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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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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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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