Author Archive: Bryant S. Banes

The FLSA Administrative Exemption For the Financial Services Industry in the Areas of Tax and Financial Consulting: Current State and Recommendations for Review

© February 8, 2019.  By Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Senior Fellow, Wage and Hour Defense Institute.

It is an understatement to say that the financial services industry has been in a quandary over how to classify its employees since the decision in Perez v. Mortgage Bankers Association, 135 S.Ct. 1199 (2015).  This decision upheld the novel and confusing Department of Labor (“DOL”) Administrative Interpretation (“AI”) 2010-1, finding that mortgage loan officers were not exempt and must be paid overtime.  This was confusing because it added a new dividing line for which financial services professionals could potentially be exempt based solely upon who they were advising.  If such employees advised businesses of any size, they could be exempt.  But, if they advised individuals, DOL suggested in AI 2010-1 that they could not be exempt.  In response to this, many courts that have considered this outlier of a rule have rejected it.  In locales other than California, where different rules apply, courts have rejected it because it is inconsistent with both prior DOL opinions and judicial precedent.  It is also clear that such an arbitrary distinction makes little practical sense in today’s world, especially as it concerns tax and financial consultants.

When we speak of the financial services industry, it is important to remember that the DOL regulations carve out a specific exemption for “tax experts and financial consultants.”  29 CFR § 541.201(c).  These types of advisors are most often regulated and licensed, exercise varying levels of discretion, and make decisions on a daily basis that may affect the financial well-being of their clients.  The employees that challenge the administrative exempt status in this context often either seek to downplay their professional contribution or criticize employer incentives that such employees say eliminate their discretion.  For these reasons, if an employer uses incentives or disincentives, it is important to tie and support such to an employee’s fiduciary and other duties to the client so that the administrative exemption can be preserved.  In this article, we explain where we are in this area of the law and, hopefully, where we may be headed in the resolution of this quandary.


The Fair Labor Standards Act (“FLSA”) mandates that covered employers pay overtime compensation for non-exempt employees.  Rainey v. McWane, Inc., 314 Fed. Appx. 693, 694 (5th Cir. Mar. 12, 2009), citing 29 U.S.C. § 207 (a).  The FLSA generally requires an employer to pay employees who work more than forty (40) hours per seven (7)-day workweek at a rate not less than one and one-half (1½) times the employee’s regular rate for that overtime work.  29 U.S.C. § 207(a) (1); Allen v. Coil Tubing Servs., LLC, Civ. A. No. H-08-3370, 2011 WL 4916003, at *5 (S.D. Tex. Oct. 17, 2011); Vela v. City of Houston, 276 F.3d 659, 666 (5th Cir. 2001); Thibodeaux v. Executive, Tet Intern., Inc., 328 F.3d 742, 749 (5th Cir. 2003).

Certain employees, however, are exempt from FLSA’s overtime requirements.  Whether an employee is exempt or not exempt under FLSA is mainly a fact issue determined by his salary and duties and application of the factors in 29 C.F.R. § 541.200(a), but the ultimate decision is a question of law.  Ford v. Hous. Indep. Sch. Dist., 97 F.Supp.3d 866, 874 (S.D. Tex. 2015)(citing Lott v. Howard Wilson Chrysler–Plymouth, Inc., 203 F.3d 326, 330–31 (5th Cir.2000); McKee v. CBF Corp., 299 Fed.Appx. 426, 429 (5th Cir. 2008).

The FLSA’s overtime provisions do not apply with respect to any employee working in a bona fide executive, administrative, or professional capacity.  29 U.S.C. § 213(a)(1); see also Cheatham v. Allstate Ins. Co., 465 F.3d 578, 584 (5th Cir. 2006).  To qualify for the administrative employee exemption, the following criteria must be met:

  1. The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
  2. The employee’s primary duty must be 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.

29 C.F.R. § 541.200(a).  Moreover, as demonstrated below, DOL’s regulations have specific carve-outs for “tax and financial consultants” that must be properly understood and applied.

Salary Basis

The first prong of the administrative exemption is met if the employer establishes that the employee was compensated on a salary or fee basis at a rate not less than $455 per week.  29 C.F.R. § 541.200(a)(1).  To be viewed as paid on a “salary basis,” an employee must “regularly receive[] each pay period on a weekly or on a less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of work performed.”  Miller v. Team Go Figure, LLP, 2014 WL 1909354, at *7 (N.D. Tex. May 13, 2014), quoting 29 C.F.R. § 541.602(a).

As set forth in Section 541.602(b)(1), an employer may make deductions from an exempt employee’s pay when the employee is absent from work for one (1) or more full days for personal reasons, other than sickness or disability.  In addition, an employer may deduct from an exempt employee’s pay when the employee is absent from work for one (1) or more full days occasioned by sickness or disability, if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by such sickness or disability.  29 C.F.R. § 541.602(b)(2).  Although the term “bona fide plan” is not defined by the regulation, the DOL’s Wage and Hour Division (“WHD) has brought clarity to the definition of a “bona fide plan” through several opinion letters.

In Opinion Letter FLSA2006-32, the WHD provided an opinion on whether a particular sick/vacation leave plan qualified as a bona fide plan under the regulations implementing section 13(a)(1) of the FLSA.  (See DE 635).  The WHD was also asked to provide an opinion on whether the sick/vacation plan at issue allowed the employer to make salary deductions for employees who have either:  (1) not qualified for leave, or (2) exhausted their leave allowance.  (Id., at p. 1).  As noted in the opinion letter, the sick/vacation plan at issue provides, in pertinent part:

     “One year after [the] start date the employee is eligible for 40 hours off with pay. After  two years the employee will receive 80 hours off with pay. After 10 years[, the employee will receive] 120 hours [off with] pay. All vacation must be taken in . . . full work day [increments,] not an hour at a time. [For e]xample some departments may work 10 hour days[, which means those employees would be entitled to 4 days off.] Also one sick day is paid per year. [Salespeople] must take vacation one week at a time.”


As to the inquiry regarding the requirements for a “bona fide plan,” WHD explained that, “a plan that has defined sick leave benefits that have been communicated to eligible employees, and that operates as described in the plan, will in general qualify as bona fide.”  (Id., at p. 2).  WHD further explained that, to qualify as bona fide, the plan must be administered impartially, and its design should not reflect an effort to evade the requirement that exempt employees be paid on a salary basis.  (Id. (citing to Wage and Hour Opinion Letters FLSA2005-7 (Jan. 7, 2005) and August 15, 1972.)).  Whether a particular plan is bona fide depends on the actual design of, and practices applicable under, the plan.  (Id.)

WHD further explained that, given the fact-specific nature of the inquiry, there is no bright-line test articulating how many days and how short a waiting period are required for a plan to be bona fide.  (Id., at p. 3).  With this said, WHD noted that it has previously approved leave plans that allow for at least five (5) days of sick leave per year as bona fide under the regulations.  (Id. (citing to Wage and Hour Opinion Letters July 21, 1997; November 20, 1995; April 14, 1992; and August 15, 1972.)).  WHD further explained that it has previously deemed a leave plan that required one (1) year of service prior to payment of sick pay benefits to be bona fide.  (Id. (citing to See Wage and Hour Opinion Letter March 1, 1982.)).

While DOL’s regulations recognize two (2) forms of compensation for exempt employees – predetermined weekly salary and additional compensation – the regulations only state an “employer who makes improper deductions from salary” may lose the exemption.  29 C.F.R. § 541.603(a).  Therefore, nothing in the FLSA or the Secretary’s regulations prohibits employers from deducting debits during the computation of an employee’s commissions, as opposed to base salary.  See, e.g., Bell v. Callaway Partners, LLC, 2010 WL 6231196, at *6 (N.D. Georgia Feb. 5, 2010) (applying similar logic to find Secretary’s regulations did not prohibit deductions from exempt employees’ bonuses).

Further, case law establishes that employers may permissibly deduct from exempt employees’ commissions without losing the exemption.  Accord Hicks v. Mercedes-Benz U.S. Intern., Inc., 877 F. Supp. 2d 1161, 1178–79 (N.D. Ala. 2012); see also Havey v. Homebound Mortgage, Inc., 547 F.3d 158, 165 (2d Cir. 2008) (“A two-part salary scheme in which employees receive a predetermined amount, plus, on a quarterly prospective basis, an additional portion subject to deductions for quality errors does not violate the salary basis test.”).

A final issue concerns whether an employer may lose the exemption for deducting sums owed from an employee’s final paycheck.  In the Preamble to 29 C.F.R. Part 541 (“Preamble”), the DOL specifically considered whether employers should be able to recover salary advances from an employee’s final pay.  69 Fed. Reg. 22122, 22178.  The DOL decided that in that situation, “recovery of salary advances would not affect an employee’s exempt status, because it is not a deduction based on variations in the quality or quantity of the work performed.”  Id.  This means employers may permissibly recover advances from an employee’s final pay without losing the exemption.  Id.  This is a somewhat controversial position, and there is little precedent on it.

In Blaize v. Concrete Strategies, L.L.C., for example, the District Court was asked to determine whether an employer lost the executive employee exemption as a result of the company’s failure to pay the employee for the final eight (8) days of work.  Id. 2009 WL 10679035 (E.D. La. Dec. 17, 2009).  In finding that the exemption was not lost, the District Court cited to Donavan v. Agnew, which held that, “where an executive employee is guaranteed a weekly salary, the employer’s failure to pay that employee during the final weeks of employment amounts to a breach of contract, but does not cause a previously exempt employee to become protected under the FLSA.”  Blaize v. Concrete Strategies, L.L.C., No. CV 09-3089, 2009 WL 10679035, at *3 (E.D. La. Dec. 17, 2009); Donavan v. Agnew, 712 F.2d 1509, 1517 (1st Cir. 1983); see Nicholson v. World Business Network, Inc., 105 F.3d 1361, 1365 (11th Cir. 1997) (refusing to turn a contract action for unpaid salary into an FLSA suit).  Accordingly, the court explained:

     Although Concrete Strategies has not paid Blaize for his last eight days of work, this, on its face, raises a claim of breach of contract, even if the reason behind its failure to pay was dissatisfaction the quality of Blaize’s work.

Blaize, 2009 WL 10679035, at *4.  Now, we move to the second prong of the test.

Management of General Business Operations

The second prong of the administrative exemption is met if the employer establishes that the employee’s primary duty is the performance of office or non-manual work that is directly related to the management of general business operations of the employer or the employer’s customers.  29 C.F.R. § 541.200(a).  To determine whether an employee meets this prong as a matter of fact and law, a court must make findings concerning the “historical facts” of the case, including the determination of an employee’s “day-to-day duties” that would constitute an employee’s “primary duty.”  Dalheim v. KDFW-TV, 918 F.2d 1220, 1226 (5th Cir. 1990).

The regulations define “primary duty” as “the principal, main, major, or most important duty that the employee performs” in view of all the facts and “with the major emphasis on the character of the employee’s job as a whole.”  29 C.F.R. § 541.700(a).  Generally, the employee’s primary duty is “what she does that is of principal value to the employer, not the collateral tasks she may also perform even if they consume more than half her time.”  Dalheim, 918 F.2d at 1227.  Some factors to be considered in determining the primary duty of an employee are:  (1) the relative importance of the exempt duties as compared with other types of duties; (2) the amount of time spent performing exempt work; (3) the employee’s relative freedom from direct supervision; and (4) the relationship between the employee’s salary and the wages paid to other employees for the kind of non-exempt work performed by the employee.  Miller, 2014 WL 1909354, at *7, quoting 29 C.F.R. § 541.700(a).  Section 541.700(b) provides that, “[e]mployees who do not spend more than 50 percent (50%) of their time performing exempt duties may nonetheless meet the primary duty requirement if the other factors support such a conclusion.” 29 C.F.R. § 541.700(b).

As noted above, 29 CFR § 541.201(c) directly provides an exemption for “employees acting as advisors or consultants to their employer’s clients or customers (as tax experts or financial consultants, for example).”  As addressed in detail below, agents for personal insurance customers have been determined to be exempt.  Hogan v. Allstate Ins. Co., 361 F.3d 621 (11th Cir. 2004) (cited in Preamble to 2004 FLSA Regulations).  Similarly, registered representatives for individual investors, who also had to pass a test and become licensed, have been found by DOL to be exempt.  Accord WHD Opinion Letter FLSA2006-43 (Nov. 27, 2006).  What is important in context is that tax and financial consultants are in a special area where DOL has carved out a specific exemption in the regulations.

While there is a dearth of cases on this, the issue of the tax and financial consultant exemption in the context of Section 201(c) was addressed in Hein v. PNC Financial Services Group, Inc., 511 F.Supp.2d 563 (E.D. Penn. 2007).  In that case, Mr. Hein was a licensed financial consultant who did not sell the services at issue and did not participate in traditional management activities for the business.  Id., at 569.  As a financial consultant, he was primarily involved in collecting client information (business and individual clients), analyzing the information, and advising the client on the best course with their money.  Id.  Because of this, the Court determined that Mr. Hein’s work is “directly related to the management or general business operations of Defendants and Defendants’ customers.”  Id. at 572 (citing 29 C.F.R. 541.200(a)(2)).

The phrase “directly related to the management or general business operations” refers to the type of work performed by the employee.  29 CFR § 541.201(a).  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.  Id.  Section 541.201(b) provides that, work “directly related to management or general business operations” includes, but is not limited to:

work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations; government relations; computer network, Internet and database administration; legal and regulatory compliance; and similar activities.

When an employee is primarily involved in producing the product of the company rather than servicing the company, the administrative exception does not apply. Miller, 2014 WL 1909354, at *11, quoting Villegas v. Dependable Constr. Servs., Inc., Civ. No. 4:07-cv-2165, 2008 WL 5137321, at *7 (S.D. Tex. Dec. 8, 2008); Foster v. Nationwide Mut. Ins. Co., 710 F.3d 640, 644 (6th Cir. 2013) (citing Schaefer v. Indiana Mich. Power Co., 358 F.3d 39 4, 402 (6th Cir. 2004)); Reich v. John Alden Life Ins. Co., 126 F.3d 1, 9 (1st Cir. 1997).  The Fifth Circuit has described this distinction as between “employees whose primary duty is administering the business affairs of the enterprise” and “those whose primary duty is producing the commodity or commodities, whether goods or services, that the enterprise exists to produce or market.” Dalheim, 918 F.2d at 1230.

In the Preamble to it 2004 FLSA Regulations, the DOL explained that in the “modern workplace” the administrative/production dichotomy was still “a relevant and useful tool in appropriate cases,” but that it should not be used as “a dispositive test for exemption.” 69 Fed. Reg. 22122, 22141 [Emphasis added].  The DOL further explained that its view that the ‘‘production versus staff’’ dichotomy has always been illustrative—but not dispositive—of exempt status is supported by federal case law.  Citing to Bothell v. Phase Metrics, Inc., 299 F.3d 1120 (9th Cir. 2002), the DOL explained that the administrative/production dichotomy is “but one piece of the larger inquiry” and should be used “only to the extent that it clarifies the analysis.”  Id.  “Only when work falls ‘squarely on the production side of the line,’ has the administration/production dichotomy been determinative.”  Id.  (quoting Bothell, 299 F.3d at 1127; see also Proposed Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 68 Fed. Reg. 15560, 15566 (March 31, 2003) (stating that “[t]he ‘production versus staff dichotomy’ … is difficult to apply uniformly in the 21st century workplace” and “[t]he proposed rule would … reduce the emphasis on the so-called ‘production versus staff’ dichotomy in distinguishing between exempt and non-exempt workers”).

Some courts have also questioned whether this dichotomy is useful at all in the service context.  In Kohl v. Woodlands Fire Dept., 440 F.Supp.2d 626, 636 (S.D. Tex. 2005), the Court stated:

     The analytic difficulty of applying the production/administration distinction has led some courts to question whether the dichotomy is analytically helpful in the context of the modern service industries and to emphasize that the analogy applies in a particular case only to the extent that it ‘elucidates the phrase ‘work business operations.’ ” . . . The revised 2004 Department of Labor regulations have moved away from this dichotomy in the context of service related industries. “Only when the work falls ‘squarely on the ‘production’ side of the line,’ has the administration/production dichotomy been determinative.

Id, citing Bothell v. Phase Metrics, Inc., 299 F.3d 1120, 1126, 1127 (9th Cir. 2002); Id. at 20-21, n. 8; see also 69 Fed Reg. 22141.  What is relevant to the determination of this exemption is an employee’s “actual day-to-day job activities,” not the labels or job title the employer places on those duties.  29 CFR § 541.2; Kohl v. Woodlands Fire Dep’t., 440 F. Supp. 2d 626, 634 (S.D. Tex. 2006); see Dalheim, 918 F.2d at 1226.

For example, in Hamby v. Associated Centers for Therapy, the Tenth Circuit affirmed a grant of summary judgment for the employer after it found that a “family advocate” working for an employer that primarily provided services for clients with mental health problems was an exempt employee under the administrative exemption.  230 Fed. App’x 772, 773, 2007 WL 458011, at 1 (10th Cir. Feb. 13, 2007).  As a family advocate, the employee’s day-to-day activities were to provide “targeted” support services to children by implementing a system of care that was child-centered and assisting in the prevention of an out-of-home child placement.  Id.  Employee’s day-to-day activities included:

“(1) [s]upport for the child and his/her family; (2) [b]e active member of the local teams; (3) [b]e a member of the family team to assist in the strengths and the assessment and care plan development; (4) [t]o mediate between the families and the professionals; (5) [a]t times provide transportation; (6) [t]o fill out and submit ‘flex forms’ for the families as needed; (7) [t]o attend or speak at conferences as needed and assigned by the Project Director; and, (8) [o]ther duties as assigned by the Project Director.”

Hamby, 230 Fed.Appx. at 783-84.  Hamby argued that she produced a commodity for Associated Centers for Therapy by carrying out the day-to-day operations of ACT.  Id. at 10.  In disagreeing with Hamby, the court explained:

“All of [Hamby’s] duties are the type of work that is directly related to assisting with the running or servicing of ACT. Hamby’s job required her to assist client families by advising and counseling them regarding their problems and by advocating for them in order to promote ACT’s goal of helping families of mentally ill children.  In providing support to these families, Hamby’s job duties cannot be likened to the type of work performed on a manufacturing production line or in selling a product in a retail or service establishment. Hamby’s work in providing services to the client families was not akin to production or sale of a commodity; rather, her work was directly related to the general business operations of ACT.”

230 Fed.Appx. at 783-84.

The result in Hamby for a social worker makes clear that the distinction between helping businesses or individuals is a meaningless distinction in the services context, especially where matters of such importance are at issue.  It is also meaningless in the financial services industry, particularly tax and financial consulting, where the decisions made by financial advisors are often for a company’s individual clients and can often impact an individual’s relative wealth even more than some business advice.  Consequently, the second prong of the administrative exemption can also be met if the employer establishes that the “employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers.”  29 C.F.R. § 541.201(c).  [Emphasis added].  For example, employees acting as advisers or consultants to their employer’s clients or customers (e.g., as tax experts or financial consultants) may be exempt.  Id.

In Zannikos v. Oil Inspections (USA), Inc., the Fifth Circuit made clear that any analysis that only considers whether the employee’s duties are related to the management of the employer is inappropriate, because such an approach “necessarily conflict[s] with 29 C.F.R. § 541.201(c)” and leads to an incomplete analysis.  Zannikos v. Oil Inspections (U.S.A.), Inc., 605 Fed.Appx. 349, 353 (5th Cir. 2015).  Section 541.201(c), which was designed to clarify the second element of the administrative exemption, “demonstrates that the performance of functions directly related to the management of an employer’s customers is sufficient, rather than merely necessary, to satisfy the second element of the exemption.”  Id., at 354.

The employees in Zannikos argued that the district court erred in concluding that they performed non-manual work that directly related to the general business operations of Oil Inspections’ customers.  Id., at 354.  The employees argued that, “employees who produce the precise service offered to customers by their employers are engaged in production.”  Id.  The employees claimed that their functions necessarily constitute production; because they were hired to produce the very product their employer sells and markets – oversight.  Id.  In rejecting the employees’ argument, the court noted:

“In effect, the plaintiffs are arguing that, even if their services do not constitute production in relation to Oil Inspections’ customers, it is sufficient that they constitute production in relation to Oil Inspections. The district court disagreed, noting that, in Cotten, ‘the court only considered whether [the employee’s] duties were related to the management of the employer, not the customer.’ The court concluded that this approach ‘necessarily conflict[s] with 29 C.F.R. § 541.201(c) ’ and leads to an incomplete analysis. We agree.”

Id.  The Fifth Circuit emphasized that the employees’ interpretation would render the administrative exemption largely meaningless, saying:

Many—perhaps most—employees whose primary duties directly relate to the management of customers perform the precise services offered by their employers. For example, tax experts, financial consultants, and management consultants, perform the precise services offered to customers by the accounting and consulting firms for which they work. Thus, under the plaintiffs’ interpretation, these employees should not fall under the administrative exemption. This result, however, conflicts with Section 541.201(c), which explicitly states that such employees satisfy the second element of the exemption. Likewise, the plaintiffs’ interpretation would insulate employees who perform work in the “functional areas” described in Section 541.201(b) from the exemption so long as the employer is in the business of providing those services. This result is also contrary to the regulatory text.

Id. at 354.

In the Preamble to 2004 FLSA Regulations, the DOL addressed commenters’ requests that it change the language of the then proposed Section 541.201(c).  69 Fed. Reg. 22122, 22142.  Specifically, the DOL noted that, commenter Karen Dulaney Smith urged the Department to “insert the word ‘business’ to clarify that the exemption does not apply to ‘individuals whose “business” is purely personal.’”  Id.  The Department did not make this change, explaining:

Nothing in the existing or final regulations precludes the exemption because the customer is an individual, rather than a business, as long as the work relates to management or general business operations.

Id.  Clearly, DOL had the opportunity to “clarify” the regulation as requested by the commenter, but it elected not to do so.

In AI 2010-1, the DOL attempts to use a restatement of Karen Dulaney Smith’s comments as a basis for adding the “purely personal” limitation to Section 541.201(c).  AI 2010-1, at p. 7.  The DOL noted –

As stated by commenter Smith, the exemption does not apply when the individual’s ‘business’ is purely personal, but providing expert advice to a small business owner or a sole proprietor regarding management and general business operations, for example, is an administrative function.

Id.  This commentary, however, should be given as much weight as it was given by the DOL when it was deciding on the final language for the regulation – which is to say, none.  The DOL received commenter Smith’s request, acknowledged the request, and then did nothing with the request.  As discussed above, a plain reading Section 541.201(c) demonstrates that there is no business/personal distinction regarding the nature of the “management . . . of the employer’s customers.”  See 29 C.F.R. §541.201(c).  As such, it is inappropriate to give any deference to the DOL’s post hoc attempt to limit the scope of the regulation in a manner that is inconsistent with both the plain language of the regulation and the regulation’s legislative history.

DOL also claimed in AI 2010-1 that its interpretation of Section 504.201(c) is supported by a “thorough review of the case law that has continued to develop on the exemption.”  Id. at p. 1.  Evidently, DOL’s review may not have been that thorough, as the DOL failed to include both Hogan v. Allstate Ins. Co. and Henry v. Quicken Loans, Inc. in its analysis of Section 504.201(c).  Instead, the DOL cites to two (2) cases (Talbot v. Lakeview Center, Inc., 2008 WL 4525012 (N.D. Fla. Sept. 30, 2008 and Bratt v. County of Los Angeles, 912 F.2d 1066 (9th Cir. 1990)) and three (3) opinion letters (FLSA2005-21, FLSA2005-30, and FLSA 2007-7) that fail to provide analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

In Hogan, the Eleventh Circuit was asked to review the lower court’s ruling that Allstate insurance agents were “administrative employees,” exempt from the FLSA’s overtime requirements.  Hogan v. Allstate Ins. Co., 361 F.3d 621 (11th Cir. 2004).  Allstate would create and provide to customers a variety of insurance products, including car, home, property, boat, commercial, renter’s, life, and comprehensive personal liability insurance.  Id., at 624.  The employees were Neighborhood Office Agents (“NOA”), whose chief duties were to promote and to sell Allstate’s insurance products, to advise and to service customers and potential customers, and to oversee the operation of their office and staff.  Id., at 624.

In affirming the district court’s ruling, the court held that the employees’ primary duty was office or non-manual work directly related to management policies or general business operations of Allstate or its customers.  Id., at 627.  The court explained:

Construing the evidence and inferences therefrom in the light most favorable to plaintiffs, test plaintiffs spent the majority of their time servicing existing customers. Their duties included promoting sales, advising customers, adapting policies to customer’s needs, deciding on advertising budget and techniques, hiring and training staff, determining staff’s pay, and delegating routine matters and sales to said staff. These duties are similar to administrative, rather than production, tasks. See Reich v. John Alden Life Ins. Co., 126 F.3d 1, 9–10 (1st Cir.1997) (deciding that “production” duties involve the development of an insurance policy, not the sale of the policy itself); Wilshin v. Allstate Ins. Co., 212 F.Supp.2d 1360 (M.D.Ga.2002) (finding Allstate insurance agents to be administrative employees).”

Hogan, 361 F.3d at 627.  [Emphasis added].  The holding in Hogan stands in the face of AI 2010-1’s “purely personal” limitation, as the fact that the NOA’s were providing services to Allstate’s customers for personal matters did not prevent the court from finding that employees were exempt.

In Henry, the Sixth Circuit affirmed a jury verdict that “mortgage bankers” were bona fide administrative exempt employees.  Henry v. Quicken Loans, Inc., 698 F.3d 897 (6th Cir. 2012).  According to Quicken, mortgage bankers performed a variety of roles:  (1) “collecting and analyzing the relevant information from our Clients concerning their financial status”; (2) “understanding our Clients’ objectives, goals and needs”; (3) “educating and advising our Clients on the entire financing process”; and (4) closing loans.  Id., at 898.  The mortgage bankers, by contrast, insisted they were glorified salesmen.  Id., at 899.  The mortgage bankers pointed to letters and internal memos that identify the mortgage bankers as a “sales force” and encourage them to “SELL SELL SELL.”  Id.  According to the mortgage bankers, their daily routines were largely prescribed by a two (2)-page document that outlines a ten (10)-step process for developing business.  Id.

In determining whether the mortgage bankers were exempt, the court first looked to whether the jury’s findings on the second element of the administrative exemption were “seriously erroneous.”  Id., at 899-900.  The court noted that to satisfy the “management-related prong” the employee’s “primary duty” must involve “work directly related to the management or general business operations” of the company or its customers.  29 C.F.R. 541.200(a)(2).  Id., at 899.  The court then cited to Section 541.201(b)’s guidance for determining whether a financial-services employee fits within the exemption –

Employees in the financial services industry generally meet the duties requirements for the administrative exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing, or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

Id., at 899–900 (quoting 29 C.F.R. § 541.201(b))

The court held that the jury acted “well within its bounds” in finding that the employees’ duties met the requirements of the administrative exemption’s second prong.  This holding stands in the face of AI 2010-1, as the court determined that the result was not “seriously erroneous” even though employees’ duties clearly include advising Quicken’s customers on purely personal matters.  See also Hein v. PNC Fin. Servs. Grp., Inc., 511 F. Supp. 2d 563, 569 (E.D. Pa. 2007) (court found that employee’s primary duty, which included advising the company’s clients on personal financial matters, met the second element of the administrative exemption).

In AI 2010-1, the DOL inaccurately cites to Talbott as the supporting authority for the “purely personal” limitation.  AI 2010-1, at p. 7.  First, Talbott does not include a meaningful analysis of Section 541.201(c).  Moreover, Talbott fails to recognize that the plain language of Section 541.201(c) does not require that the employee assist the employer’s customer on business-related matters.

In Talbott, the court found that the administrative exemption did not apply to the employees. Talbott, 2008 WL 4525012.  With regard to its analysis of the second prong of the exemption, the court focused only on Sections 541.201(a) and (b), concluding that, “defendant has not met its burden of showing . . . that plaintiffs have assumed duties that are directly related to… management or general business operations.”  [Emphasis added].  Id. at *4-6.  The court’s discussion of 541.201(c) was limited to dicta in footnote 5 –

The regulation also provides that the employee’s work may be directly related to the general business operations of “the employer’s customers.” 29 C.F.R. § 541.200(a)(2). The court does not find this provision relevant because even if Lakeview’s foster clients are “customers,” they do not have “general business operations.”

 Id., at n. 5.  Even if this comment were accepted as an analysis of Section 541.201(c), it is a conclusory and incomplete analysis.  Moreover, the court’s dicta fails to recognize that the plain language of Section 541.201(c) does not require that the employee assist the employer’s customer on business related matters.  Indeed, it refuses to consider the situation where the business operations at issue are those of the employer, as well, in implementing its—and each employee’s—fiduciary or contractual duties to the clients.  As such, Talbott fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Bratt is also misplaced, as Bratt does not address the questions raised by an analysis of Section 541.201(c).  In Bratt, six (6) of the employees at issue were employed by the County’s Probation Department as Deputy Probation Officers II (“DPO II”).  Bratt, 912 F.2d at 1067.  The DPO II’s would, “conduct factual investigations for, and make recommendations to, County courts, either to aid in sentencing an adult offender or to determine whether and how to detain a minor who has been arrested.”  Id.  The County argued that, employees’ duties were “more akin to those of advisory specialists or consultants such as stock brokers or insurance claim agents and adjusters,” thus, servicing the business of the courts by advising the management.  Id. at 1069-1070.  The Ninth Circuit disagreed, stating:

Accordingly, to the extent that probation activities can be analogized to a business, the work of the DPO II Employees primarily involves the day-to-day carrying out of the business’ affairs, rather than running the business itself or determining its overall course or policies.

 Id. at 1070.

As to the County’s argument that the employees were servicing the business of the court, the Ninth Circuit also disagreed.  The court explained:

The use of stock brokers and insurance claims agents and adjusters in § 541.205(c)(5) as examples of employees who are “servicing” a business is not inconsistent with the language of the regulations. To the extent that these employees primarily serve as general financial advisors or as consultants on the proper way to conduct a business, e.g., advising businesses how to increase financial productivity or reduce insured risks, these employees properly would qualify for exemption under this regulation. Here, although probation officers provide recommendations to the courts, these recommendations do not involve advice on the proper way to conduct the business of the court, but merely provide information which the court uses in the course of its daily production activities.

 Id.  The foregoing discussion focuses only on whether the employers established that the requirements of Section 541.201(a) were met.  The Ninth Circuit apparently did not have cause to analyze the question of whether the employee’s “primary duty was the performance of work directly related to the management or general business operations of the employer’s customers.”  See 29 C.F.R. §541.201(c).  As such, Bratt fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Opinion Letter FLSA2005-21 is also misplaced, as the letter does not address the questions raised by an analysis of Section 541.201(c).  WHD Opinion Letter FLSA2005-21.  In FLSA2005-21, WHD was asked to provide an opinion “concerning the applicability of the administrative exemption  . . . to background investigators . . .”  Id.  Although WHD quotes Section 541.201(c) in its entirety, the WHD’s analysis was focused on Section 541.201(a).  Id.  After applying the facts presented to Section 541.201(a), the DOL concludes as follows:

“We believe that the activities performed by Investigators employed by your client are more related to providing the ongoing, day-to-day investigative services, rather than performing administrative functions directly related to managing your client’s business.  From the information provided in your letter, it appears that the primary duty of the Investigator is diligent and accurate fact-finding, according to DSS guidelines, the results of which are turned over to DSS who then makes a decision as to whether to grant or deny security clearances. Such activities, while important, do not directly relate to the management or general business operations of the employer within the meaning of the regulations.”

Id., at p. 4.  As the Ninth Circuit did in Bratt, the WHD’s analysis only answers whether the employee’s primary duty is directly related to the management or general business operations of the employer.  As such, FLSA2005-21 fails to provide any analytical support for the DOL’s attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.

The DOL’s reliance on Opinion Letter FLSA2005-30 is also misplaced as the letter’s analysis is focused on the employee’s duties, and not on the identity of the employee.  WHD Opinion Letter FLSA2005-30.  In FLSA2005-30, WHD was asked to provide an opinion on whether a “Regional Advocate” can be considered an exempt administrative employee.  Id., at p. 1.  The following is a description of the Regional Advocate’s duties:

The Regional Advocate is responsible for advocating for services for people with disabilities.  The Regional Advocate represents the wishes and desires of a client and must do so in accordance with national protection and advocacy standards.  The Regional Advocate’s duties include keeping informed of changes in federal/state laws, regulations, policies, and court orders affecting persons with disabilities. The Regional Advocate maintains full and accurate documentation of all clients assigned, and prepares and provides regular monthly reports of assigned cases to the Data Report Specialist and other management personnel.  The Regional Advocate is also responsible for investigating and acting upon complaints of abuse or neglect, directly advises the Lead Advocate on matters relating to the client’s concerns, and participates in client case reviews.  Furthermore, the Regional Advocate is responsible for representing the employer in outside forums, committees, and work groups as assigned by the Program Director.  The Regional Advocate does not supervise other employees.


WHD concluded that a Regional Advocate does not meet the criteria to qualify as an exempt administrative employee.  Id. at p. 2.  The WHD explained –

[T]he Regional Advocate is not primarily tasked with performing any of the management or general business operational areas described in 29 C.F.R. 541.201(b); nor is the Regional Advocate primarily tasked with providing administrative services to the employer’s customers as contemplated in 29 C.F.R. 541.201(c).  Based on this analysis, we conclude that a Regional Advocate’s job function does not satisfy the requirement that the primary duty must be 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.  See Opinion Letter dated March 5, 1999 (finding that employees in the positions of intake coordinator, program coordinator and assisted living coordinator for individuals with disabilities are engaged in production work and, therefore, do not qualify for the administrative exemption); Opinion Letter dated March 30, 1999 (finding social workers/counselors of a social service agency do not qualify for the administrative exemption).

Id.  As mentioned, the letter’s analysis is clearly focused on employee’s duties, and not – as the DOL suggests – on the identity of the employer’s customer.  After addressing the Regional Advocate’s duties, WHD lumps Section 541.201(b) and Section 541.201(c) together to explain that Regional Advocate does not perform the required administrative functions.  Id.  The analysis does not turn on the identity of the customer.

The DOL’s reliance on Opinion Letter FLSA2007-7 is also misplaced as the letter does not address the questions raised by an analysis of Section 541.201(c).  WHD Opinion Letter FLSA2005-21.  In FLSA2007-7, WHD was asked to provide an opinion on whether the administrative exemption applied to Case Managers.  Id.  WHD concluded that the described Case Managers did not qualify for the administrative exemption.  Id.  The DOL provided the following explanation:

After reviewing the information you provided, we believe that the activities performed by Case Managers employed by your client are more related to providing the Company’s ongoing, day to-day case management services for its consumers, which involves duties such as assessing costs of care, preparing a plan of care, and identifying and implementing services to meet the consumers’ needs, rather than performing administrative functions directly related to managing either your client’s business or any business of your client’s customers. A Case Manager is not primarily tasked with performing duties in any of the management or general business functional areas described in 29 C.F.R. § 541.201(b); nor is the Case Manager primarily tasked with providing administrative services to the employer’s customers as contemplated in 29 C.F.R. § 541.201(c).

 Id., at pp. 2-3.

In providing its opinion, however, the DOL failed to make clear what it was relying on, or referring to, when it alluded to the “contemplated” application of Section 541.201(c).  Presumably, the DOL is referring to the following quoted excerpt from Preamble:

With regard to the type of work performed, the preamble to the Department’s 2004 revisions to the Part 541 regulations explains that “the administrative exemption covers only employees performing a particular type of work—work related to assisting with the running or servicing of the business.”

Id. (citing to 69 Fed. Reg. 22,122, 22,141.)  The DOL, however, failed to accurately quote the preamble.  The full quote is as follows:

Based on these principles, the Department provided in proposed section 541.201(a) that the administrative exemption covers only employees performing a particular type of work—work related to assisting with the running or servicing of the business.

69 Fed. Reg. 22122, 22141.  [Emphasis added].  As such, the quoted excerpt only addresses the “contemplated” application of Section 541.201(a).  It does not address Section 541.201(c).   Moroever, if DOL was relying on the plain text of the regulation, then, as discussed above, such an interpretation is unsupported.

The foregoing discussion demonstrates that DOL failed to provide any authority containing a pertinent analysis that might support its post hoc attempt to add a “purely personal” limitation to Section 541.201(c)’s definition of primary duty.  Moreover, it makes little practical or business sense.  In the Preamble, the DOL provided guidance regarding the analytical focal point when determining whether the administrative exemption applies.  The DOL states, “[t]he final rule distinguishes the exempt and the nonexempt financial service employees based on the duties they perform, not on the identity of the customer they serve.”  69 Fed. Reg. 22122, 22146.  The DOL goes on to explain, “[f]or example, a financial services employee whose primary duty is gathering and analyzing facts and providing consulting advice to assist customers in choosing many complex financial products may be an exempt administrative employee.”  Id.  It is certainly no coincidence that the DOL used the “financial services” employee to illustrate the significance of focusing the analysis on the duties performed by the employee rather than the identity of customer served.  As explained by the DOL, financial services often require an employee to analyze complex matters, and often require an employee to make decisions or offer advice on matters of substantial significance to the customer.  Of course, the rendering of complex financial services (e.g. advice or consultation) that are of substantial significance can occur in either a personal or business context.  In either scenario, the complexity of the financial advice need not necessarily change.  This is why the Preamble to DOL’s 2004 FLSA Regulations instructs us to look at the employee’s duties and not at the identity of the customer.

Discretion and Independent Judgment On Matters of Significance

The third and last prong of the administrative exemption is met if the employer establishes that the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.  29 C.F.R. § 541.200(a)(3); 29 C.F.R. 541.202(a).  In general, the exercise of discretion and independent judgment involves the comparison and the evaluation of possible courses of conduct, and acting or making a decision after the various possibilities have been considered.  29 C.F.R. 541.202(a).  “The term ‘matters of significance’ refers to the level of importance or consequence of the work performed.”  Talbert v. American Risk Insurance Company, Inc., 405 Fed. Appx. 848, 853, quoting 29 C.F.R. § 541.202(a).

The phrase “discretion and independent judgment” must be applied in the light of all the facts involved in the particular employment situation in which the question arises.  29 C.F.R. § 541.202(b).  Factors to consider for this determination include, but are not limited to, whether an employee has authority to formulate, affect, interpret, or implement operating practices; whether an employee performs work that affects business operations to a substantial degree, even if the employee’s assignments are related to operation of a particular segment of the business; and whether the employee has authority to waive or deviate from established policies and procedures without prior approval.  Id.  However, a case-by-case analysis is required for this determination. See McKee v. CBF Corp., 299 Fed.Appx. at 429.  For example, in Haywood v. North American Van Lines, the Seventh Circuit upheld the administrative exemption where an employee could negotiate on behalf of the employer with some degree of settlement authority, conduct independent investigation, and had authority to deviate from established procedures without prior approval.  Haywood v. North American Van Lines, 121 F.3d 1066, 1071–73 (7th Cir. 1999).

While the exercise of discretion and independent judgment implies that the employee has the authority to make an independent choice, free from immediate direction, an employee may exercise discretion even if his decisions are reviewed, revised, or reversed at a higher level.  29 CFR § 541.202(c); Cheatham v. Allstate Ins. Co., 465 F.3d 578, 585 (5th Cir. 2006).  Thus, the term “discretion and independent judgment” does not require that the decisions made by an employee have a finality that goes with unlimited authority and a complete absence of review.  29 C.F.R. § 541.202(b); Lott, 203 F.3d at 331.  The decisions made as a result of the exercise of discretion and independent judgment may consist of recommendations for action rather than the actual taking of action.  29 C.F.R. § 541.202(c).  The fact that an employee’s decision may be subject to review and that upon occasion the decisions are revised or reversed after review does not mean that the employee is not exercising discretion and independent judgment.   29 C.F.R. § 542.202(c).

The regulations also explain that the use manuals or guidelines do not preclude a finding that the employee exercised discretion and independent judgment.  29 C.F.R. §541.704; Cheatham, 465 F.3d at 585.  Section 541.704 provides as follows:

The use of manuals, guidelines or other established procedures containing or relating to highly technical, scientific, legal, financial or other similarly complex matters that can be understood or interpreted only by those with advanced or specialized knowledge or skills does not preclude exemption under section 13(a)(1) of the Act or the regulations in this part.  Such manuals and procedures provide guidance in addressing difficult or novel circumstances and thus use of such reference material would not affect an employee’s exempt status.  The section 13(a)(1) exemptions are not available, however, for employees who simply apply well-established techniques or procedures described in manuals or other sources within closely prescribed limits to determine the correct response to an inquiry or set of circumstances.

Id.  Further, the “fact that many employees perform identical work, or work of the same relative importance, does not mean that the work of each such employee does not involve the exercise of discretion and independent judgment.”  29 CFR § 541.202(d).

In Cheatham, the Court noted that “consult[ation] with manuals or guidelines does not preclude the[ ] exercise of discretion and independent judgment.”  Cheatham, 465 F.3d at 585 (citation omitted).  The Court then went on to enumerate the ways in which the insurance adjusters being considered exercised discretion, despite consulting claims manuals, including “determining coverage, conducting investigations, determining liability and assigning percentages of fault to parties, evaluating bodily injuries, negotiating a final settlement, setting and adjusting reserves based upon a preliminary evaluation of the case, investigating issues that relate to coverage and determining the steps necessary to complete a coverage investigation, and determining whether coverage should be approved or denied.”  Id. at 586; see also Id. at 585 n. 7.

Such investigatory and evaluative functions clearly extend beyond the observation of processes, enforcement of standards, and reporting of noncompliance.  Zannikos, 605 Fed.Appx at 359.  Indeed, while claims manuals may inform assignments of fault, injury evaluations, settlement negotiations, and other aspects of the claims process, they seldom dictate the results in absolute terms or obviate the need to evaluate possible courses of action.  Id.  (citing McAllister v. Transamerica Occidental Life Ins. Co., 325 F.3d 997, 1001 (8th Cir.2003)).  This type of discretion is what led DOL to recently find that Client Service Managers who are professional, licensed insurance agents and advisors are administratively exempt.  DOL Op. FLSA2018-8 (January 5, 2018).  An employer’s volume of business may also make it necessary to employ a number of employees to perform the same or similar work.  The fact that many employees perform identical work, or work of the same relative importance, does not mean that the work of each such employee does not involve the exercise of discretion and independent judgment with respect to matters of significance.  29 C.F.R. § 541.202(d).


As stated at the outset, the purpose of this article was to explain the current state of the FLSA administrative exemption in the context of tax and financial consultants, and recommend a framework for their review.  While we’ve tried to be thorough, it is always appropriate to consult a knowledgeable attorney in this complex and evolving area of the law, especially with respect to your company’s unique business model and employee policies.  The attorneys at the Wage and Hour Defense Institute have this expertise, are committed to the defense of employers, and can advise them on their rights and responsibilities in their wage and hour practices.


Texas Federal District Court Slaps U.S. Labor Department With Attorneys Fees for Unjustified Misclassification Case

In a win for every small business in the United States, a Federal Court near Houston sent a clear message to the government: don’t pursue a frivolous wage and hour case or you will pay the employer’s attorneys fees and expenses. The opinion by Senior Judge John D. Rainey ordered the U.S. Department of Labor (DOL) to pay $565,000 to a 37-member oilfield services company for a case that “should have [been] abandoned.” This latest decision, issued on April 9, 2014, followed an earlier decision that had dismissed all DOL’s misclassification claims and granted judgment to the employer.

 To grant the attorney fees and expenses, the Court relied upon the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412, which was enacted in response to concerns that persons “may be deterred from seeking review of, or defending against, unreasonable governmental action because of the expense involved in securing the vindication of their rights.” To prevail on an EAJA claim, a private litigant must show several factors. Most importantly, it must have less than a $7 million net worth and less than 500 employees, win a final judgment against the government, and demonstrate that the position the government took in the litigation was “not substantially justified.” This is no easy task by any standard. But here, it was met and then some.

The Court unequivocally stated that “[h]ad the DOL interviewed more than just a handful of [the employer’s] roughly 400 gate attendants before presenting [the employer] with a $6,000,000.00 demand and filing its Enforcement Action against [the employer], it would have known the gate attendants were not employees. Once discovery revealed the facts cited in the paragraph above, the DOL should have abandoned this litigation.”  This sends a strong message, one we hope the government hears.

As a practical matter, however, the likelihood of this decision causing a sea change in such overbearing enforcement efforts is unlikely for the time being. While it may cause DOL to pause when approaching a small business in this manner, this case is no deterrent for the pursuit of larger businesses.  This brings us to the more important point.  The facts in this case show that DOL prejudged the case, repeatedly ignored the facts, and couched its case in terms only favorable to its improper position, something it continued to do even after it lost.  While government investigators and lawyers are bound by a code ethics that requires them to seek justice, the system somehow miserably failed here.  It is most unfortunate that, in this author’s experience, this sad state of affairs is not unique.

For this reason, we are happy to stand together as part of the Wage and Hour Defense Institute (WHDI).  WHDI relishes its role and our collaboration as a bulwark against such government overreaching and, with time and diligence, is working to ensure the right result in wage and hour matters for our business clients.        

The case is Gate Guard Services L.P. v. Thomas E. Perez, Secretary of Labor, United States Dept. of Labor (S.D. Tex., April 9, 2014), and the author is Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas.


The Fifth Circuit recently addressed one of the lesser used exemptions under the Fair Labor Standards Act (FLSA)…outside sales. 2013 WL 3013871 (C.A, 5, Tex., June 18, 2013). Meza v. Intelligent Mexican Marketing, Inc.  In the opinion, the court laid out a nice roadmap to use when determining if a driver/salesperson is truly exempt.

Meza was an employee who worked for about a year as a route salesman for a company that sells and delivers food and beverage items to convenience stores.  He was paid a weekly salary, plus commissions.  As a route salesman, he generally worked about 72 hours a week and his wage averaged $6.66 per hour.  The employee filed suit alleging he was owed money for unpaid minimum wages and overtime.  Under the FLSA the employer has the burden of proving that an employee is ineligible for overtime or minimum wage compensation and in this case the court found in the company’s favor, saving it nearly $20,000 in wages and overtime.  Why? As usual when dealing with FLSA exemptions, it all had to do with the employees actual duties, regardless of title.

Here, the employee drove the delivery truck as well as sold products.  He was also encouraged to visit new stores to bring in new business. And he received commissions based on the sales. The critical factor in this situation was that the employee was not just driving and delivering.  The company did have employees whose only job was to drive and deliver pre-ordered goods.  Those employees were not exempt under the FLSA and accordingly, were paid at least minimum wage and overtime if applicable.

But Meza had more duties than just driving and delivering goods.  The court reviewed the FLSA regulations on outside sales and went through each factor to see how it applied to Meza.  To be considered outside sales, the primary duty has to be: 1) making sales or obtaining orders, and; 2) the employee has to be regularly away from the employer’s place of business when performing the primary duty.  Besides this basic guideline, there are also 9 factors to consider and the court went through each one to see how they compared to Meza’s duties.  Ultimately the court decided that only one factor favored Meza, five favored the company and two were not applicable to this case.  So with the score of one for Meza and five for company, the company won.

Bryant S. Banes
Managing Shareholder
Neel, Hooper & Banes, P.C.
Houston, Texas

Despite the Government’s View to the Contrary, It is Still Legal for Government Contractors to Make a Profit

When it comes to Time and Material or Labor Hour contracts many contractors might not know all of their rights concerning what is an acceptable amount of profit. The Federal Acquisition Regulation (FAR) defines hourly rates in Section 52.232-7, but little case law exists when it comes to interpreting reasonable amounts of profit under Labor Hour or Time and Material contracts. Contractors are not the only ones who may not be aware of what constitutes reasonable profits under these types of contracts. As the following Armed Services Board of Contract Appeals (“ASBCA”) case illustrates, the Government is also not always privy as to what a contractor can bill. It is of the utmost importance for contractors to know what is acceptable when it comes to billing under Time and Material or Labor Hour contracts. A recent holding from an ASBCA case bodes well for government contractors.

In GaN Corp., ASBCA 57834, 2012 WL 2997037 (July 17, 2012), the ASBCA was tasked with interpreting the meaning of the “Payments Under Time-and-Materials and Labor Hour Contracts” clause in FAR 52.232-7. The underlying issue was whether a government contractor could charge the Government for “unexpensed and uncompensated” hours worked by the contractor’s exempt employees. In other words, could a contractor charge the government hourly rates for employee time when it was paying its employees a salary.

In GaN, the U.S. Army Engineering Support Center, Huntsville (“USACEH”) entered into a contract with the GaN Corporation (“GaN”). In the contract (“the Contract”) executed between the parties, the payment provision, Section A, stated that “task orders will be Labor Hour (“LH”) and/or Firm Fixed Price (“FFP”).” GaN’s employees assigned to work under the contract were salaried exempt workers. Thus, GaN paid its employees a fixed salary that did not fluctuate based on additional hours worked. However, when GaN billed the Government, it charged by the hour, including any hours worked in excess of a standard 40 hour work week. In other words, even though GaN paid its employees a fixed salary, it billed the Government by the hour, including hours worked by its employees that exceeded its employees’ base 40 hour work week. In doing so, GaN relied on the provision in the Contract that stated task orders could be LH.

The Government contested the billing method, alleging that GaN could not recover for hours worked unless its employees were actually paid on an hourly basis. GaN countered that even though it paid its employees a salary, it was entitled to bill the Government for hours worked based on the language of the Contract. The Government contended that allowing GaN to bill on an hourly basis would permit GaN “to pocket undue windfall profits at taxpayer expense” and that it should only be charged for costs incurred. In support of its argument, the Government reasoned that Time-and-Materials (“TM”) and LH contracts are essentially cost reimbursement contracts. As the ASBCA determined, this was incorrect. The Government all too conveniently “read out” portions of the Contract with GaN, and misinterpreted FAR 52.232-7.

The Pricing Schedule (Section B in the Contract, cross referenced with sections (a)(2) and (3) of FAR 52.232-7) stipulated that “the amounts shall be computed by multiplying the appropriate hourly rates prescribed in the Schedule by the number of direct labor hours performed.” Furthermore, the Payments clause stated that the Government would pay the contractor for all hours performed by the contractor. The Government basically ignored these clauses, relying only on other sections of the Payments clause that would have an uninformed party believe that employees would have to be hourly workers in order for GaN to be reimbursed for the hours they worked. Relying on well established contract principles, the ASBCA looked to the plain language of the Contract and determined the Government’s interpretation to be without merit. As the ASBCA stated: “The Government appears to think that the various references to actual payment and cost mean that the contractor cannot recover for hours unless the employees were paid on an hourly basis. We disagree.” The Contract made clear that task orders could be based on LH, and it made clear how to calculate payment amounts.

FAR 52.232-7 (a)(4) provides that rates under a TM or LH contract shall include wages, indirect costs, general and administrative expense, and profit. (emphasis added). FAR 16.601(c)(2), a TM provision, reflects the same. Additionally, pursuant to FAR 52.216-7, an “allowable cost and payment” provision, states with regards to billing rates that “until final annual indirect cost rates are established for any period, the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative, subject to adjustment when the final rates are established.” These billing rates “(1) shall be the anticipated final rates, and (2) may be prospectively or retroactively revised by mutual agreement… to prevent substantial overpayment or underpayment.” (emphasis added). Clearly, the FAR supports contractors making a reasonable profit from their efforts, and not limiting profits in TM or LH contracts unless there is a specific agreement imposing a limit. In following with these provisions, the ASBCA upheld this precedent, and held the Government to the contract they entered into with GaN.

GaN was largely a case of first impression, but the issues discussed are hardly novel. Contractors have always been entitled to reasonably profit from their work. What the Government attempted in GaN was to disregard the clear import of FAR 52.232-7, and strip that right away from GaN Corp. As one of the first cases of its nature, GaN serves to assert contractors’ rights, while holding the Government accountable for the contracts it enters into.

Also germane to the topic of government contractor profits is Empire Blue Cross and Blue Shield v. United States, 26 Cl.Ct. 1393 (Oct. 14, 1992). Empire, though distinct from GaN, addresses when contractors are entitled to reimbursement for cost incurred. In this case the Government sought reimbursement of added costs paid to an intermediary under a government contract. The primary issue the court resolved in Empire was whether additional charges for new work preformed should be reimbursed to the Government because the work was carried out with resources that already existed under the original contract. As in GaN, the Government in this case took the stance that it would only pay for costs incurred by the contractor.

The ASBCA found against the Government, and did not require the contractor to return the additional payments. In arriving at this conclusion, the court reasoned: “a contractor’s cost may be increased by a change even though he makes no additional expenditure or incurs no additional obligation. Costs are considered to be incurred when the contractor is deprived of something of value.” However, in this case, the contractor actually was deprived of something of value by performing the additional work for the Government—the contractor was deprived of its employees’ labor.

Empire, like GaN, helps to draw the line between reasonable and unreasonable profits for contractors. Both cases address reimbursements and point out that contractors can profit even if they incur no additional cost. These cases implicitly recognize that obligating a contractor’s labor to work less has its own consequences. In other words, a contractor is allowed to make a profit being efficient with its personnel.

It is important to know your rights under the FAR when engaging in a government contract so that you can maximize your profits. Though the Government in these cases would have us believe that it is improper, the FAR tells us otherwise. It is axiomatic that government contractors engage in contracts to derive a profit. What is not always so clear is what exactly constitutes a reasonable or acceptable profit. Empire is instructive in answering that question, while GaN further elucidates the answer to what constitutes fair profit under TM and LH contracts. If there is one lesson to be learned from these cases, it is that profiting from a government contract is still not a crime.

Bryant S. Banes
Managing Shareholder
Neel, Hooper & Banes, P.C.
Houston, Texas

Peering Over the Fiscal Cliff

Many government contractors and other business are standing on the edge of the fiscal cliff that occurs on January 1, 2013; namely, the automatic 10% government-wide across the board cuts known as “sequestration.”  For those who have not been watching Congress make sausage, there is a divide between Democrats and Republicans about what the fix should be.  In essence, Democrats think the primary fix lies in doing away with the Bush-era tax cuts for the wealthy, and Republicans think that cutting entitlement programs is the primary fix.  While both sides have made this about class warfare, the true fix lies somewhere in the middle.  For all their bluster, Congress knows this.        

Nevertheless, this provides little solace to employers, especially those whose cash flow depends upon government payments.  They are all asking: are we headed for a plunge when the 10% across the board cuts kick in?  Even more importantly, they are asking what to do, and how to tell their employees and investors.   Frankly, a good answer can be gleaned from the actions of the Defense Department’s largest contractor who, based on government guidance, has taken a measured approach.    Specifically, we know that as long as current contracts are funded through the end of the fiscal year (September 30, 2013), the automatic cuts arising from sequestration will have little immediate effect.  So, for any company peering over the cliff, the goal should be to look at their pipeline of business and their contracts supporting them to make certain they are adequately funded before automatic cuts kick in. 

What is interesting about this is how the panic for employers began and how a measured approach was achieved.  Led by Lockheed Martin, the Aerospace Industries Association told the Defense Department in June 2012 that they would be issuing WARN Act notices to their employees in November to prepare for layoffs in January 2013 resulting from sequestration.  This led the government to take an unusual election-year step.  In July 2013, The Department of Labor issued nonbinding guidance saying that WARN Act notices would be inappropriate due to the “lack of certainty” over the automatic budget cuts.  On September 28, 2012, the Office of Management Budget issued guidance saying the government may pay the costs of contractors who failed to comply with the WARN Act due this lack of certainty. 

This appears to be what Lockheed Martin was waiting for.  On October 1, 2012, Lockheed Martin issued a public statement on its website.  See  In this notice, Lockheed Martin stated: 

“After careful review of the additional guidance provided by the Office of Management and Budget and the Department of Defense, we will not issue sequestration-related WARN notices this year. The additional guidance offered important new information about the potential timing of DOD actions under sequestration, indicating that DOD anticipates no contract actions on or about 2 January, 2013, and that any action to adjust funding levels on contracts as a result of sequestration would likely not occur for several months after 2 Jan. The additional guidance further ensures that, if contract actions due to sequestration were to occur, our employees would be provided the protection of the WARN Act and that the costs of this protection would be allowable and recoverable.” 

This statement pretty much says it all, and takes an approach this writer recommends, assuming each contractor has assured itself that their contracts are also fully funded through the end of the fiscal year.  

Bryant S. Banes
Managing Shareholder
Neel, Hooper & Banes, P.C.
Houston, Texas


Ascertaining the Scope of a Conditionally Certified Class in Texas

In Lopez v. Bombay Pizza Co., 2012 WL 5397192 (S.D. Tex., Nov. 5, 2012) the Court was faced with the issue of defining the scope of a conditionally certified class. In this case, a former cook at Bombay Pizza sued to collect on unpaid overtime wages under the Fair Labor Standards Act (FLSA). In doing so, Lopez moved for a conditional class certification of all current or former employees who also were not paid overtime wages. Lopez’s posited class standard was too overbroad, however, according to the Court. Lopez’s proposed class sought to include all cooks and “other nonexempt hourly employees.” The Government, on the other hand, sought to limit the class to just “cooks.” The court held that “a finding of similarity does not require a showing of identical duties and working conditions across the entire group.” However, the court stated that “a minimal showing that all members of the class are similarly situated in terms of (1) similar job requirements and (2) payment practice” was required.

Thus, the two essential requirements found by the Court in Lopez for establishing a conditionally certified class are (1) similar job requirements and (2) payment practice. In Lopez, those requirements manifested as individuals performing the job functions of cooks, and who were not paid overtime compensation.

Other cases have supported the requirements for conditional class certification, and refined the meaning of “similarly situated” employees. In Richardson v. Wells Fargo Bank, N.A., 2012 WL 334038 (S.D. Tex., Feb. 2, 2012) the Court noted that “there must be substantial allegations that potential members ‘were together the victims of a single decision, policy, or plan.’” The Court in Richardson established a two pronged analysis for determining whether to certify a conditional class. This analysis consisted of: (1) similarity in job duties, and (2) whether the employer maintained a nationwide policy or plan for payment methods. Again, as in Lopez, the court focused on (1) job duties and (2) payment practice.

In Andel v. Patterson-UTI Drilling Co., 2012 WL 531167 (S.D. Tex., Feb. 15, 2012). the Court took the analysis a step forward, and set forth a scenario in which a conditional classification for similarly situated employees would be defeated, for the purposes of establishing a collective action. The Andel Court noted that a collective action suit would be defeated if a plaintiff in the alleged class required individualized inquiries. In other words, if a plaintiff in a class requires inquiries into his claim that are unique from those of any other putative plaintiff, a collective action could not result. The Court stated that “if there are enough differences between each individual plaintiff that the court would still be required to conduct an individualized analysis of each putative plaintiff” and FLSA collective action could not exist.

Andel also carried on the analysis for similarly situated employees employed by the Courts in Lopez and Richardson. The Court required “substantial allegations that the putative class members were together the victims of a single decision, policy, or plan.” The Court went on to state that the two step approach (job duties and payment practice) established in Lusardi v. Xerox Corp., 118 F.R.D. 351, 359 (D.N.J. 1987) (as also adopted by Lopez and Richardson) was the majority approach. Specifically, the court noted that the Lusardi approach is “consistent with Fifth Circuit dicta, stating that the two-step approach is the typical manner in which…collective actions proceed.”

Substantial, recent, case law in the Fifth Circuit is adamantly in agreement that for a collective action to proceed, a showing must be made that the putative plaintiffs had similar job duties and payment practices. Additionally, if plaintiffs each require individual inquiries into their claim, a collective action is unsupported.

Bryant S. Banes
Managing Shareholder
Neel, Hooper & Banes, P.C.
Houston, Texas

Elder Care and the Companionship Service Exemption to FLSA[i]

Employee productivity is directly impacted by family care issues. In fact, more employee productivity is spent on elder-care issues than on child-care issues.[ii] It is estimated that as the population continues to grow, most employees will be affected by elder-care issues during their career.[iii] As this trend continues, employers would be wise to educate their employees on relevant employment issues and laws.

Harkening back to the days of the Clinton Era and “Nanny Gate”, the issue of whether household employees could be non-exempt has been an entertaining question, with an often elusive answer. For many household professionals this issue raised the specter of having to pay additional taxes or wages on household employees. Today the question remains: what are the wage and hour laws for household employees? Just exactly how do you draw the line between exempt and non-exempt household employees?

In 1979, amendments to the FLSA added domestic service regulations that provided guidance in determining when a homecare employee is exempt or non-exempt. Specifically, 29 U.S.C. Section 213(a)(15) provides that homecare providers can qualify as exempt employees if they solely render elder companionship services. The Department of Labor’s regulation implementing this provision provides that companionship services do not include time spent on “general household work” that exceeds 20% of total weekly hours worked.[iv] Any time spent over 20% of total weekly hours qualifies for overtime under the FLSA.[v]

A recent Fifth Circuit case interpreted this provision and clarified exactly what kind of work qualifies as non-exempt. In Nelms v. Kramer, a former eldercare provided sued her ex-employee claiming that she qualified for over-time pay under the Fair Labor Standards Act (FLSA).[vi] On Appeal, the court was faced with only one question: “whether the Plaintiff’s services fell within the companionship service exemption provided for in 29 U.S.C. Section 213(a)(15).”[vii]

The court in Nelms had to determine if the Plaintiff had in fact performed an adequate amount of general household work to qualify for over-time pay. The Defendant claimed that she not only committed time specific to elder-care, but that she did other general household work for the benefit of the entire family. In the end, the evidence that defeated the Plaintiff’s claim was receipts entered into evidence by the Defendants to controvert the Plaintiff’s claim that she had spent over 20% of her total weekly work time cooking for the entire family. The court noted that testimony from either party was inconclusive, but that the receipts were sufficient to rebut the Plaintiff’s claim that she had committed enough time to “general household care.”

The take away from all of this is simple: many employees are not used to also acting as employers, and thus being affected by laws like the FLSA. Cases like Nelms illustrate the importance of educating your employees as to relevant homecare laws that could affect them. As the population continues to grow, an increasing amount of employees may be switching to an employer role when they get home. Educate your employees so that they know when they are liable for paying non-exempt home-care employees, and what kind of work activities may trigger non-exempt employee status. Educating your employees as to these issues will go a long way towards helping keep productivity up at the office.

Bryant S. Banes
Managing Shareholder
Neel, Hooper & Banes, P.C.
Houston, Texas

[i] Mr. Bryant Banes would like to thank Mr. John Price for his assistance in preparing this entry

[iii] Id.

[iv] Id.

[v] Nelms v. Kramer, 2012 WL 3792088 (5th Cir., August 31, 2012).

[vi] Id.

[vii] Id.

The Service Contract Act – Part 1

The Service Contract Act (SCA) generally requires that government contractors on service contracts, with certain limited exceptions, pay a “prevailing wage” to their employees in each specified locality where they have work.  Today, we will address the regulatory language and supporting case law that dictate how and at what point contractors should apply new labor rates in the context of the Department of Labor (DOL) wage determinations.  The rules are confusing and not intuitive.  Moreover, they are different depending on whether or not wages are set by a collective bargaining agreement (CBA).

DOL regulations and applicable law make clear that new wage determinations are not binding on a contractor until incorporated into a modification which exercises an option, extends the contract, or adds labor requirements.  29 C.F.R. § 4.143.  Specifically, any wage determination issued by DOL will apply to a contract “entered into thereafter and before such determination has been rendered obsolete by a withdrawal, modification, or supersedure.”  29 C.F.R. § 4.3(b).  Wage determinations issued by the DOL are not self-executing, are not retroactive, and do not apply to a contractor until the exercise of the next option period after issuance.  Accord Guardian Moving and Storage Company, Inc. v. Hayden, 421 F.3d 1268 (Fed. Cir. 2005).  This coincides with the regulatory language, which provides that qualifying modifications creates a new contract.  29 C.F.R. § 4.143.

Under applicable statutes and DOL regulation, the review and implementation of new wage determinations has to be, at least, every two years.  29 C.F.R. § 4.4.  This review and implementation also coincides with the type of money on the contract.  Id.  For annual appropriation contracts, this review is conducted every year.  Id.  For all other applicable contracts the review is no less frequently than every two years.  Id.  Moreover, until it is incorporated into the contract, the old rates should remain in effect, but not for longer than two years.  Id. 

When operating under a CBA, the application of the SCA shifts.  See generally 41 U.S.C. §§ 351, et seq.  Contracts employing CBAs are not treated the same as those without CBAs.  Specifically, while new wage determinations issued by the DOL are obligated to be reviewed and incorporated into the contract no less frequently than every two years, but more commonly every option period, the rates detailed in a CBA become effective immediately due to the arms length nature of the negotiation process of the new CBA.  Accord Guardian Moving and Storage Company, Inc. v. Hayden, 421 F.3d 1268 (Fed. Cir. 2005).  These rates stay in effect, regardless of any subsequent wage determination or contract successor, until modified with a new CBA.  29 C.F.R. §§ 4.4 & 4.163.  The SCA contemplates such a distinction as well, as they have provided for it in Section 4(c) of the SCA.  This is different than what is expected of contracts that do not operate under a CBA, as the language of 4(d) of the SCA is not self-executing until a new contract is in place.

Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas (May 10, 2012)

Update on Executive and Employee Compensation in Government Contracts

The Government is in constant pursuit of later for ways to save money and, for many in the government, there is no better place to do that than on the backs of contractor that serve it.  A popular target with the  current Administration is the area of executive compensation.  It seems not enough that shareholders keep this in check.  The government also feels it need inject itself in this market-based equation with hard and fast rules.  It has even seen fit on occasion to create rules where there are none, using the Defense Contract Audit Agency (DCAA) as its sword.  With respect to rules, there exists the prospect of political restraint.  Also, where the Government oversteps its bounds, there are Courts that sometimes rein it in.

On the rulemaking side, Congress amended 10 USC § 2324 this past year to provide that the cap on  allowable executive compensation reimbursed on cost-based contracts (currently $693,951 annually, including wages, salary, bonuses and deferred compensation) now applies to “any contractor employee.”  It applies not only to prime contractors but also to subcontractors at any level.  This does not mean that contractors are limited in what they can pay employees; rather, it simply serves as a limit on what can be reimbursed on a government contract.  Accord 48 CFR 31.205-6(p).  Additionally, allowable amounts are also subject to the requirements that the compensation be “reasonable and allocable.”  This reasonableness requirement is where DCAA has recently been chastised for its views.

In Appeal of J.F. Taylor, Inc., ASBCA No. 56105 (January 18, 2012), the Board rejected the government’s challenge to a contractor’s executive compensation model that considered both the revenues of the whole company and its superior performance, as anyone with experience in the private sector would expect.  The government instead tried to rely upon DCAA’s approach that simply mechanically applied a median executive compensation number loosely based upon a market survey unrelated to the contractor at issue.  In its decision, the Board accepted the contractor’s unrebutted expert testimony that “the methodology used by DCAA was fatally flawed statistically and therefore unreasonable.”  The Board also went on to reject the DCAA expert, saying “the government effort to support its own methodology was supplanted by an expert witness of questionable judgment.”  That is harsh by any standard, but appropriate given the circumstances.

What we take from this is that Executive Compensation Reviews (ECRs) by DCAA will continue, and that they may morph into wider reviews.  However, the silver lining is that Courts and Boards seem to willing to scrutinize government positions on compensation that do not make sense; this may give the Government pause.  It is often a battle of the experts, and this writer can personally vouch for the expert used by J.F. Taylor in its case, namely Jimmy Jackson (having seen his excellent work myself).  It remains to be seen whether the Government will appeal J. F. Taylor; they have until May 17, 2012 to do so.  Regardless, the Government must deal with DCAA’s methodology on ECR reviews which, at present, is considered fatally flawed.  We recommend that any contractor undergoing an ECR seek competent counsel for assistance.  It could make a big difference to your bottom line!

Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas (May 9, 2012)

Houston Courts Deny Conditional Certification in Two FLSA Collective Actions

In Richardson v. Wells Fargo Bank, N.A. (S.D. Tex., February 2, 2012) and Andel v. Patterson-UTI Drilling Co., LLC, (S.D. Tex., February 15, 2012), the Houston Federal Court sent a clear message to  seekers of conditional certification in FLSA collective actions.  Namely, it will take much more than an employee’s belief to meet the criteria that there is either a “nationwide policy or plan” or that they are all “similarly situated” to gain certification.

Both cases were heard by the District Court at the initial conditional certification stage with varying degrees of discovery.  Rejecting the applicability of Wal-Mart Stores, Inc. v. Dukes, (S.Ct. 2011), and paying homage to the conflict prevalent in the Fifth Circuit concerning which standard to apply, the  Court in both instances took pains to note that it was applying the more “lenient standard” of Lusardi v. Xerox Corp. (D.N.J. 1987).  This being said, the leniency ended there.

In Richardson, the Court was faced with a number of bankers who we claiming they were forced to work odd hours off the clock under what they contended was a nationwide policy or plan.  The Court noted that Wells Fargo had “clear written policies mandating accurate recordkeeping of employee’s time and payment of overtime when working outside scheduled [times].”  Of course, all employees had nearly identical affidavits wherein they all expressed their belief that certain bank managers expected them to work off the clock.  However, the Court was not persuaded.  While there were instances of rogue conduct or misinterpretations by certain bank managers, there was no proof that the managers consistently failed to follow the bank’s written policy (or that the bank knew of and adopted the inappropriate conduct).  Given this, the Court rejected conditional certification.

The Court reached a similar result in Andel.  In that case, the plaintiffs were welders who were all claiming misclassification as independent contractors.  Applying the “economic realities” test of Thibault v. Bellsouth Telecomms., Inc. (5th Cir. 2010), the Court stated that whether an individual is an employee or independent contractor is “highly dependent on the particular situation presented, and this requires an intensive factual analysis.”  Consequently, the Court ruled that “this individualized analysis precludes certification.”

The lessons to take from these cases are clear.  First, all companies should review their written policies or plans to make certain that they dovetail with FLSA.  Second, defense attorneys should press the Court to look behind any self-serving declaration of plaintiffs to determine if there is really a policy or plan that replaces written policies.  Finally, a forceful objection to conditional certification can be made in any case where misclassification is alleged.

Bryant S. Banes, Managing Shareholder, Neel, Hooper & Banes, P.C., Houston, Texas