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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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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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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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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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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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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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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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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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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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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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 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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