First Circuit’s Administrative Exemption Decision Could Maintain the Availability for the Administrative Exemption for Some So-Called “Sales” Employees

On November 28, 2011, the U.S. Court of Appeals for the First Circuit issued a decision in Hines v. State Room, Inc. finding that sales managers for a Boston banquet facility were exempt from overtime under the Fair Labor Standards Act's ("FLSA") administrative exemption. The case is certain to become a key precedent for employers in two ways. First, it aids employers in arguing that employees in sales-related job positions meet the "duties test" for the administrative exemption. Second, the case clarifies that the discretion and independent judgment analysis necessary for application of the administrative exemption should not be unnecessarily rigid.

Production vs. Administrative Work

The court determined that the plaintiffs' job functions – which included working with clients to design customized weddings and other events and securing contracts for those events, as well as selling banquet services to customers – were properly considered administrative because they were ancillary to the employer's principal business function of actually providing banquet services. In doing so, the First Circuit implicitly rejected the position taken by the Department of Labor's Wage and Hour Division ("DOL") and some courts that performing sales work places an employee on the non-exempt side of the so-called "production vs. administrative" or "ancillary" dichotomy of the administrative exemption.

The DOL's position in this regard is summarized in its controversial Administrator's Interpretation No. 2010-1 issued on March 24, 2010 concerning the exempt status of mortgage loan officers (found at: http://www.dol.gov/WHD/opinion/adminIntrprtn/FLSA/2010/FLSAAI2010_1.pdf). In that Interpretation, the DOL opined that the typical duties of mortgage loan officers lead to the conclusion that their primary duty is making sales. Once it reached that conclusion, it further reasoned that because companies employing mortgage loan officers have a primary business purpose of designing, creating, and selling home lending products, the sale of a home mortgage by those employees is "production" work that is ineligible for the administrative exemption.

The DOL's reasoning is based on the requirement that administrative exempt employees, among other things, have a primary duty of "the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers." 29 C.F.R. § 541.200(a)(2). "To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment." 29 C.F.R. § 541.201(a) (emphasis added). The DOL's Interpretation reasons that "a careful examination of the law as applied to the mortgage loan officers' duties demonstrates that their primary duty is making sales and, therefore, mortgage loan officers perform the production work of their employers."

This Interpretation, to which some courts have deferred to at least some extent, potentially narrows the administrative exemption. First, it defines the sales function as part of a company's core function. A mortgage company exists not only to design and create home lending products, but also to sell them. A pharmaceutical company exists not just to research, development, and manufacture drugs and therapies, but also to sell them. A banquet company exists not merely to prepare and provide banquets, but also to sell banquets. A widget company's main purpose is not just to make widgets, but also to sell them. Second, because work on a business' core function is "production" work in the view of the DOL, the DOL's Interpretation then equates sales with production work that is ineligible for the administrative exemption. This narrow interpretation, the reasoning of which is not limited to mortgage loan officers - is particularly harmful for employers because it more conducive to both collective and class certification and to summary judgment than the often factually-intensive "discretion and independent judgment" prong of the administrative exemption (discussed below).

The First Circuit in Hines, however, takes a far less mechanistic reading of the administrative exemption. It does not equate sales with a company's function. Rather, it limits the definition of the banquet companies' principal business as "providing banquets." As to sales, the court reasoned that "[t]he sales aspect of the defendants' businesses, although necessary to their success, is clearly ancillary to the principal function of actually providing the banquet services themselves." Indeed, virtually every business includes a sales function. Without sales, a business has no revenue, and thus no way to stay in business. The First Circuit in Hines correctly acknowledged that just because sales are necessary to success, they do not therefore become the company's principal business for purposes of the administrative exemption. Thus, under the First Circuit's reasoning, and in contrast to the DOL's view, a widget maker's principal business for administrative exemption purposes is to make widgets, not to sell them (or a law firm's principal business is to represent and advise its clients on legal matters, not to sell legal services to clients). And therefore, sales work is not necessarily production work. By de-linking sales from a company's principal business, the First Circuit makes the administrative exemption potentially available to employees whose primary duty arguably is sales.

Discretion and Independent Judgment

Showing that an employee performs work "directly related to the management or general business operations of the employer" does not necessarily mean that an employee is exempt. The employee must also have a primary duty that "includes the exercise of discretion and independent judgment with respect to matters of significance." 29 C.F.R. § 541.200(a)(3). Hines is significant on this prong of the administrative exemption as well. In this regard, the court found that the sales manager job involved the exercise of independent judgment and discretion because acting as the face of the company and "engaging potential clients and assisting them in selecting from various options from the employers' offerings" required "invention, imagination and talent."

The court rejected the plaintiffs' argument that, based on language in a recent and controversial Second Circuit decision involving pharmaceutical sales representatives, In re Novartis Wage & Hour Litigation, they could not be administrative exempt because they lacked authority to make financial decisions and did not perform any of the specific examples of job duties involving independent judgment and discretion listed in the DOL's administrative exemption regulations. The First Circuit expressed disagreement with the notion that "simple evaluation of the regulation's exemplary list of factors to be considered among 'all the facts involved in the particular employment situation in which the question arises' provides a determinative answer to the ultimate question whether an employee exercises discretion."

Further, the court rejected plaintiffs' argument that the employees merely recited a prescribed sales pitch or were required to hue to a particular guidelines. In keeping with precedents from the First, Sixth, and Seventh Circuits, the court held that discretion and independent judgment nevertheless could be exercised within the guidelines provided by an employer.

Finally, the court declined to adopt plaintiffs' arguments that they did not exercise the requisite discretion and independent judgment because of areas where they had no authority, such as those involving the employer's finances and contractual obligations. Taking a "glass-is-half-full" approach, the First Circuit focused instead on what the plaintiffs could do, and in performing those duties, whether those duties involved the exercise of discretion and independent judgment. On these facts, the First Circuit answered that question in the affirmative.

Conclusion

At least in the First Circuit, Hines represents a rejection of the DOL's narrow view of administrative work and of the Second Circuit's narrow view of discretion and independent judgment. If the opinion proves persuasive in other circuits, Hines could be a significant precedent in maintaining the availability of the administrative exemption to employers under the FLSA and state overtime laws.

By: Noah A. Finkel and Jessica M. Schauer

Noah A. Finkel is a partner in Seyfarth's Chicago office and Jessica Schauer is an associate in the firm's Boston office. If you would like further information, please contact your Seyfarth Shaw LLP attorney, Noah A. Finkel at nfinkel@seyfarth.com, or Jessica Schauer at jmschauer@seyfarth.com.

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