By Peter M. Panken, Michael S. Kun, Douglas Weiner, and Larissa Lalor-Rosado

Misclassification of employees as exempt from overtime compensation has become a cottage industry for plaintiff’s lawyers and for the United States Department of Labor (“DOL”) in the Obama years.  One of the most difficult issues is whether employees meet the so-called administrative exemption to the Wage Hour laws.  In Hines v. State Room, the United States Circuit Court in New England offered some clarity and help to beleaguered employers holding that former banquet sales managers were exempt from overtime requirements under the Fair Labor Standards Act (“FLSA”).

The FLSA, requires 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 seven day period unless the employee is exempt. The three pronged test for exemption for administrative employees is whether the employee is (1) salaried (paid a regular amount of at least $455 for all hours worked in a workweek); (2) the employee’s primary duty is 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; and (3) the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

Plaintiffs were banquet sales managers whose job included seeking potential customers for events at the employer, developing the elements of the party or other event and submitting the proposed contract terms for approval by senior officials of the Banquet Halls.

The Court found that Plaintiffs met the first two prongs for exemption: Plaintiffs were paid on a salary basis, and their work was primarily administrative because it was ancillary to the employer’s actual business of providing banquet services.

Plaintiffs claimed that they did not meet the third prong for exemption because they lacked the authority to make any decisions of financial consequence, supervisory authority or policy-making authority.

The Court found that while the plaintiffs’ discretion in matters having significant financial impact was subject to managerial approval, such restrictions did not detract from the judgment exercised in developing a proposal for the client. Plaintiffs’ duties included maintaining primary contact with a client, tailoring an event to their needs, and overseeing the event through to execution. The Court ruled that plaintiffs exercised adequate discretion as sales people to be designated as exempt.

Other Factors Considered for Exemption

The preamble to the current DOL regulations identifies a host of factors that courts have found sufficient to demonstrate that employees exercise independent judgment. 69 Fed. Reg. at 22144. Such factors include:

·                     the ability to exercise discretion and independent judgment,

·                     freedom from direct supervision,

·                     personnel responsibilities,

·                     trouble-shooting or problem-solving activities on behalf of management,

·                     use of personalized communication techniques,

·                     authority to handle atypical or unusual situations,

·                     responsibility for assessing customer needs, primary contact to public or customers on behalf of the employer, the duty to anticipate competitive products or services and distinguish them from competitor’s products or services,

·                     advertising or promotion work, and coordination of departments, requirements or other activities for or on behalf of employer or employer’s clients or customers.

Unfortunately these factors are very fact intensive and do not provide a bright line test for exemption, But the Hines case does offer some useful precedent and guidance for employers. In any event, care must be taken to be sure that the law in a particular state or in a particular circuit does not impose a stricter limitation on the discretion and independent judgment issue.

Take-Away

An employer may retain the right to review an employee’s ability to create financial and contractual obligations and still properly classify the employee as exempt. Requiring managerial approval for these purposes does not necessarily detract from the judgment exercised by the employee at arriving at the proposal in the first place. In addition, as set forth above, there are numerous other factors that courts can consider in determining whether an employee should be designated as exempt.

by Michael Kun and Kathryn McGuigan

In recent years, the alleged misclassification of employees under California’s wage and hour laws has been a hotly contested issue and the subject of a great many class actions. Faced with several appeals pending before it, the Ninth Circuit has now sought guidance from the California Supreme Court on the outside salesperson and administrative exemption tests as they apply to pharmaceutical sales representatives. Such guidance should prove invaluable to employers in the industry, and to parties to these claims.

In D’Este v. Bayer Corporation, 07-56577 (9th Cir. 2009), a pharmaceutical sales representative brought a class action lawsuit against her employer, claiming that she had been misclassified as an exempt employee and had not been paid overtime or provided meal and rest breaks in compliance with California’s wage and hour laws. The district court granted summary judgment in favor of the employer, finding that the employee was exempt under California’s outside salesperson exemption; it declined to reach the question whether she was exempt under the administrative exemption. The employee appealed to the Ninth Circuit.

 D’Este is not the only class action on appeal to the Ninth Circuit on this issue. Three other class actions on appeal before the Ninth Circuit — and four other class actions filed in the Central District of California — all involve the question of whether pharmaceutical sales representatives are exempt under California’s outside salesperson and administrative exemptions.

 In light of the number of actions regarding the classification of pharmaceutical sales representatives, the Ninth Circuit certified the following two questions to the California Supreme Court:

 1. Does a pharmaceutical sales representative qualify as an “outside salesperson” under Industrial Welfare Commission’s (“IWC”) Wage Orders 1-2001 and 4-2001 if the pharmaceutical sales representative spends more than half the working time away from the employer’s place of business and personally interacts with doctors and hospitals on behalf of drug companies for the purpose of increasing individual doctors’ prescriptions of specific drugs?

 2. Is a pharmaceutical sales representative involved in duties and responsibilities that meet the requirements of a person employed in an administrative capacity as defined under IWC Wage Order 4-2001?

 The Ninth Circuit will accept the California Supreme Court’s decisions on these questions.

 The California Supreme Court’s review of these questions should provide employers with a clear understanding of the application of outside salesperson and administrative exemptions from overtime and meal and rest break requirements for pharmaceutical sales representatives employed in California. The Supreme Court’s ruling will provide invaluable guidance to employers in the industry about how to classify these persons going forward, and a clearer understanding to parties already litigating this issue. Should the ruling suggest that these persons normally fall under one or both exemption, litigation of these claims by pharmaceutical sales representatives may end. Should the ruling suggest that these persons normally fall under neither exemption, a new wave of class actions could be expected.