CONTEXT MATTERS: SECOND CIRCUIT RULES ON PRIMARY DUTY REQUIREMENT OF ADMINISTRATIVE EXEMPTION

By Ashe, Rafuse & Hill, LLP

The Court of Appeals for the Second Circuit recently clarified the primary duty requirement for an exempt administrative employee under 29 U.S.C. § 213(a)(1). The decision places the focus for primary duty analysis on the function of the employee in relation to the business as a whole, rather than on the duties of the employee or the industry of the employer. Production and sales work are not limited to the manufacturing and retail industries—even in service-oriented businesses. Employees performing non-manual work may be engaged in production, such that their primary duty is not directly related to the management or general business operations of their employer. Davis v. J.P. Morgan Chase & Co., __ F.3d __, No. 08-4092-cv, 2009 WL 3922892 (2d Cir. Nov. 20, 2009).

In Davis, underwriters challenged their classification as exempt administrative employees under the FLSA. After seeking a declaratory judgment on the classification, both sides filed motions for summary judgment. The trial court granted summary judgment for JP Morgan Chase (“Chase”), but the Second Circuit reversed, holding that the plaintiff was not employed in a bona fide administrative capacity.

According to the findings of the Court, underwriters at Chase followed detailed guidelines (the “Credit Guide”) when evaluating loan applications. The Credit Guide and other product guidelines assisted underwriters when matching loan applicants with particular products based on specific requirements for qualifying income and credit history. There were disputes between the parties regarding the ability of underwriters to make exceptions when an applicant failed to meet the Credit Guide’s standards. The impact of these guidelines on an underwriter’s exercise of discretion and independent judgment, however, were not addressed by the Court because it held that the primary duty of the underwriters was not the performance of work directly related to the management or general business operations of the company or its customers as required by 29 C.F.R. § 541.200.

The Second Circuit clarified the line between administrative work and production or sales work—something it did not address a year earlier in Havey v. Homebound Mortgage, Inc.[1] There, the Court affirmed the trial court’s decision that underwriters were exempt because they performed non-manual work for a company not engaged in production. In Homebound Mortgage, according to the Second Circuit, the trial court erroneously assumed that production was limited to activities involving tangible goods. The Second Circuit did not correct this interpretation, however, because the sole issue on appeal was whether the underwriters were paid on a salary basis.

Addressing the issue in Davis, the Second Circuit discusses the line between exempt administrative work and non-exempt production or sales work. The Court considered the nature of the employee’s duties, not the “physical conditions of her employment” Department of Labor regulations provide an example of production and sales work to distinguish work directly related to management,[2] but the Second Circuit’s analysis reveals that the example is not limited by industry. The Court pointed to another section of the regulations stating that an employee whose primary duty involves selling financial products does not qualify for exempt status (29 C.F.R § 541.203(b)), as well as a series of prior opinion letters making distinctions between advisory duties and the sale of loans. Applying these standards to the plaintiffs, the Court determined that the underwriters’ main job was not the more general work involved with business operations, but the more specific “production” of loans.

Chase’s internal characterizations of underwriters did not help their cause. Chase employees “referred to the work performed by underwriters as ‘production work.’” Deparments were informally categorized as either “operations” or “production,” with underwriters in the latter category. Underwriters were also evaluated, at least in part, on the average number of actions per day, and paid incentives based on the number of sales. These last two factors, according to the Court, “show that Chase believed that the work of underwriters could be quantified in a way that the work of administrative employees generally cannot.”

When evaluating whether or not an employee is likely to qualify as an exempt administrative employee, the Second Circuit’s emphasis is on context. An employee is more likely to be engaged in administrative work if the nature of that work is more generic—something that every business needs to operate—rather than directly related to the end product of a particular company:

[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.

Put another way, according to the Second Circuit, an employee is more likely an exempt administrative employee if her primary duty is not itself primary but rather auxiliary to the business as a whole. Drawing a distinction between employees directly involved in the goods or services that are the “primary output of a business” and those performing more general work “applicable to the running of any business,” the Court stated: their work was “primarily functional rather than conceptual;” they were not “at the heart of the company’s business operations;” they did not set future strategy or direction for the company; they did not work “in any way related to the business’s overall efficiency or mode of operation;” they did not establish policy; and they were trained only to apply policy “as they found it.”

Davis places the exemption focus on the employee. In the Second Circuit, an analysis of an employee’s function, and the context of that function in relation to the operation of the business as a whole, is the focus for primary duty analysis under the administrative exemption.

Ashe Rafuse & Hill

1 No. 2:03-CV-313, 2005 WL 1719061 (D. Vt. July 21, 2005), aff’d, 547 F.3d 158 (2d Cir. 2008).
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).

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