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December 18, 2009

Second Circuit Interprets the "Administrative Exception" of the FLSA

On November 20, 2009, the United States Court of Appeals for the Second Circuit held in Whalen v. J.P. Morgan Chase & Co., Docket No. 08-cv-4092, that an underwriter employed by J.P. Morgan Chase (“Chase”) was not employed in a bona fide administrative capacity that would exempt him from the overtime requirements of the federal Fair Labor Standards Act (“FLSA”).  This case exemplifies a holding requiring overtime pay for jobs that have been traditionally viewed by many employers as exempt from the FLSA overtime requirements.

The FLSA requires the payment of overtime to all employees unless they fall within one of the statute’s defined exemptions, such as employees who work in an executive, administrative or professional capacity.  The FLSA regulations define exempt “administrative” positions as those in which employees perform work “directly related to management policies or general business operations.”  The Court explained that bona fide administrative work, as distinguished from non-exempt “production” or, in a retail or service establishment, “sales” work, requires the employee to “customarily and regularly exercise discretion and independent judgment.”  The key distinction between exempt administrative and non-exempt production work is in the nature of duties performed, and not the level of responsibility, importance, or skill needed to perform the particular job. 

In Whalen, plaintiff’s primary duty as an underwriter was to sell loan products in accordance with detailed guidelines provided by Chase.  Underwriters were not expected to advise customers as to what loan products best met their needs and abilities.  Underwriters were evaluated by measuring each underwriter’s productivity in terms of “average of total actions per day,” and occasionally received paid incentives to increase production.  In addition, underwriters had no involvement in determining the future strategy or direction of the business, nor did they perform any other function that related to Chase’s overall efficiency or mode of operation.  The fact that underwriters exercised discretion and independent judgment in assessing creditworthiness did not overcome the fact that they performed work that was primarily functional rather than conceptual.  The Court made clear that “production” work is not limited to the production of material goods, but also includes the “production” of an intangible service.

The Court concluded that plaintiff did not perform work directly related to management policies or general business operations, and thus the job of underwriter fell under the non-exempt category of production work rather than exempt administrative work.  In its analysis, the Court relied upon its 1993 decision in Reich v. State of New York, where the Court held that state police investigators who both supervised and conducted investigations “fell squarely on the ‘production’ side of the line.”  Thus, as these employees “produced” criminal investigations, they were not exempt from the FLSA’s overtime requirements. 

In sum, the Court held that to qualify under the “administrative” exemption, an employee must both perform work directly related to management policies or general business operations and customarily and regularly exercise discretion and independent judgment.  When such results are tallied for thousands of employees stretching back either two or three years, the overtime payments will represent a significant cost penalty to the employer.

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