Monthly Archives: November 2009

2d. Cir.: Mortgage Underwriters Not Subject To Administrative Exemption; Plaintiffs Are ‘Production’ Rather Than ‘Administrative’ Workers

Davis v. J.P. Morgan Chase & Co.

Plaintiff, was employed as mortgage underwriter.  He brought the case challenging Defendant, J.P. Morgan Chase’s categorization of underwriters as administrative employees exempt from the Fair Labor Standard Act’s overtime pay requirements.  The District Court granted Defendant’s Motion for Summary Judgment finding Plaintiff to be subject to the Administrative Exemption.  On appeal, the Second Circuit reverses, finding Plaintiff to be non-exempt.

The Court initially described the issue before it as follows:

“This appeal requires us to decide whether underwriters tasked with approving loans, in accordance with detailed guidelines provided by their employer, are administrative employees exempt from the overtime requirements of the Fair Labor Standards Act. Andrew Whalen was employed by J.P. Morgan Chase (“Chase”) for four years as an underwriter. As an underwriter, Whalen evaluated whether to issue loans to individual loan applicants by referring to a detailed set of guidelines, known as the Credit Guide, provided to him by Chase. The Credit Guide specified how underwriters should determine loan applicant characteristics such as qualifying income and credit history, and instructed underwriters to compare such data with criteria, also set out in the Credit Guide, prescribing what qualified a loan applicant for a particular loan product. Chase also provided supplemental guidelines and product guidelines with information specific to individual loan products. An underwriter was expected to evaluate each loan application under the Credit Guide and approve the loan if it met the Guide’s standards. If a loan did not meet the Guide’s standards, certain underwriters had some ability to make exceptions or variances to implement appropriate compensating factors. Whalen and Chase provide different accounts of how often underwriters made such exceptions.”

Discussing a variety of precedent and the administrative/production dichotomy, the Court held that such underwriters are not subject to the Administrative Exemption.

“Precedent in this circuit is light but provides the framework of our analysis to identify Whalen’s job as either administrative or production. In Reich v. State of New York, 3 F.3d 581 (2d Cir.1993), overruled by implication on other grounds by Seminole Tribe v. Florida, 517 U.S. 44 (1996), we held that members of the state police assigned to the Bureau of Criminal Investigation (BCI), known as BCI Investigators, were not exempt as administrative employees. See id. at 585, 588. BCI Investigators are responsible for supervising investigations performed by state troopers and conducting their own investigations of felonies and major misdemeanors. Applying the administrative versus production analysis, we then reasoned that because “the primary function of the Investigators … is to conduct-or ‘produce’-its criminal investigations,” the BCI Investigators fell “squarely on the ‘production’ side of the line” and were not exempt from the FLSA’s overtime requirements. Id. at 587-88.

The administrative/production dichotomy was similarly employed in a Vermont case we affirmed last year, but the circumstances of our affirmance limit its precedential value. The facts of that case were similar to those presented here: the plaintiffs were employed as underwriters for a company in the business of underwriting mortgage loans that were then sold to the secondary lending market. See Havey v. Homebound Mortgage, Inc., No. 2:03-CV-313, 2005 WL 1719061, at *1 (D.Vt. July 21, 2005), aff’d, 547 F.3d 158 (2d Cir.2008). The district court concluded with very little analysis that the underwriters were not employed in production because they performed “nonmanual work related to Homebound’s business.” Id., at *5 Significantly, the court appeared to assume that “production” must relate to tangible goods, citing a Connecticut case in which the court refused to grant summary judgment finding that material planning specialists, senior financial analysts, project financial analysts, and logistics specialists employed by a company that built submarines were exempt from FLSA’s overtime requirements. See id. at *5 n. 6, citing Cooke v. Gen. Dynamics Corp., 993 F.Supp. 56 (D.Conn.1997). The Havey court noted that “[i]n that case … the corporation was in the business of producing submarines. Homebound was in the business of underwriting mortgage loans. No production was taking place.” Id. (citations omitted).

As Reich illustrates, this literal reading of “production” to require tangible goods has no basis in law or regulation. We affirmed the district court in Havey, but the only issue presented on appeal was whether plaintiffs were paid on a salary basis under the payment structure adopted by Homebound. Accordingly, our opinion offered no analysis as to whether the underwriters performed work directly related to the management policies or general business operations of their employers under the FLSA. We therefore do not read our Havey opinion as adopting the flawed analysis of the Vermont court as to administrative and production job functions.

The line between administrative and production jobs is not a clear one, particularly given that the item being produced-such as “criminal investigations”-is often an intangible service rather than a material good. Notably, the border between administrative and production work does not track the level of responsibility, importance, or skill needed to perform a particular job.  The monetary value of the loans approved by Whalen as an underwriter, for example, is irrelevant to this classification: a bank teller might deal with hundreds of thousands of dollars each month whereas a staffer in human resources never touches a dime of the bank’s money, yet the bank teller is in production and the human resources staffer performs an administrative position. Similarly, it is irrelevant that Whalen’s salary was relatively low or that he worked in a cubicle. What determines whether an underwriter performed production or administrative functions is the nature of her duties, not the physical conditions of her employment.

The Department of Labor has attempted to clarify the classification of jobs within the financial industry through regulations and opinion letters. In 2004, the Department of Labor promulgated new regulations discussing, among other things, employees in the financial services industry. Although these regulations were instituted after Whalen’s employment with Chase ended, the Department of Labor noted that the new regulations were “[c]onsistent with existing case law.” 69 Fed.Reg. 22,122, 22,145 (Apr. 23, 2004). The regulation states:

Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.29 C.F.R. § 541.203(b).

The Department of Labor explained that the new regulation was sparked by growing litigation in the area and contrasted two threads of case law. On the one hand, some courts found that “employees who represent the employer with the public, negotiate on behalf of the company, and engage in sales promotion” were exempt from overtime requirements. 69 Fed.Reg.. 22,122, 22,145 (Apr. 23, 2004), citing Hogan v. Allstate Ins. Co., No. 02-15918, 2004 WL 362378 (11th Cir.2004); Reich v. John Alden Life Ins. Co., 126 F .3d 1 (1st Cir.1997); Wilshin v. Allstate Ins. Co., 212 F.Supp.2d 1360 (M.D.Ga.2002). On the other hand, the Department cited a Minnesota district court, which found that “employees who had a ‘primary duty to sell [the company’s] lending products on a day-to-day basis’ directly to consumers” were not exempt. 69 Fed.Reg.. 22,122, 22,145 (Apr. 23, 2004), quoting Casas v. Conseco Fin. Corp., No. Civ. 00-1512(JRT/SRN), 2002 WL 507059, at *9 (D.Minn.2002). The regulation thus helped to clarify the distinction between employees performing substantial and independent financial work and employees who merely sold financial products.

Opinion letters issued by the Department of Labor similarly recognize a variance in the types of work performed by employees within the financial industry, and explain why some financial employees are administrative while some perform production functions. In 2001, the Department stated that a loan officer who was responsible for creating a loan package to meet the goals of a borrower by “select[ing] from a wide range of loan packages in order to properly advise the client, … supervis[ing] the processing of the transaction to closing,” and “acquir[ing] a full understanding of the customer’s credit history and financial goals in order to advise them regarding the selection of a loan package that will fit their needs and ability” performed administrative work, although the opinion letter ultimately concluded that such loan officers were not exempt. Dep’t of Labor, Wage & Hour Div., Op. Letter (Feb. 16, 2001), available at 2001 WL 1558764.

Crucially, the 2001 opinion letter clarified an opinion letter issued in 1999 after the Department received more information about the loan officer’s duties. In 1999, the Department understood loan officers to develop new business for their employer, consult with borrowers to obtain the best possible loan package, work with a number of different lenders to select loan programs, and perform assorted services shepherding the loan to completion. See Dep’t of Labor, Wage & Hour Div., Op. Letter (May 17, 1999), available at 1999 WL 1002401. With that understanding of the loan officers’ duties, the Department concluded that the loan officers were “engaged in carrying out the employer’s day-to-day activities rather than in determining the overall course and policies of the business” and were therefore not employed as administrative employees. See id. While the 2001 letter reconsidered the loan officers’ employment and reached a different conclusion, the later letter noted that the reconsideration was “in light of the advisory duties [loan officers] perform on behalf of their employer’s customers,” which the employer clarified were the “primary duty” of a loan officer. See 2001 WL 1558764. The two letters read together thus provide a helpful point of reference, highlighting the importance of advisory duties as opposed to mere loan sales.

We thus turn to the job of underwriter at Chase to assess whether Whalen performed day-to-day sales activities or more substantial advisory duties. As an underwriter, Whalen’s primary duty was to sell loan products under the detailed directions of the Credit Guide. There is no indication that underwriters were expected to advise customers as to what loan products best met their needs and abilities. Underwriters were given a loan application and followed procedures specified in the Credit Guide in order to produce a yes or no decision. Their work is not related either to setting “management policies” nor to “general business operations” such as human relations or advertising, 29 C.F.R. § 541.2, but rather concerns the “production” of loans-the fundamental service provided by the bank.

Chase itself provided several indications that they understood underwriters to be engaged in production work. Chase employees referred to the work performed by underwriters as “production work.” Within Chase, departments were at least informally categorized as “operations” or “production,” with underwriters encompassed by the production label. Underwriters were evaluated not by whether loans they approved were paid back, but by measuring each underwriter’s productivity in terms of “average of total actions per day” and by assessing whether the underwriters’ decisions met the Chase credit guide standards.

Underwriters were occasionally paid incentives to increase production, based on factors such as the number of decisions underwriters made. While being able to quantify a worker’s productivity in literal numbers of items produced is not a requirement of being engaged in production work, it illustrates the concerns that motivated the FLSA. The overtime requirements of the FLSA were meant to apply financial pressure to “spread employment to avoid the extra wage” and to assure workers “additional pay to compensate them for the burden of a workweek beyond the hours fixed in the act.” Overnight Motor Transp. Co., Inc. v. Missel, 316 U.S. 572, 577-78 (1942), superseded by statute, Portal-to-Portal Pay Act of 1947, ch. 52, 61 Stat. 84 (granting courts authority to deny or limit liquidated damages awarded for violations of the FLSA). While in the abstract any work can be spread, there is a relatively direct correlation between hours worked and materials produced in the case of a production worker that does not exist as to administrative employees. Paying production incentives to underwriters shows that Chase believed that the work of underwriters could be quantified in a way that the work of administrative employees generally cannot.

We conclude that the job of underwriter as it was performed at Chase falls under the category of production rather than of administrative work. Underwriters at Chase performed work that was primarily functional rather than conceptual. They were not at the heart of the company’s business operations. They had no involvement in determining the future strategy or direction of the business, nor did they perform any other function that in any way related to the business’s overall efficiency or mode of operation. It is undisputed that the underwriters played no role in the establishment of Chase’s credit policy. Rather, they were trained only to apply the credit policy as they found it, as it was articulated to them through the detailed Credit Guide.

Furthermore, we have drawn an important distinction between employees directly producing the good or service that is the primary output of a business and employees performing general administrative work applicable to the running of any business. In Reich, for example, BCI Investigators “produced” law enforcement investigations. By contrast, administrative functions such as management of employees through a human resources department or supervising a business’s internal financial activities through the accounting department are functions that must be performed no matter what the business produces. For this reason, the fact that Whalen assessed creditworthiness is not enough to determine whether his job was administrative. The context of a job function matters: a clothing store accountant deciding whether to issue a credit card to a consumer performs a support function auxiliary to the department store’s primary function of selling clothes. An underwriter for Chase, by contrast, is directly engaged in creating the “goods”-loans and other financial services-produced and sold by Chase.

This conclusion is also supported by persuasive decisions of our sister circuits. In Bratt v. County of Los Angeles, the Ninth Circuit held that the “essence” of an administrative job is that an administrative employee participates in “the running of a business, and not merely … the day-to-day carrying out of its affairs.” 912 F.2d 1066, 1070 (9th Cir.1990) (internal quotations omitted). The Department of Labor later quoted that same language approvingly. See Dep’t of Labor, Wage & Hour Div., Op. Letter (Sept. 12, 1997), available at 1997 WL 971811. More recently, the Ninth Circuit expanded, “The administration/production distinction thus distinguishes between work related to the goods and services which constitute the business’ marketplace offerings and work which contributes to ‘running the business itself.’ “ Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 1127 (9th Cir.2002). The Third Circuit has also noted that production encompasses more than the manufacture of tangible goods. See Martin v. Cooper Elec. Supply Co., 940 F.2d 896, 903-04 (3d Cir.1991). In that case, telephone salespersons were given a pricing matrix specifying price quotes for specific goods as offered to specific customers. The salespersons had some authority to deviate from the price quotes, and occasionally also called manufacturers to restock items, negotiating the price of acquiring the item with the manufacturer. The salespersons were paid a fixed salary, but were also paid incentives tied to their sales performance. The Third Circuit held that the salespersons were production employees because the goal of the salespersons was “to produce wholesale sales.” Id. at 903 (emphasis in original). Along similar lines, the First Circuit held that marketing representatives charged with cultivating and supervising an independent sales force were exempt administrative employees, as their primary duties of educating and organizing salespeople were “aimed at promoting … customer sales generally,” not “routine selling efforts focused simply on particular sales transactions.” Reich v. John Alden Life Ins. Co., 126 F.3d at 10 (emphasis in original).

A number of district court opinions have drawn a similar distinction. See, e.g., Neary v. Metro. Prop. & Cas. Ins. Co., 517 F.Supp.2d 606, 614 (D.Conn.2007) (finding that a claims adjuster did not perform administrative work because he did not perform “duties clearly related to servicing the business itself: it could not function properly without employees to maintain it; a business must pay its taxes and keep up its insurance. Such are not activities that involve what the day-to-day business specifically sells or provides, rather these are tasks that every business must undertake in order to function.”); Relyea v. Carman, Callahan & Ingham, LLP, No. 03 Civ. 5580(DRH)(MLO), 2006 WL 2577829, at *5 (E .D.N.Y.2006) (“Like [escrow] closers …, Plaintiffs applied existing policies and procedures on a case-by-case basis. Their duties do not involve the crafting of those policies, but rather the application of those policies. As a result, Plaintiffs are better described as ‘production,’ rather than ‘administrative’ workers, and they are not exempt from FLSA.”); Casas, 2002 WL 507059, at *9 (finding that loan originators for a finance company who were “responsible for soliciting, selling and processing loans as well as identifying, modifying and structuring the loan to fit a customer’s financial needs” were “primarily involved with ‘the day-to-day carrying out of the business’ rather than ‘the running of [the] business [itself]’ or determining its overall course or policies” (quoting Bratt, 912 F.2d at 1070)); Reich v. Chi. Title Ins. Co., 853 F.Supp. 1325, 1330 (D.Kan.1994) (finding escrow closers employed by a company engaged in the business of insuring title for real property to be engaged in a production rather than administrative capacity).

Other out-of-circuit cases similarly support the logic that context matters. An employee whose job is to evaluate credit who works in the credit industry is more likely to perform a production job. See Casas, 2002 WL 507059, at *9 (loan officers for bank are production); Relyea, 2006 WL 2577829, at *5 (loan closers are production); Reich v. Chi. Title Ins. Co., 853 F.Supp. at 1330. Employees who evaluate and extend credit on behalf of a company that is not in the credit industry-extending credit in order to allow customers to purchase a tangible good that the employer manufactured, for example-are generally considered administrative employees. See Hills v. W. Paper Co., 825 F.Supp. 936 (D.Kan.1993) (employee extended credit to customers of company manufacturing paper); Reich v. Haemonetics, 907 F.Supp. 512 (D.Mass.1995) (employee involved in extending credit to customers of company that sold equipment to hospitals). But in the context of such businesses, such employees provide adjunct, general services to the overall running of the business, while at Chase, underwriters such as Whalen are the workers who produce the services-loans-that are “sold” by the business to produce its income.

Chase offers a few out of circuit cases suggesting that underwriters are exempt administrative employees, but the cases are distinguishable on their facts. See, e.g., Edwards v. Audobon Ins. Group Co., No. 3:02-CV-1618-WS, 2004 WL 3119911, at *5 (S.D.Miss. Aug. 31, 2004) (finding an underwriter who “decide[d] what risks the company would take and at what price” an exempt administrative employee); Callahan v. Bancorpsouth Ins. Servs. of Miss., Inc., 244 F.Supp.2d 678, 685-86 (S.D.Miss.2002) (finding manager responsible for overseeing all aspects of employer’s operations, including marketing, billing and collections, and underwriting, was administrative employee); Hippen v. First Nat’l Bank, Civ. A. No. 90-2024-L, 1992 WL 73554, at *7 (D.Kan. Mar. 19, 1992) (finding executive vice president of bank who described himself as “number two” in hierarchy and was member of board of directors to be administrative employee); Creese v. Wash. Mut. Bank, No. B193931, 2008 WL 650766, at *8 (Cal.Ct.App.2008) (noting specifically that lower court determination as to class certification did not address the merits of whether underwriters seeking to challenge exempt classification were administrative employees). In virtually all of these cases, the employee in question exercised managerial tasks beyond assessing credit risk, or assessed risks in a firm whose primary business was not the extension of credit, and the result is therefore not in tension with the analysis offered here. In any event, to the extent that the reasoning, language, or result in any of these cases is not consistent with our analysis, we respectfully disagree.

Accordingly, we hold that Whalen did not perform work directly related to management policies or general business operations. Because an administrative employee must both perform work directly related to management policies or general business operations and customarily and regularly exercise discretion and independent judgment, we thus hold that Whalen was not employed in a bona fide administrative capacity. We need not address whether Whalen customarily and regularly exercised discretion and independent judgment.”

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N.D.Cal.: Damages In A Salary Misclassification Case Must Be Calculated At Time And A Half; Fluctuating Workweek Not Applicable Without “Clear Mutual Understanding” And/Or Contemporaneous Payments Of Overtime

Russell v. Wells Fargo and Co.

This case was before the Court on the parties’ partial Cross Motions for Summary Judgment, regarding the methodology to be applied to determine damages where, as here, an employee is misclassified and paid solely their weekly salary, despite the fact they work overtime hours.  The Plaintiffs asserted that they were due the default time and a half (1.5x) under the FLSA, but the Defendant argued that Plaintiffs’ damages should be calculated under the exception to the default rule, referred to as the Fluctuating Workweek (FWW), whereby they would receive so-called half-time in lieu of time and a half.  In a detailed well-reasoned decision, the Court agreed with the Plaintiffs, and determined that Plaintiffs were due time and a half for all overtime hours worked, because Defendant could not meet several of the elements required for the application of the FWW.

The Court framed the following 3 issues for resolution on the Motions:

“1. Whether it is possible to have the required “clear mutual understanding” necessary to compute damages by the fluctuating workweek method (FWW method) in an exempt/non-exempt misclassification case;

2. Whether the concurrent payment of overtime pay is a required element to compute unpaid overtime by the FWW method, such that the FWW method of overtime calculation cannot be used in an exempt/non-exempt misclassification case; and

3. Whether damages (if any) on the FLSA overtime claim of an opt-in plaintiff who resides in California or Connecticut can be computed by the FWW method.”

Denying Defendant’s Motion seeking to apply the FWW, and granting Plaintiffs’ Motion to apply the time and a half default standard, for calculating Plaintiffs’ damages, the Court explained:

“Defendants argue that the FWW method can be used to calculate overtime pay retroactively for the purposes of determining damages in an exempt misclassification case. They assert that the FWW method is available when the employer and employee have a clear mutual understanding that a fixed salary will compensate the employee for all hours worked in a week, including those in excess of the FLSA’s forty-hour maximum, even if the “understanding” is based on the employer’s erroneous premise that the employee is exempt and thus not entitled to overtime pay. Defendants’ argument is untenable. The FWW method cannot be used to calculate overtime pay retroactively in a misclassification case.

As noted above, section 778.114 contains legal prerequisites, which employers must first satisfy to use the discounted overtime rate available through the FWW method. These prerequisites include (1) a clear mutual understanding that a fixed salary will be paid for fluctuating hours, apart from overtime premiums; and (2) the contemporaneous payment of overtime premiums.

When an employee is not exempt and is paid a fixed salary for fluctuating hours, the employer can satisfy these prerequisites. The employer and employee must have a clear mutual understanding of the fixed salary which, by law, must include an understanding that an overtime premium will be paid for any hours worked over the forty-hour-per-week maximum. Because both parties understand that overtime hours will be compensated, overtime pay would be provided contemporaneously.

When an employee is treated as exempt from being paid for overtime work, there is neither a clear mutual understanding that overtime will be paid nor a contemporaneous payment of overtime. Thus, when an employee is erroneously classified as exempt and illegally not being paid overtime, neither of these legal prerequisites for use of the FWW method is satisfied.

First, an effective clear mutual understanding is absent in misclassification cases. Defendants assert that an employer could have a clear mutual understanding with its employees that the employees would be paid a flat weekly rate for fluctuating hours, including those hours worked in excess of forty, and would not receive overtime pay. Defendants essentially argue that misclassified employees have implicitly agreed not to receive their FLSA entitlement to overtime pay. This would be illegal. Employees cannot agree to waive their right to overtime pay. See Barrentine v. Arkansas-Best Freight Sys., Inc., 450 U.S. 728, 739-40 (1981).

Second, because the employees were erroneously classified as exempt, overtime compensation was not provided contemporaneously. Employers cannot satisfy this requirement, after having been found to violate section 207, by claiming that they had intended to pay overtime; such an after-the-fact provision of overtime compensation was rejected by the Supreme Court in Overnight Motor. See 316 U .S. at 581 (rejecting the employer’s attempt to use FWW method where there was “no provision for additional pay in the event the hours worked required minimum compensation greater than the fixed wage”). As stated above, 29 C.F.R. § 778.114(c) requires contemporaneous overtime pay: the FWW method cannot be used “where all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for nonovertime hours.” 29 C.F.R. § 778.114(c). In a misclassification case, because employees have not been paid overtime premiums, they are compensated for those hours worked more than forty at a rate not greater than the regular rate.

If Defendants’ position were adopted, an employer, after being held liable for FLSA violations, would be able unilaterally to choose to pay employees their unpaid overtime premium under the more employer-friendly of the two calculation methods. Given the remedial purpose of the FLSA, it would be incongruous to allow employees, who have been illegally deprived of overtime pay, to be shortchanged further by an employer who opts for the discount accommodation intended for a different situation.

In making its decision here, the Court is “mindful of the directive that the [FLSA] is to be liberally construed to apply to the furthest reaches consistent with Congressional direction.” Klem v. County of Santa Clara, 208 F.3d 1085, 1089 (9th Cir.2000) (quoting Biggs v. Wilson, 1 F.3d 1537, 1539 (9th Cir.1993)) (quotation marks and alterations omitted).

The Ninth Circuit has not directly addressed the question of whether the FWW method may be used retroactively to compensate employees who have been misclassified as exempt.FN4 In Oliver v.. Mercy Medical Center, the court concluded that the FWW method could not be used to calculate liquidated damages pursuant to 29 U.S .C. § 216, in part because the plaintiff-employee and the defendant-employer did not agree to a fixed salary covering all hours worked in a week. See 695 F.2d 379, 381 (9th Cir.1982). Oliver confirms that an employer and employee must, at the least, agree to a fixed salary for fluctuating hours. But its holding does not address whether the FWW method can be applied retrospectively to calculate overtime pay in a misclassification case. To the extent the holding is silent on this point, there is no binding Ninth Circuit precedent.

In Bailey v. County of Georgetown, 94 F.3d 152 (4th Cir.1996), non-exempt employees challenged their employer’s use of the FWW method to calculate their overtime pay. Instead of compensating overtime at the time-and-a-half rate, the employer opted for the FWW method and paid a one-half time premium based on fluctuating hours. Id. at 153-54. The employees claimed that this was improper, arguing that the FWW method could only apply if it was shown that they “clearly understood the manner in which their overtime pay was being calculated under the plan.” Id. at 154. The court disagreed. The Fourth Circuit determined that neither the plain language of the FLSA nor section 778.114 required an understanding on how overtime would be calculated; according to the court, all that section 778.114 requires is a clear mutual understanding of a fixed salary for fluctuating hours. Id. at 156-57. The court provided no additional analysis. And because the case involved non-exempt employees who were paid overtime, the court had no occasion to address whether contemporaneous overtime pay was a requirement.

Thus, Bailey did not address remedial payment to misclassified employees. Nonetheless, the First and Tenth Circuits applied its rule to misclassification cases. See, e.g., Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir.2008); Valerio v. Putnam Associates, 173 F.3d 35 (1st Cir.1999). In Clements and Valerio, the courts held that the FWW method can be used to calculate overtime pay retroactively. But Clements and Valerio merely cite Bailey. Neither provides a substantive analysis or explains why Bailey should apply in the misclassification context. See Clements, 530 F.3d at 1230; Valerio, 173 F.3d at 40. The Fourth Circuit similarly applied Bailey’s interpretation of section 778.114 in the misclassification context without analysis. See Roy v. County of Lexington, South Carolina, 141 F.3d 533, 547 (4th Cir.1998). In Blackmon v. Brookshire Grocery Company, the Fifth Circuit applied the FWW method in a misclassification case. 835 F.2d 1135, 1138 (5th Cir.1988). Blackmon, like the other cases above, offers no explanation. See 835 F.2d at 1138-39.

District courts outside these circuits have held that the FWW method cannot be used in misclassification cases. In Rainey v. American Forest & Paper Association, the court analyzed section 778.114 and found that its requirements include a clear mutual understanding that the employee is entitled to overtime compensation and contemporaneous payment of overtime premiums. 26 F.Supp.2d 82, 99-102 (D.D.C.1998); see also Hunter v. Sprint Corp., 453 F.Supp.2d 44, 58-62 (D.D.C.2006) (discussing application of the FWW method in a misclassification case). Other courts have rejected the use of the FWW method in misclassification cases because there is no contemporaneous payment of overtime compensation in such cases. See, e.g., Cowan v. Treetop Enters., 163 F.Supp.2d 930, 941 (M.D.Tenn.2001) (citing Rainey ); Scott v. OTS Inc., 2006 WL 870369, *12 (N.D.Ga.) (citing Rainey ).

Defendants reject many of the other cases cited by Plaintiffs because “they are not in the exemption misclassification context.” Defs.’ Reply at 12. However, Bailey, the case relied upon by most of the cases cited by Defendants, was likewise not in the exemption misclassification context. Thus, Defendants’ argument undermines their reliance on Valerio, Clements and Roy. Accordingly, the Court does not follow Bailey and its progeny: Bailey is not on point, and the cases that rely on it are not persuasive.

The Court is similarly unpersuaded by the DOL’s January 14 letter. Generally, courts must defer to the expertise of an agency in interpreting statutes that Congress charged to administer. See Cent. Ariz. Water Conservation Dist. v. EPA, 990 F.2d 1531, 1539-40 (9th Cir.1993) (citing Chevron U.S.A., Inc. v. Nat’l Res. Def. Council, 467 U.S. 837 (1984)). However, opinion letters do not warrant such deference; under Skidmore v. Swift, 323 U.S. 134, 140 (1944), they are to be accorded respect, not deference. An opinion letter is entitled to respect to the extent that it has the “power to persuade.” See Christensen v. Harris County, 529 U.S. 576, 587 (2000).

The opinion letter does not explain why the FWW method should be applied retrospectively, despite the plain language of the DOL’s long-standing interpretation of the FLSA contained in § 778.114. The letter relies solely upon Clements and Valerio to explain the DOL’s new position, and it goes no further to detail why the DOL was departing from its forty-year-old interpretation. Given the DOL’s significant change in course, this explanation is insufficient. Further, the DOL’s prior abandoned effort to revise § 778.114(a) through notice-and-comment rulemaking, and the timing of the opinion letter’s release-less than one week before a change in the administration-detract from its persuasiveness. Deferring to the letter “would permit the agency, under the guise of interpreting a regulation, to create de facto a new regulation.” Christensen, 529 U.S. at 588. The DOL cannot use the letter to make a substantive regulatory change that would have the force of law. See id. at 587. The letter lacks thoroughness in its explanation and consistency with the DOL’s earlier FLSA interpretation. The Court is not persuaded by it. See id. (citing Skidmore, 323 U.S. at 140).

Thus, the background and policy of the FLSA, the Supreme Court’s decision in Overnight Motor and the DOL’s 1968 interpretive rules demonstrate that the FWW method cannot be used to calculate overtime pay retroactively for the purposes of determining damages under the FLSA in a misclassification case. Section 778.114, which the DOL promulgated in light of Overnight Motor, provides legal prerequisites that cannot be satisfied in a misclassification case.

CONCLUSION

For the foregoing reasons, the Court interprets § 778.114 to restrict application of the FWW method to calculate overtime pay to situations where (1) there is a clear mutual understanding between an employer and employee that the employee will be paid a fixed salary for fluctuating weekly hours but nonetheless receive overtime premiums and (2) overtime is compensated contemporaneously. The Court therefore DENIES Defendants’ motion for partial summary judgment and GRANTS Plaintiffs’ cross-motion for partial summary judgment on the first and second stipulated legal issues. Based upon these holdings, the Court need not decide the third stipulated issue. Accordingly, the Court DENIES as moot Defendants’ and Plaintiffs’ motions for partial summary judgment on the third stipulated legal issue.”

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2d. Cir.: Employee Is Not Professionally Exempt Unless His Work Requires Knowledge Customarily Acquired After A Prolonged Course Of Specialized, Intellectual Instruction And Study

Young v. Cooper Cameron Corp.

The U.S. District Court for the Southern District of New York held on summary judgment that, as a matter of law, plaintiff, a “Product Design Specialist,” was not subject to the “professional exemption” to the overtime requirements of the Fair Labor Standards Act.  Defendant appealed and the Second Circuit affirmed, holding that an employee is not an exempt professional unless his work requires knowledge that is customarily acquired after a prolonged course of specialized, intellectual instruction and study.

Describing the relevant facts and the holding below, the Court stated, “Young is a high school graduate. He enrolled in some courses at various universities, but did not obtain a degree. Before he was hired by Cameron, he worked for 20 years in the engineering field as a draftsman, detailer, and designer. He was a member of the American Society of Mechanical Engineers, a membership that required the recommendation of three engineers. For three of the 20 years, Young worked with what are known as hydraulic power units (“HPUs”).

In the spring of 2001, Young applied for a job with Cameron, and he was offered the position of Mechanical Designer in the HPU group. This position paid an hourly wage of $26 and was classified as non-exempt under the FLSA. Young, seeking higher pay, declined.

Soon after, Young met again with Cameron. This time, Cameron offered to hire him as a PDS II-a position that Cameron had determined, through multiple internal and external analyses, was exempt from the FLSA’s overtime provisions. This job paid an annual salary of $62,000 (an effective hourly wage of $29.81). Applicants were required to have twelve years of relevant experience; but no particular kind or amount of education was required, and no PDS II had a college degree. Young accepted Cameron’s offer on July 23, 2001, understanding that the position was exempt from the FLSA’s overtime provisions. For his three-year tenure at Cameron, Young worked as a PDS II in the HPU group.

HPUs contain fluid under pressure for use in connection with oil drilling rigs. They are large and complex, and they are subject to a variety of industry standards, codes, and government specifications. Young was the principal person in charge of drafting plans for HPUs. This work required depth of knowledge and experience, and entailed considerable responsibility and discretion. For example, Young assimilated layers and types of specifications into a safe, functional, and serviceable design that met consumer demands, engineering requirements, and industry standards. Young personally selected various structural components of the HPU and modified certain specifications to account for new technology. In these ways, Young operated at the center of both the conceptual and physical processes of HPU creation and development.

On August 2, 2004, after losing his job in a reduction-in-force, Young sued Cameron in federal court, alleging that Cameron had improperly and willfully classified him as an exempt professional. The district court, adopting a report and recommendation from the magistrate judge (Gorenstein, M.J.), granted partial summary judgment to Young on the exemption issue. The court held as a matter of law that the work of a PDS II is ‘not of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study.’ “

Affirming the lower Court’s Order finding Plaintiff not subject to the professional exemption, the Court stated:

“The typical symbol of the professional training and the best prima facie evidence of its possession is, of course, the appropriate academic degree, and in these professions an advanced academic degree is a standard (if not universal) prerequisite.” 29 C.F.R. § 541.301(e)(1). So it is not the case that “anyone employed in the field of … engineering … will qualify for exemption as a professional employee by virtue of such employment.” Id. § 541.308(a). At the same time, “the exemption of [an] individual depends upon his duties and other qualifications.” Id. “The field of ‘engineering’ has many persons with ‘engineer’ titles, who are not professional engineers, as well as many who are trained in the engineering profession, but are actually working as trainees, junior engineers, or draftsmen.” Id. § 541.308(b). Thus “technical specialists must be more than highly skilled technicians” to be eligible for the professional exemption. Id. § 541.301(e)(2); see also id. (“The professional person … attains his status after a prolonged course of specialized intellectual instruction and study.”).

As the Secretary interprets the regulations, a three-part test determines whether an employee has the type of knowledge sufficient to qualify as an exempt professional. First, the employee’s “knowledge must be of an advanced type … generally speaking, it must be knowledge which cannot be attained at the high school level.” 29 C.F.R. § 541.301(b). Second, the knowledge must be in a field of science or learning. Id. § 541.301(c). Third, the knowledge “must be customarily acquired by a prolonged course of specialized intellectual instruction and study.” Id. § 541.301(d). The word “customarily” is key:

The word ‘customarily’ implies that in the vast majority of cases the specific academic training is a prerequisite for entrance into the profession. It makes the exemption available to the occasional lawyer who has not gone to law school, or the occasional chemist who is not the possessor of a degree in chemistry, etc., but it does not include the members of such quasi-professions as journalism in which the bulk of the employees have acquired their skill by experience rather than by any formal specialized training. Id.

It is uncontested that the job of a PDS II requires no formal advanced education. The issue is whether a position can be exempt notwithstanding the lack of an educational requirement, if the duties actually performed require knowledge of an advanced type in a field of science or learning. Cameron argues for a stand-alone “duties test” independent from any educational considerations. Young argues, and the district court held, that if advanced and specialized education is not customarily required, the exemption cannot apply, regardless of the employee’s duties.

We agree with Young and the district court. The regulations state that a professional is someone “[w]hose primary duty consists of the performance of [w]ork requiring knowledge of an advance type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study. 29 C.F.R. § 541.3(a)(1) (emphasis added). As noted above, “customarily” in this context makes the exemption applicable to the rare individual who, unlike the vast majority of others in the profession, lacks the formal educational training and degree. But where most or all employees in a particular job lack advanced education and instruction, the exemption is inapplicable: hence, the Secretary’s interpretation advising that “members of such quasi-professions as journalism in which the bulk of the employees have acquired their skill by experience rather than by any formal specialized training” are not properly considered exempt professionals. See 29 C.F.R. § 541.301(d).

We therefore hold that an employee is not an exempt professional unless his work requires knowledge that is customarily acquired after a prolonged course of specialized, intellectual instruction and study. If a job does not require knowledge customarily acquired by an advanced educational degree-as for example when many employees in the position have no more than a high school diploma-then, regardless of the duties performed, the employee is not an exempt professional under the FLSA.

With these principles in mind, it is clear that Young is not exempt. The undisputed evidence is that the PDS II position required no advanced educational training or instruction and that, in fact, no PDS II had more than a high school education.

Two sister courts have issued persuasive opinions on this subject. In Vela v. City of Houston, 276 F.3d 659, 675 (5th Cir.2001), the only decisive factors were education and discretion (the exercise of professional judgment on the job). On that basis, the court distinguished emergency medical technicians and paramedics (who are not required to have college degrees) from nurses and athletic trainers (who are so required). Id. (explaining that EMTs and paramedics are not exempt professionals because they “lack the educational background to satisfy the education prong of the Learned Professional exemption”).

In Fife v. Harmon, 171 F.3d 1173, 1177 (8th Cir.1999), the minimum qualifications for the plaintiffs’ position as Airfield Operation Specialists were “a Bachelor’s degree in aviation management or a directly related field, or four years of full-time experience in aviation administration, or an equivalent combination of experience and education.” The court held the exemption inapplicable: “This is advanced knowledge from a general academic education and from an apprenticeship, not from a prolonged course of specialized intellectual instruction.” Id. (internal quotation marks omitted). The court did not separately consider the nature of the plaintiffs’ duties.

Other cases similarly tie the exemption analysis to the academic requirements of the position at issue. See, e.g., Reich v. Wyoming, 993 F.2d 739, 743 (10th Cir.1993) (concluding that game wardens are subject to the professional exemption because they must have a degree in wildlife management, biology, or a similar field); Dybach v. Fla. Dep’t of Corr., 942 F.2d 1562, 1566 (11th Cir.1991) (“Dybach’s position [as a probation officer] did not rise to the level of a section 213(a)(1) [exempt] professional because it did not require a college or an advanced degree in any specialized field of knowledge.”).

Finally, the case law advanced by Cameron is neither binding on this Court nor inconsistent with our conclusion. Some of these cases either misapply (or ignore altogether) the requirement that the plaintiff’s knowledge be of the type customarily acquired by a prolonged course of advanced intellectual study. See Debejian v. Atl. Testing Labs., Ltd., 64 F.Supp.2d 85, 88 (N.D.N.Y.1999); Stevins v. Provident Constr. Co., No. 04-15189, 137 Fed.Appx. 198, 199 (11th Cir. Apr. 18, 2005). Another case cited by Cameron provides minimal justification for its holding. See Dingwall v. Friedman Fisher Assocs., P.C., 3 F.Supp.2d 215, 218 (N.D.N.Y.1998) (holding, without explanation, that designing electrical systems is “clearly an area requiring advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study”).

On the basis of the foregoing, we conclude that, as a matter of law, Young was not an exempt professional because he did not do work which required knowledge customarily acquired by a prolonged course of advanced intellectual study.”

Therefore, the Court affirmed the lower Court’s ruling that Plaintiff, who lacked a prolonged course of specialized, intellectual instruction and study, was not professionally exempt.

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E.D.La.: Notwithstanding The Use Of A 212 Hour Month In Collective Bargaining Agreement (CBA), City Failed To Provide Adequate Proof It Adopted A 28-day Work Period As Required For § 207(k) Exemption

Miley v. City of Bogalusa

Fire suppression and prevention employees of the City of Bogalusa (the City) filed a complaint against the City to recover overtime, liquidated damages, and attorney’s fees, pursuant to the FLSA.  The firefighters work a three-day cycle (one day on duty and two days off), their pay schedule is bi-monthly on the fifteenth and last day of the month, and the pay periods vary in length.  The City pays a flat 12 hours of overtime pay monthly.  The firefighters alleged that they routinely work in excess of the basic overtime threshold of 40 hours in a workweek. They sought overtime pay at the rate of one and one-half times the regular rate of pay for all hours worked in excess of 40 hours in a workweek.  Alternatively, assuming that a seven-day work cycle has been adopted by the City, the plaintiffs alleged that they are entitled to full overtime for all hours worked beyond 60 hours in a work week.  The threshold issue before the Court was whether the City had properly adopted a 28-day work period as required to assert their exemption under § 207(k).  As discussed below, the Court held they had not.

Discussing the 207(k) exemption, the Court stated, “[t]here is no dispute that the City is eligible for the exemption under § 207(k) as a local government that provides vital public services. The parties agree that there are no disputed issues of material fact, and the question is whether the City adopted the seven day or 28-day work period to qualify for the exemption.

The plaintiffs contend that the City has not opted for the overtime exemption under § 207(k), and the regular overtime provisions of § 207(a) apply, requiring an employer to pay overtime compensation at a rate of one and one half times the regular rate after the employee has worked more than 40 hours in a week. Moreover, the plaintiffs contend that the City provided no statement or announcement that it has adopted any seven to 28-day period. The plaintiffs agree that the adoption of a particular work period necessary to come under the exemption of § 207(k) does not have to be formal or express if the City can demonstrate adoption by its actions. See Singer v. City of Waco, Tex., 324 F.3d at 819 (a municipality can establish a particular work period by demonstrating that it actually pays its fire fighters in accordance with the longer work period).

The City argues that it set out a 28-day work period, as evidenced by the reference to an hourly scale based on 212 hours per month, when negotiating the collective bargaining agreement. It further argues that it paid its firefighters through a formula in accordance with the collective bargaining agreement for the past twenty years.

The Bogalusa Professional Firefighters Association-Local No. 687-AFL-CIO entered a collective bargaining agreement with the City on April 19, 1989. Article IV addresses the “Hours of Work” for firefighters as follows:

The normal working hours shall be twenty-four hours on and forty-eight hours off and shifts shall be arranged and working assignments made in accordance with this schedule. As these working hours which were requested by the Union and have been in effect for a number of years result in at least one out of every three work weeks being in excess of the sixty hours provided by law, the Union, on behalf of its members, does hereby waive any overtime pay for any hours of work in excess of sixty hours per calendar week resulting from this working schedule and have requested each employee to personally execute a waiver of overtime to this extent.  However, any firefighter called back to work other than pursuant to a regular shift shall be paid overtime at the rate of one and one-half times his usual salary to be determined by reducing his average monthly salary to an hourly scale, based on 212 hours per month and to include State Supplementary Pay; all in addition to his regular monthly salary.

Dale Branch, the City attorney, represented the City in negotiating the collective bargaining agreement. He opined that the City had adopted the 28-day work period by its payroll-calculation practice for the past 20 years, and that the formula used to calculate overtime pay was designed to comply with the FSLA and its state counterpart, Louisiana Revised Statute 33:1994, based on a 28-day work period. Def. exh. C at 43, 49. He admitted that he does not know the origin of the formula, nor when it was implemented, and that he knows of no other document or other indication of the adoption of a work period by the City.

Patty Sandifer, a City payroll computer operator, testified in her deposition that Bogalusa firefighters work 240 hours a month, consisting of ten, twenty-four hour shifts. On the 15th of the month, firefighters are paid for 120.01 hours. At the end of the month, the firefighters receive regular pay and additional compensation for setup, shift differential, overtime, and contract overtime.

In order to calculate overtime pay, Sandifer applies a formula, which the City has used for over 20 years. Sandifer begins with the firefighter’s base salary from a salary schedule and adds a state monthly supplement to obtain a monthly salary. The monthly salary is divided by 212 to provide the monthly rate per hour. Sandifer then subtracts the hourly state supplemental from the monthly rate to obtain the base hourly rate. The base hourly rate is used to calculate any overtime payment that is due. The base hourly rate is multiplied by 2880, which represents the firefighter’s annual hours (12 x 240). The resulting amount is the annual overtime salary. Sandifer has no idea where the number 212 originated other than that it is the monthly hours used for figuring overtime.

In this case, the City has provided no statement or announcement that it has adopted a 28-day work period for § 207(k) purposes. The firefighters worked a three-day cycle of 24 hours on and 48 hours off and were paid twice a month. The use of 212 hours referenced in the collective bargaining agreement to calculate the overtime without more is insufficient to establish a 28-day work period. Further, the 212 reference is contained in a sentence which applies to “any firefighter called back to work other than pursuant to a regular shift” and is not applicable to the overtime hours at issue. Accordingly, the City has not carried its burden of proving it adopted a 28-day work period.

Alternatively, the City argues that it is entitled to an exemption using the seven-day work period. In support of the argument, the City relies on the testimony of its experts, Don Strobel and Karen Clampitt that firefighter are entitled to overtime only after 53 hours a week, even if a work period is not adopted under § 207(k), because the Department of Labor does not require that the City “revert back to a 40-hour work week.”

The plaintiffs filed a motion in limine to exclude the testimony of Don Strobel and Karen K. Clampitt, pursuant to Federal Rules of Evidence 702 and 704. They argue that the expert opinions are impermissible legal conclusions that there is no violation of the FLSA and do not assist the court in determining the facts.

Federal Rules of Evidence 702 and 704 govern the admissibility of expert testimony. Rule 702 provides:

If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.

Rule 704 provides:

Opinion on Ultimate Issue

(a) Except as provided in subdivision (b), testimony in the form of an opinion or inference otherwise admissible is not objectionable because it embraces an ultimate issue to be decided by the trier of fact.

(b) No expert witness testifying with respect to the mental state or condition of a defendant in a criminal case may state an opinion or inference as to whether the defendant did or did not have the mental state or condition constituting an element of the crime charged or of a defense thereto. Such ultimate issues are matters for the trier of fact alone.

The motion in limine to exclude the testimony is denied, and the court will consider the expert testimony offered by the City.

The experts opine that the Department of Labor takes the position that, if someone is engaged in firefighting and they meet the duty test, then they can only go down to the 53 hours a week without compliance with the § 207(k) exemption. They opine that firefighters would be entitled to overtime after 53 hours, not 40 hours, even if they “had never heard” of § 207(k).

The experts base their opinion on their experience in the Department of Labor, but do not explain the basis of their opinion or present documents, cases, opinion letters, or regulations upon which they rely. When asked in the deposition to point to a regulation that provides for a default to 53 hours if the City does not establish an exemption, Strobel stated that he did not think it appeared in the regulations, the field office handbook, or an internal document. Clampitt stated in her deposition that she did not rely on any regulation, but just her “working knowledge of the law.”

The opinions of the experts do not establish that the City is entitled to a “default” work period of seven days. Other than the opinion of the experts, the City offers no evidence to carry its burden of establishing that it adopted a seven-day work period.

Accordingly, the City has not carried its burden of establishing that it qualifies for the exemption by adopting either a seven or 28-day work period. Therefore, the City is not entitled to the partial overtime exemption under § 207(k). The case will proceed to trial on the issues whether the terms of the collective bargaining agreement limiting overtime to twelve hours a month should be enforced; what, if any, amount the firefighters are owed as overtime compensation; whether the City is entitled to a set off for overtime that it has paid; and whether the City acted in good faith in its payment of overtime.

Accordingly, there are no disputed issues of material fact, and the plaintiffs are entitled to judgment as a matter of law. The plaintiffs’ motion for summary judgment is granted, and the City’s cross-motion for summary judgment is denied.”

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Tyson Foods Found In Violation Of Fair Labor Standards Act In Donning And Doffing Suit, Reuters Reports

Reuters is reporting that “Tyson Foods Inc., one of the nation’s largest poultry producers, has been found in violation of the Fair Labor Standards Act (FLSA) at its Blountsville, Ala., facility.  The jury’s verdict in federal court in Birmingham resulted from a lawsuit filed by the U.S. Department of Labor against the company…

The Department of Labor’s lawsuit was filed in the U.S. District Court for the Northern District of Alabama.  The federal department alleged that Tyson Foods did not keep accurate records and failed to pay production line employees for the time they spend donning and doffing safety and sanitary gear, and performing other related work activities.  The violations cover the period from the year 2000 to the present and affect approximately 3,000 current and former workers at the plant.

The initial investigation began in April 2000 as part of the department’s Wage and Hour Division’s poultry enforcement initiative.  The Labor Department filed the district court complaint in May 2002 following the company’s failure to comply with the law and to pay back wages.  The first jury trial, which began in February 2009, ended in a mistrial.  The Labor Department chose to pursue a second trial in August 2009 to secure a ruling that Tyson was failing to compensate its employees lawfully.”

To read the full story go to Reuters’ website.

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