Supreme Court Denial of Certiorari Leaves Scope of Administrative Exemption Unsettled

The U.S. Supreme Court on May 3, 2010 denied certiorari in a case that offered the Justices the opportunity to clarify the often-muddy waters of the “administrative” exemption under the Fair Labor Standards Act. The Court’s refusal to accept the case Whalen v. JPMorgan Chase & Co. (09-1160) lets stand the Second Circuit’s November 2009 holding that certain loan underwriters at the bank do not qualify for that exemption, and foretells continued uncertainty over the exemption’s meaning and scope.

To qualify for the administrative exemption, the applicable regulation states that an “employee's primary duty must be the performance of work directly related to the management or general business operations of the employer or the employer’s customers” 29 C.F.R. § 541.201(a).  In Whalen, the Second Circuit applied the regulation by relying primarily on the so-called “administrative-production dichotomy.” It held that underwriters’ duties were not administrative—and therefore not exempt—because “[t]heir 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.”

The court’s reasoning was in tension with the approach taken by other Circuits, which have viewed the administrative-production dichotomy as more of an analytical guide to resolving the exemption question rather than as a strict rule of decision. The Department of Labor’s August 2004 revisions to its exemption regulations also appeared to put to rest the notion that the dichotomy was itself dispositive in any particular case unless “the work ‘falls squarely on the production side of the line.’” (Whalen arose under the pre-2004 regulations.) While the regulation explicitly provides for an exemption for employees who either manage a business or engage in general business operations, the application of this language will remain in conflict now that the Supreme Court has passed on this opportunity to address the issue.

The Supreme Court’s denial of certiorari also comes during a time of increased uncertainty over the application of the administrative exemption. Since the Whalen decision was issued, other Circuits have given a broad reading to the administrative exemption in similar contexts. For example, in Robinson-Smith v. GEICO (D.C. Cir. Jan. 5, 2010), the D.C. Circuit held that GEICO’s auto damage adjusters exercise sufficient discretion and independent judgment to qualify as administrative employees. However, as we have previously reported, the DOL Wage and Hour Division recently adopted the novel practice of issuing “Administrator’s Interpretations” on wage-hour issues, the first of which opined that the administrative exemption does not apply to mortgage loan officers, reversing an earlier Opinion Letter that such employees are exempt. The new interpretation was one of several recent signals from the DOL that it  intends to interpret the administrative exemption  narrowly.

The lesson for employers from these developments is clear: all positions that are currently classified as exempt under the administrative exemption should be reexamined closely to ensure compliance with applicable law during a period of uncertainty that may last for several years to come.

For more information, contact the Seyfarth attorney with whom you work or any Labor & Employment attorney on our website.