Y. Apr. 17, 2008).

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On March 31, Magistrate Judge John Tunheim of the United States District Court for the District of Minnesota issued a lengthy opinion in several consolidated FLSA actions brought by a group of securities brokers who alleged they were misclassified as exempt under the FLSA.  In re Rbc Dain Rauscher Overtime Litig., 2010 U.S. Dist. LEXIS 32413 (D. Minn. March 31, 2010).  The opinion addresses several issues relevant to financial services industry employers including:

• The applicability of the “learned professional exemption – the Court denied summary judgment to the Defendant on this issue as to one broker because based on the record the Court could not determine that the knowledge utilized by the broker (who possessed a Series 7 license and an MBA) to perform his job was customarily acquired via academic instruction.  Id. at * 30-36;

• Whether a “non-forgivable” but recoverable draw satisfies the salary basis payment requirement - the Court held that a non-forgivable but recoverable draw that never fell below the minimum salary required for exemption ($455 per week under federal law) satisfied the salary basis, even though the draw was reconciled in calculating commissions.  Id. at * 37-43.  In reaching this finding the Court cited a United States Department of Labor opinion letter issued by then-Wage and Hour Administrator and current Jackson Lewis partner and head of the Jackson Lewis Wage and Hour Practice Group, Paul DeCamp; and

• Impact of the “Highly Compensated” exemption test – the Court held that brokers who met the “highly compensated” threshold set forth in 29 C.F.R. § 541.601 (i.e., payment of the salary basis minimum and total compensation of at least $100,000/year) were exempt, as they customarily and regularly performed exempt administrative duties by providing financial advice and analysis.  Id. at * 86-105.

In re RBC serves as a valuable primer for financial services firms seeking to identify and review the exemption issues that often arise in the financial services industry.  Unfortunately, the industry is under attack despite the high levels of compensation received by many industry employees. 

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In yet another wage-and-hour decision with the potential to disrupt longstanding practices within an industry, a federal court in Florida has ruled that the FLSA’s “learned professional” exemption does not apply to a group of caseworkers providing child protection services for an state-authorized agency. Talbott, et al v. Lakeview Center, 06-cv-378 (N.D. Fla. February 2, 2010). The learned professional exemption requires that:

• An employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment;

• The advanced knowledge must be in a field of science or learning; and

• The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.

In Talbott, Plaintiffs were caseworkers in two different job titles who provided counseling services to families under the supervision of their “casework counselor supervisor.” The Plaintiffs alleged that while many of them held a degree related to social work, their actual job did not require them to use that degree or exercise any discretion or judgment. Specifically, Plaintiffs asserted that Defendant’s “six- to eight-week . . . training course provided them with the knowledge necessary to perform their jobs” and accordingly the job requirements were “insufficient to meet the learned professional exemption’s requirement of advanced knowledge.” The Court agreed. It observed that while the Defendant had put forth evidence that it required a combination of education and experience to obtain the job, it was clear to the Court that “[t]he type of knowledge necessary to perform the duties . . . is gained by the employee in Lakeview’s training course.” The Court even found the violation to be willful and based on such finding extended the liability period to 3 years and awarded 100% liquidated damages.

Further (and economically devastating to the Defendant), the court concluded based on evidence in the record (including listing fixed hours in the job posting for the position and invoking an informal “flex time” concept with the employees to address circumstances where their hours would exceed 40) that the “contract” of employment with the Plaintiffs had been for 40 hours of work per week, and therefore Plaintiffs were entitled to overtime based on time and half their regular rate of pay based on a 40 hour workweek (i.e, 1.5 times (their weekly salary divided 40) times hours worked in excess of 40 in the week). The Court specifically rejected any overtime calculation based on dividing the weekly salary by total hours worked and paying ½ time for overtime hours. 

What are the lessons? First, all employers must ensure that individuals classified as exempt learned professionals have at the least Bachelors Degree in a specific discipline and that the educational coursework to achieve the degree is essential to the performance of job duties. Second, employers should be very wary of advising any employee classified as exempt that their salary covers a set number of hours per week. Rather, employers should advise employees that the salary covers all hours worked.

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Often when analyzing whether a position is exempt, we only focus on whether the job duties are sufficient for exempt status. However, in most instances, there is a second requirement: compliance with the salary basis test.   A recent decision issued by Judge Larimer of the Western District of New York is a reminder to not overlook salary basis test compliance. Simply put, deductions from the salary of an exempt employee must be carefully monitored to ensure that they comply with the FLSA regulations and do not destroy the exemption. 

At issue in Scholtisek v. Eldre Corp., 2010 U.S. Dist. LEXIS 26664 (W.D.N.Y. Mar. 22, 2010) was evidence presented at the summary judgment stage that the employer “both engaged in an actual practice of making unlawful deductions, and maintained a policy that created a significant likelihood of such deductions [from the salary of exempt employees]”, and that such a practice and policy destroyed the plaintiffs’ exempt status, entitling them to overtime under the FLSA. The Court granted plaintiffs’ motion for summary judgment, based on documentary evidence and admissions from the HR professionals responsible for the company’s payroll which together demonstrated that there had been a policy of making partial day deductions from the salaries of exempt employees for missed work time, in contravention of 29 CFR § 541.602. Defendant was not entitled to the “window of correction” to remedy the error, because the window is available to correct payroll mistakes, not unlawful policies.

The Court did not rule as to the appropriate remedy for this violation, observing that “[o]n the record before me, however, the Court cannot determine as a matter of law during what periods those improper deductions did occur, the extent to which they occurred, exactly which employees or job classifications were affected by this practice, or the number of hours for which plaintiffs are entitled to overtime pay. The amount of damages therefore remains to be decided.” The Court will ultimately need to rule as to whether the exemption loss was limited to only those who were subject to an actual deduction and/or whether for the period of time for which the exemption was lost is limited only to those individual workweeks in which the deduction was taken.

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There are many reasons an employer may decide to reclassify an employee from exempt to non-exempt: changes in the law; modified court or DOL interpretations of existing law; as a result of an internal audit; or, simply based on changes in the business needs of the company. Does that decision to reclassify create evidence that the employee was “misclassified” as exempt, and that the misclassification was willful? No, said the court in Clarke v. JP Morgan Chase Bank, No. 08-CV-2400 (S.D.N.Y., March 26, 2010), holding that reclassification does not establish that the employee was misclassified, or that any violation was willful.

In Clarke, the employer decided to reclassify various technical computer workers based on the increasing number of FLSA suits. Because one of the plaintiffs who had been reclassified waited over two years after the reclassification to file suit, the FLSA claim was time barred unless he could establish the employer “willfully” violated the law, extending the FLSA statute of limitations to three years.

In support of his claim that he was misclassified and that the misclassification was willful (thus saving the claim), plaintiff argued the decision to reclassify itself demonstrated knowledge that the prior classification was wrong. The court rejected this, and held the decision to reclassify did not establish a willful violation, but just the opposite: a good faith effort by the Company to ensure that the company’s classification complied with the FLSA. The reclassification was likely a conservative measure adopted at a time when FLSA collective action overtime lawsuits were becoming more and more common, the court held.  Indeed, the court held “if the mere fact of a reclassification were enough to trigger the exceptional three year limitations period, it [the three year limitations period] would cease to become an exception.” 

Additionally, as to a second plaintiff whose claims were not time-barred, the court held the reclassification did not establish that the employee was misclassified. “The mere fact that an employee was reclassified cannot establish an employer’s liability for the period prior to the reclassification,” the court held, reemphasizing that, under the FLSA, it is the duties that control. In fact, despite the reclassification, the court granted summary judgment to the employer finding the employee was exempt under the computer professional exemption—one of only a handful of cases addressing that exemption. 

While plaintiffs’ counsel will certainly continue to argue that any decision to reclassify is evidence that the employee was previously misclassified, the reclassification decision alone will not, according to the Clarke court, provide evidence of a willful violation or establish that the employee was in fact misclassified in the first place. This decision provides some comfort to employers who decide to reclassify employees, and will permit employers to reclassify employees in cases where the exempt status is unclear with less fear that the decision to reclassify will be used against the company in a lawsuit challenging the original classification decision.     

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On March 24, 2010, Nancy J. Leppink, the Deputy Administrator for the Wage and Hour Division of the United States Department of Labor, issued an “Administrator’s Interpretation” stating that employees who perform the typical job duties of a mortgage loan officer generally do not meet the prerequisites for the administrative exemption under the FLSA.   The issuance of the Interpretation is a significant departure from the Division’s past practice of generally issuing legal opinions solely in response to requests for guidance from the public, and may be a sign of a more aggressive Wage and Hour Division.  The Interpretation is directly contrary to a September 8, 2006 opinion letter issued by the Division stating that mortgage loan officers could qualify for the exemption, and in fact the Deputy Administrator stated that the previous opinion was based on a misleading assumption and a selective and narrow analysis.

The Division bases its new position on the following conclusions:

• A Mortgage Loan Officer’s primary duty is to make sales and accordingly he/she performs production work and not administrative work.  As stated by the Deputy Administrator, “[w]ork such as collecting financial information from customers, entering it into the computer program to determine what particular loan products might be available to that customer and explaining the terms of the available options and the pros and cons of each option, so that a sale can be made, constitutes the production work of an employer engaged in selling or brokering mortgage loan products.”

• While in certain situations, providing advice to a business regarding a potential mortgage to purchase land could qualify as exempt work based on it being related to the management or general business operations of the employer’s customers, home loans do not as “[i]ndividuals acting in a purely personal capacity do not have “management or general business operations.”

• Its belief that the September 8, 2006 opinion letter improperly created an alternative standard for the administrative exemption for employees in the financial services industry.

This is a significant development for industry employers that relied on the administrative exemption for loan officers based on the 2006 opinion letter.  This narrowing of the definition of “administrative” work by the DOL is also consistent with the Second Circuit’s recent decision in Davis v. J.P. Morgan Chase & Co., 587 F.3d 529 (2d Cir. 2009)(underwriter “produced” bank’s product of making loans, and thus was not an administrative employee). 

While it is not a resolved legal issue, some courts have held that the 7(i) “commissioned employee” exemption also is inapplicable to mortgage loan officers because they do not work in a “retail” industry. Compare Gatto v. Mortgage Specialists of Ill., Inc., 442 F. Supp. 2d 529 (N.D. Ill. 2006) with In re: Wells Fargo Home Mortg. Overtime Pay Litig., 2008 U.S. Dist. LEXIS 46595 (N.D. Cal. June 11, 2008). This would leave the outside sales exemption as the only potential exemption on which employers in the industry can rely, however, such exemption typically has limited application in the industry as most mortgage loan officers perform services from a fixed location.  An additional open question remains as to whether loan officers who are “highly compensated” (i.e., are paid on an FLSA-compliant salary basis and receive more than $100,000/year in total compensation) may still qualify for exemption.  29 CFR § 541.601.

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