Wage & Hour Defense Blog : Wage & Hour Lawyer & Attorney : Epstein Becker Green Law Firm : DOL Enforcement, FLSA Coverage

Suppose a group of your salaried employees sues your company under the Fair Labor Standards Act, claiming they’ve been improperly classified as exempt and are entitled to overtime pay for the last three years. And suppose you’re concerned about the strength of your exemption defense and want to calculate your potential exposure. Do you calculate the employees’ overtime hours at 1.5 times their regular rate? Or can you assert that even if the employees were improperly classified, their salary paid them at a straight time rate for all their overtime hours, and therefore any liability should be calculated at only a half-time rate? 

The answer depends on how many hours the employees’ salary was intended to cover. 

Here’s why. The FLSA requires that employers pay non-exempt employees overtime pay for hours worked in excess of 40 per week at a rate not less than one and one-half times the employee’s regular rate of pay.  29 U.S.C. § 207(a)(1).  The regular rate must be “must be drawn from what happens under the employment contract.” 29 C.F.R. § 778.108. Suppose you agree to pay an employee a weekly salary of $1,000 for a 40 hour workweek. The regular rate is determined by dividing total compensation by the number of hours the salary is intended to compensate. 29 C.F.R. § 778.113. Here, the employee’s regular rate is $25 per hour. If a court determines that the position is non-exempt, your company will be liable for overtime at 1.5 times the regular rate, i.e. $37.50.

Employers and salaried employees often do not have a specific agreement as to how many hours of work are required or expected. But if the facts warrant a conclusion that the salary was intended to cover a 40 hour workweek, the employer will still be liable for overtime hours at 1.5 times the regular rate. In a recent case, Talbot v. Lakeview Center, Inc., Case No. 3:06cv378/MCR/MD (N.D. Fla., February 2, 2010), the employer posted two job opening advertisements that listed the hours of employment as 8 a.m. to 5 p.m., Monday through Friday. Plaintiffs were expected to be on the job during normal business hours and did not believe they were permitted to work fewer than 40 hours per week. Although plaintiffs understood that evening or weekend work would sometimes be required, the employer used a “flex time” arrangement that permitted plaintiffs to arrive at work late if required to work on an evening or weekend. The court found these facts consistent with a contract for a 40 hour week and held that the employer was liable for overtime at 1.5 times the regular rate.

For employers, there is a better way. If you’ve made it clear to salaried employees that their salary covers all hours worked, irrespective of the number of hours they work, you can argue that the employees’ salary already compensated them at a straight time rate for all hours worked, and that even if the employees are found to be non-exempt, any overtime should be calculated at a half-time rate. Courts sometimes characterize this as a retroactive application of the “fluctuating workweek” method.

Under the Department of Labor’s “fixed salary for a fluctuating workweek” rule, “where there is a clear mutual understanding of the parties,” an employer can pay a non-exempt employee a fixed salary that serves as compensation for all hours worked if it is sufficient to compensate the employee for all straight time hours worked at a rate not less than the minimum wage and the employee is paid an additional one-half of the regular rate for all overtime hours. See 29 C.F.R. § 778.114. To be clear, when you treat employees as exempt, you are not actually utilizing the “fluctuating workweek” method because, by definition, you are not paying the employees any overtime. But if your exemption argument fails, many courts will allow you to apply the rule retroactively to limit overtime liability to a half-time rate.

For example, in Blackmon v. Brookshire Grocery Co., 835 F. 2d 1135 (5^th Cir. 1988), the plaintiffs had been promoted with the understanding that they would be paid a fixed weekly salary, and would work whatever number of hours were required to get the job done. The trial court found that plaintiffs were not exempt and calculated overtime at 1.5 times their regular rate. On appeal, the Fifth Circuit Court of Appeals, citing the fluctuating workweek rule, held that a half-time rate was appropriate. In Saizan v. Delta Concrete Prods. Co., 209 F. Supp. 2d 639, 640 (M.D. La. 2002), the court, citing Blackmon, reached the same conclusion. In Sutton v. Legal Services Corp., 11 W.H Cas.2d 401, 404 (D.C.Sup.2006), the court stated that “virtually every court that has considered the question” has upheld the remedial use of half-time in failed exemption cases.

A January 14, 2009 Department of Labor opinion letter (FLSA2009-3),  in which the DOL endorsed the fluctuating workweek method to compute the retroactive payment of overtime to misclassified employees, lends support to Blackmon and similar cases.

But recently, at least two courts have held that the fluctuating workweek method cannot apply retroactively. In In re Texas EZPawn Fair Labor Stds. Act Litig., 633 F. Supp. 2d 395 (W.D. Tex. 2008), the court stated that applying the method not only as a way to pay an employee, but also as a way to remedy misclassification, is inconsistent with the remedial provisions of the FLSA. In Russell v. Wells Fargo and Co., No. C 07-3993 (N.D. Cal. Nov. 17, 2009), the court reached the same conclusion and specifically found the DOL opinion letter (FLSA2009-3) unpersuasive.

In Torres v. Bacardi Global Brands Promotions, Inc., 482 F. Supp. 2d 1379 (S.D. Fla. 2007), the court side-stepped the issue altogether and held that the application of the fluctuating workweek method was not at issue because the employer was not relying on it.  The court nevertheless agreed with the employer that because the plaintiff had “already received his regular rate for all hours worked,” he was only entitled to half-time for those hours worked in excess of forty per week.  

While there is some disagreement in the case law about whether it is proper to use a half-time rate to calculate overtime liability in a failed exemption case, there is little or no disagreement that half-time is applicable, if at all, only where the employees’ salaries were intended to cover all hours worked. If the evidence shows that the employees’ salaries were intended to cover a 40-hour workweek, the employer’s half-time argument will fail.

And make no mistake, the difference between calculating overtime at a half-time rate and 1.5 times the regular rate is dramatic. As noted above, an employee who is paid a $1,000 weekly salary for a 40-hour workweek has a regular rate of $25 per hour. Ten hours of overtime will cost the employer $375 in back pay (25 x 1.5 x 10 = $375). Now consider an employee who is paid a $1,000 weekly salary with a clear understanding that her salary covers all hours worked. In a week in which the employee works 50 hours, the regular rate is $20 per hour. Using a half-time rate, the employer’s liability for ten hours of overtime is only $100 (20 x 0.5 x 10 = $100), a $375% difference.  

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In an important decision that explains the distinction between promoting and making sales, the Eleventh Circuit held recently that a marketing executive was exempt from the overtime and minimum wage provisions of the Fair Labor Standards Act as an outside salesperson. The case is Gregory v. First Title of America, Inc., Case No. 08-10737 (11th Cir., January 27, 2009).

Before addressing the facts of the case and the Eleventh Circuit’s holding, let’s review the applicable statute and regulations. The FLSA includes several exemptions from its minimum wage and overtime requirements, including any employee employed in the capacity of an outside salesperson, as defined by the Secretary of Labor. See 29 U.S.C. § 213(a)(1).

The Department of Labor defines “outside sales employee” as any employee whose primary duty is (i) making sales within the meaning of section 3(k) of the Act, or (ii) obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and (2) Who is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty. 29 C.F.R. § 541.500(a).

29 C.F.R. section 541.501 defines “making sales or obtaining orders” as follows:

(b) Sales within the meaning of section 3(k) of the Act include the
transfer of title to tangible property, and in certain cases, of tangible
and valuable evidences of intangible property. Section 3(k) of the Act
states that ‘sale’ or ‘sell’ includes any sale, exchange, contract to sell,
consignment for sale, shipment for sale, or other disposition.

(c) Exempt outside sales work includes not only the sales of
commodities, but also ‘obtaining orders or contracts for services or for
the use of facilities for which a consideration will be paid by the client
or customer.’ Obtaining orders for ‘the use of facilities’ includes the
selling of time on radio or television, the solicitation of advertising for
newspapers and other periodicals, and the solicitation of freight for
railroads and other transportation agencies.

(d) The word ‘services’ extends the outside sales exemption to
employees who sell or take orders for a service, which may be
performed for the customer by someone other than the person taking
the order.

Promotional work is addressed in 29 C.F.R. § 541.503. Promotional work may or may not be exempt outside sales work, depending on the circumstances under which it is performed. “Promotional work that is actually performed incidental to and in conjunction with an employee’s own outside sales or solicitations is exempt work” whereas “promotional work that is incidental to sales made, or to be made, by someone else is not exempt outside sales work.” 29 C.F.R. § 541.503(a).

Now for the facts and the Eleventh Circuit’s holding. First Title of America, Inc. (“First Title”) is a title marketing company based in Lake Mary, Florida. The plaintiff, Nelda Gregory, was a “marketing executive” for First Title who was hired due, in large part, to her prior experience in selling insurance. According to the Employment Agreement executed between the parties, her job description was to “provide the services for referring and closing title insurance companies.”

Under the terms of the Employment Agreement, Gregory initially was paid $1000 per week. At Gregory’s suggestion, she later began to be paid on a commission basis and received a fifty percent commission on all orders for title insurance from her clients that closed with First Title. Gregory claimed that although she often worked more than forty hours per week, she was never compensated for her overtime.

Gregory argued that she did not fall within the FLSA’s outside sales exemption because she was employed by First Title as a marketing representative and she never actually consummated a sale during her employment. Gregory contended that she was tasked only with inducing realtors, brokers and lenders to begin referring their customers – the end user – on to First Title for title insurance services. She maintained that she never directly sold title insurance or title insurance services to anyone because she was not licensed to do so. In short, Gregory asserted that she was employed only to promote First Title’s services and to stimulate sales and was never involved in the actual sale of title insurance to the realtors, brokers and lenders, or to the end users.

First Title argued that Gregory’s primary duty was bringing in or obtaining orders for First Title and that her compensation was tied directly to orders for title services that ultimately closed. First Title cited to language from the Preamble to 29 C.F.R. Part 541 discussing recent modifications to § 541.403 (Promotion Work), in which the DOL remarked that:

[T]he Department agrees that technological changes in how orders are taken and processed should not preclude the exemption for employees who in some sense make the sales. Employees have a primary duty of making sales if they ‘obtain a commitment to buy’ from the customer and are credited with the sale.. . . . Exempt status should not depend on whether it is the sales employee or the customer who types the order into a computer system and hits the return button. The changes to proposed section 541.503(c) are intended to avoid such a result.

Thus, First Title argued that that how the order is placed is immaterial – the inquiry should focus on the efforts of the salesperson. If those efforts were directed toward the consummation of her own sales as opposed to stimulating the sales of the company in general, then the employee is exempt.

Agreeing with First Title, the Eleventh Circuit concluded that Gregory’s primary duty was to obtain orders for First Title’s title insurance services, i.e., bring in orders. The court noted that the bulk of Gregory’s time was spent away from the office, free from direct supervision and performing work that could not be conclusively characterized as nonexempt.

Addressing Gregory’s argument that her work was “stimulating sales” as opposed to “obtaining orders for services,” the court concluded that “Gregory did, indeed, make a sale in some sense.”

She obtained commitments to buy orders for First Title’s title insurance service and, most importantly, was credited with the sale. She was hired for her prior sales experience and brought a book of clients with her to First Title. Not long after being hired, Gregory’s sole source of income was directly tied to the number of orders that she brought in. She listed her clients for the Appellees and received credit (and payment) only for those orders placed by her clients that closed. All of her efforts were directed towards the consummation of her own sales and not towards stimulating sales for First Title in general.

The court also noted that Gregory did not merely “pave the way” for other salespeople. “Gregory did not collect orders and turn them over to another salesperson nor does the record contain evidence of any other intervening sales effort between Gregory and orders placed with First Title[,]” the court noted. “As opposed to conceiving of Gregory as “paving the way” for others to consummate the sale, we view her as acting more as a conduit through which orders for services flowed. Gregory received credit and payment for those orders that flowed through her to First Title.”

The Gregory decision is significant, as there are undoubtedly thousands of sales and marketing employees within the Eleventh Circuit (Florida, Georgia and Alabama) who “obtain a commitment to buy” from the customer and are credited with the sale, but who do not actually place the order for the sale. Gregory makes clear that such facts do not necessarily preclude the application of the outside sales exemption.

A caveat: Employers should keep in mind that courts generally construe exemptions to the FLSA narrowly. Before classifying any employee as exempt under one of the “white collar” exemptions, careful attention must be paid to the employee’s actual job duties and the tests set forth by the DOL.

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