Opinion ID: 566011
Heading Depth: 1
Heading Rank: 2

Heading: EXEMPTION UNDER SECTION 13(a)(1)

Text: 11 We must decide whether the district court erred by concluding that Cooper's inside salespersons are not eligible for section 13(a)(1)'s administrative employee exemption from the Act's overtime pay requirements. 12 Whether Cooper's inside salespersons fall within the exemption is a mixed question of law and fact. We review the district court's findings of historical fact under the clearly erroneous standard set forth in Federal Rule of Civil Procedure 52(a). Icicle Seafoods, Inc. v. Worthington, 475 U.S. 709, 713-14, 106 S.Ct. 1527, 1529-30, 89 L.Ed.2d 739 (1986). See also Brock v. Claridge Hotel and Casino, 846 F.2d 180, 184 (3d Cir.), cert. denied, 488 U.S. 925, 109 S.Ct. 307, 102 L.Ed.2d 326 (1988) (We can review the historical facts only for clear error. Whether the district court properly applied these facts to the regulations is a legal question, over which we have plenary review.) 13 Likewise, where the district court was required to draw factual inferences from historical facts in order to apply Labor's regulations under section 13(a)(1), we review those inferences for clear error too. Walling v. General Industries Co., 330 U.S. 545, 550, 67 S.Ct. 883, 885, 91 L.Ed. 1088 (1947) (inferences, which are drawn by district court from evidentiary facts and are material factors under Labor's regulations, should be left undisturbed by court of appeals unless clearly wrong). See also Icicle Seafoods, 475 U.S. at 713, 106 S.Ct. at 1529-30 (facts necessary to a proper determination of the legal question whether an exemption to the FLSA applies in a particular case should be reviewed under clearly erroneous standard); Dalheim v. KDFW-TV, 918 F.2d 1220, 1226 (5th Cir.1990) (same). Such inferences include, for example, findings as to what work constitutes an employee's primary duty under 29 C.F.R. 541.214. Dalheim, 918 F.2d at 1226. 14 However, we exercise plenary review of the district court's construction of section 13(a)(1), and its ultimate determination that Cooper's inside salespersons are not exempt under the statute. Icicle Seafoods, 475 U.S. at 714, 106 S.Ct. at 1530; Dalheim, id. To the extent Labor's regulations interpreting the exemption are at issue, we recognize that these constitute the agency's body of experience and informed judgment about the statute, and so, they should be given considerable and in some cases decisive weight. Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 164, 89 L.Ed. 124 (1944). 15 We also understand that section 13(a)(1)'s exemptions from the Act's requirements are to be narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit. Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S.Ct. 453, 456, 4 L.Ed.2d 393 (1960). The burden of proving these exemptions is upon the employer, and if the record is unclear as to some exemption requirement, the employer will be held not to have satisfied its burden. Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190, 206, 86 S.Ct. 737, 747, 15 L.Ed.2d 694 (1966).B. 16 Of the various exemptions provided by section 13(a)(1) of the Act, only the administrative exemption is at issue here. The statutory exemption provides as follows: 17 The provisions of section 206 [minimum wage requirements] ... and section 207 [maximum hours and overtime requirements] shall not apply with respect to ... any employee employed in a bona fide ... administrative ... capacity ... as ... defined and delimited from time to time by regulations of the Secretary.... 18 29 U.S.C. 213(a)(1) (emphasis added). 19 Labor has issued agency regulations interpreting the exemption for administrative employees. These regulations outline both long and short tests of bona fide administrative employee status. See 29 C.F.R. Sec. 541.2(a)-(e) (long test); 29 C.F.R. Secs. 541.2(e)(2) and 541.214 (short test). 4 As the parties agree, the two-prong short test applies here because Cooper's inside salespersons are high salaried employees who earn not less than $250 per week. 20 Under the applicable short test, an employee qualifies as a bona fide administrative employee if: (1) the employee's primary duty consists of either the performance of office or nonmanual work directly related to management policies or general business operations of the employer or the employer's customers; and (2) such primary duty includes work requiring the exercise of discretion and independent judgment. 29 C.F.R. Sec. 541.214(a) (emphasis added). The district court concluded that the first requirement (first prong) of the short test is dispositive of the exemption issue with respect to Cooper's inside salespersons. We agree. 5 21 Labor's regulations appearing at 29 C.F.R. Sec. 541.205(a)-(d) establish the meaning of the first prong of the short test. Subsection a of the regulation reads as follows: 22 The phrase directly related to management policies or general business operations of his employer or his employer's customers describes those types of activities relating to the administrative operations of a business as distinguished from production or, in a retail or service establishment, sales work. In addition to describing the types of activities, the phrase limits the exemption to persons who perform work of substantial importance to the management or operation of the business of his employer or his employer's customers. 23 29 C.F.R. Sec. 541.205(a) (emphasis added). Subsection a first establishes the analytical importance of an administrative/productive work dichotomy to be used when characterizing an employee's primary duty for purposes of first prong analysis. This dichotomy is not, however, relevant when the business under scrutiny is a retail or service establishment. See 29 C.F.R. Sec. 541.205(a). Then the appropriate classifying dichotomy is between administrative and sales work. Id. Since Cooper is a wholesaler, the district court correctly chose to focus on the administrative/productive work dichotomy when it applied 29 C.F.R. Sec. 541.205(a) to Cooper's inside salespersons. 24 Subsection b of the regulation explicates this dichotomy by fleshing out the character of administrative (as opposed to productive) activity in a business: 25 The administrative operations of the business include the work performed by so-called white-collar employees engaged in servicing a business as, for example, advising the management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control. An employee performing such work is engaged in activities relating to the administrative operations of the business notwithstanding that he is employed as an administrative assistant to an executive in the production department of the business. 26 29 C.F.R. Sec. 541.205(b) (emphasis added). Thus, servicing an employer's business, such as by negotiating, representing, purchasing and promoting sales, is administrative activity. 27 Subsection a of the regulation establishes too that only persons who perform work of substantial importance to the management or operation of the business will satisfy the first prong of the short test. Subsection c of the regulation describes work of substantial importance as follows: 28 As used to describe work of substantial importance to the management or operation of the business, the phrase directly related to management policies or general business operations is not limited to persons who participate in the formulation of management policies or in the operation of the business as a whole. Employees whose work is directly related to management policies or to general business operations include those [whose] work affects policy or whose responsibility it is to execute or carry it out. The phrase also includes a wide variety of persons who either carry out major assignments in conducting the operations of the business, or whose work affects business operations to a substantial degree, even though their assignments are tasks related to the operation of a particular segment of the business. 29 29 C.F.R. Sec. 541.205(c) (emphasis added). 30 In summary then, the first prong of the short test of the administrative exemption asks ultimately whether an employee's primary work duty is directly related to management policies or general business operations of his employer. This ultimate question subsumes two other inquiries: (1) whether an employee is a production rather than administrative worker within the meaning of the statute and 29 C.F.R. 541.205(a) & (c); and (2) whether an employee performs work of substantial importance to his employer by directly or indirectly formulating, affecting, executing or carrying out management polices by, for example, undertaking major assignments or performing work which affects business operations to a substantial degree within the meaning of 29 C.F.R. 541.205(a) & (b). These inquiries are fact intensive. 6 C. 31 After trial, the district court made the following findings of fact: 32 Inside salespersons at Cooper Electric work an average of forty-five hours per week. The majority of their time is spent in the office making telephone sales of electrical products, or in work closely related to selling electrical products. Sales are made primarily to contractors, industrial buyers, institutions, and government organizations. Only a small percentage of inside sales are made to individual consumers. Inside salespersons generate approximately $20 million dollars of Cooper Electric's gross annual sales. 33 During the course of their employment, inside salespersons are paid a fixed salary plus incentive bonuses based on sales performance. These bonuses can increase an inside salesperson's annual compensation by $2000 to $5000. The sales incentive program is designed to reward the sales staff for attending educational programs, increasing the number of line items sold and maintaining high profit margins. 34 Most of the goods sold by inside salespersons are from Cooper Electric's in-house inventory. Price quotations for these items are available through various trade publications, computerized price sheets, manufacturer's representatives, and an in-house computer which coordinates a pricing matrix based on the customer's record of purchases. Depending on the particular transaction, an inside salesperson may deviate either upward or downward from these price quotes, increasing or decreasing the company's margin of profit. When a particular item is not in stock, an inside salesman will call a manufacturer directly to purchase the product on special order. In that instance, the inside salesperson negotiates the cost to Cooper Electric with the manufacturer's representative and then negotiates the selling price to the customer requesting the goods. 35 App. 10-12. 36 Analyzing these historical facts under the first prong of the short test, the district court concluded that Cooper's inside salespersons do not satisfy either subpart of first prong analysis--to wit, they were not administrative employees and they do not perform work of substantial importance to their employer. The district court did not reach analysis under the short test's second prong which focuses on whether an employee's primary duty includes work requiring the exercise of discretion and independent judgment. 29 C.F.R. Sec. 541.214(a). D. 37 We hold the district court did not err by concluding that Cooper's inside salespersons are production rather than administrative employees. The district court recognized appropriately that it is important to consider the nature of the employer's business when deciding whether an employee is an administrative or production worker. App. 17. Thus, the court took account of the parties' stipulations that Cooper's business is the sale of electrical products and its primary business purpose ... is to produce sales of electrical products. App. 17; 32-33. These stipulations reflect the underlying reality of wholesale sales enterprises like Cooper: they aim to produce wholesale sales. It follows that Cooper's inside salespersons may be classified as production rather than administrative employees for purposes of the short test and Labor's regulations at 29 C.F.R. Sec. 541.205. See similarly Dalheim, 918 F.2d at 1228-33 (television newscast producers, station directors and assignment reporters are non-exempt employees because their primary work duties are related to production aspect of television station's business); Gusdonovich v. Business Information Co., 705 F.Supp. 262, 264-65 (W.D.Pa.1985) (insurance claims investigator is not an administrative employee where employer's business purpose is  'producing' information for its clients and investigator's duties consisted almost entirely of gathering that 'product' ). 38 The district court decided properly that while [Cooper's inside salespersons'] efforts cannot be considered 'production' in the sense of manufacture of tangible goods, ... these individuals play a substantial and integral role in defendant's ability to 'produce sales of electrical products' . App. 18. Given [t]he narrow scope of an inside salesperson[']s responsibility, the district court concluded that Cooper's inside salespersons engage in activities relating to the day-to-day 'production' of sales within the plain meaning of the regulation rather than 'the administrative operation of a business' . Id. This conclusion is not clearly erroneous. 39 Contrary to Cooper's view, the concept of production in 29 C.F.R. Sec. 541.205(a)'s administrative/productive work dichotomy is not to be understood as covering only work involving the manufacture of tangibles. The concept is not limited to manufacturing activities. Since Labor's regulations indicate that certain non-manufacturing employees such as bank tellers, bookkeepers and clerks are not typically administrative employees for purposes of the statutory exemption, non-manufacturing employees may therefore be production workers for purposes of the dichotomy. See 29 C.F.R. 541.205(c)(1)-(3). 40 Production within the meaning of 29 C.F.R. Sec. 541.205(a) may include wholesale sales work in the context of wholesale-distribution businesses like Cooper's. If Cooper's narrower construction of the term production were adopted, then all workers not actually engaged in tangibles manufacture would need to be classified as administrative employees. This narrow view of production under the regulation is at odds with the principle that exemptions from the Act's requirements are to be narrowly construed. We hold that inside salespersons like Cooper's may be classified as production workers for purposes of Labor's regulations under section 13(a)(1) of the Act. 41 Focusing on the language at 29 C.F.R. Sec. 541.205(b) which permits a finding of administrative work when an employee services his employer's business by, for example, representing, negotiating, purchasing, and promoting sales on his employer's behalf, the district court reasoned as follows: 42 Defendant argues that inside salespersons participate in the administrative operations of the business because they represent the company to individuals seeking to purchase electrical supplies from Cooper Electric, occasionally promote sales by advising customers of additional products which may be a necessary or beneficial supplement to their existing orders, and negotiate on behalf of the company to make a sale to a particular customer.... Admittedly, this characterization of an inside salesperson's responsibilities does meet the literal language of the interpretive regulations. However, these activities are part and parcel to the inside salespersons [sic] primary responsibility of producing sales; the impact on administrative operations of the business is minimal. 43 App. 18-19 (emphasis added). The district court concluded that Cooper's inside salespersons are not engaged in 'servicing' the business so as to participate in the administrative operations of Cooper Electric. App. 19. This determination is not clearly erroneous. 44 Cooper's inside salespersons do not service Cooper's business enough to justify a finding that they are administrative employees within the meaning of 29 C.F.R. Sec. 541.205(a) & (b). Even though inside salespersons may sometimes negotiate, represent the company and purchase on Cooper's behalf when customers request products not already in Cooper's stock-in-inventory, these are not their primary duties. The first-prong of the short test requires that an employee's primary duty consist of administrative-type work. 29 C.F.R. Sec. 541.214(a). 7 As the district court found, an inside salesperson's primary responsibility is to produce sales. It follows that negotiating product purchases from manufacturers is only intermittent, secondary employment responsibility for Cooper's inside salespersons. This does not make them administrative employees within the meaning of 29 C.F.R. Sec. 541.205(a) & (b). 45 Likewise, the inside salespersons' primary duties of making routine wholesale sales are not administrative in nature just because their sales inevitably involve some price/terms negotiations with customers. This activity is not a servicing of Cooper's business. As the district court decided, these activities are part and parcel of the activity of producing sales. 46 Servicing a business within the meaning of 29 C.F.R. Sec. 541.205(b) denotes employment activity ancillary to an employer's principal production activity, whether that be production of a commodity or commodities, ... goods or services, see Dalheim, 918 F.2d at 1230, or as in the case here, production of wholesale sales. It follows that inside salespersons do not service Cooper's business by making wholesale sales--wholesale sales is Cooper's business. Any negotiation and representational duties undertaken by Cooper's inside salespersons in the course of ordinary selling do not constitute administrative-type servicing of Cooper's wholesale business within the meaning of 29 C.F.R. Sec. 541.205(b). These activities are only routine aspects of sales production within the context of Cooper's operation. 47 Furthermore, Cooper's inside salespeople do not primarily undertake administrative-type work of 'sales promotion' within the meaning of 29 C.F.R. Sec. 541.205(b). Under that regulation, promoting sales means something more than routine selling efforts focused simply on particular sales transactions. Sales promotion (as an example of servicing under 29 C.F.R. Sec. 541.205(b)), consists of marketing activity aimed at promoting (i.e., increasing, developing, facilitating and/or maintaining) customer sales generally. Promoting sales does not encompass activities necessarily included in the process of closing specific sales. 48 Accordingly, the district court was not clearly wrong when it rejected Cooper's argument that its inside salespersons are administrative employees who promote sales. Inside salespersons at Cooper make discrete sales; they are not promoters or marketeers. Even if, as Cooper argues, 8 they occasionally ... advis[e] customers of additional products which may be a necessary supplement to their existing orders, and 'negotiate' on behalf of the company to make a sale to a particular customer, App. 18 (emphasis added), such selling efforts in the context of discrete, particularized sales transactions do not constitute administrative work within the meaning of section 13(a)(1) of the Act. E. 49 As for the first-prong's other requirement that employees perform work of substantial importance to the management or operation of an employer's business within the meaning of Labor's regulations at 29 C.F.R. Sec. 541.205(a) & (c), the district court said: 50 It is axiomatic that a salesperson 'performs work of substantial importance' to any sales-oriented business. Because of the large volume of sales generated by inside salespersons, it is clear that these individuals are important to the success of Cooper Electric. However, to suggest that in making these sales, an inside salesperson is carrying out major assignments is to strain the interpretation of the regulation beyond common sense.... [T]he nature of an inside salespersons [sic] work is to produce sales for Cooper Electric, not to develop or implement specific work assignments consistent with an overall company policy. There is no evidence in the record to suggest that inside salespersons are formally assigned to particular customer accounts.... To conclude that this interpretive regulation [Sec. 541.205(c) ] was intended to include inside salespersons would unreasonably extend the application of an otherwise unambiguous provision. 51 App. 19-20 (emphasis added). With this the district court decided that Cooper's inside salespersons do not perform work of substantial importance to the management or operation of Cooper's business. 52 Though the court found explicitly that Cooper's inside salespersons do not carry out major assignments, it did not say their work affects [Cooper's] business operations to a substantial degree within the meaning of 29 C.F.R. Sec. 541.205(c). Nevertheless, the court indirectly spoke to the latter point by saying inside salespersons [do] not ... develop or implement specific work assignments consistent with an overall company policy. App. 19. 53 Cooper and amici contend inside salespeople are administrative employees who affect Cooper's business operations to a substantial degree, because on the one hand the inside salespeople make important financial contributions to Cooper's business; and on the other, these salespeople have skills and knowledge that are essential to Cooper's wholesale enterprise. 54 We hold as a matter of law that Cooper's inside salespersons do not perform work of substantial importance to the management or operation of Cooper's business within the meaning of 29 C.F.R. Sec. 541.205(a) and (c). The district court decided correctly that inside salespersons do not undertake major assignments within the meaning of 29 C.F.R. Sec. 541.205(c). The record suggests these salespersons are no more than routine functionaries, albeit important employees. 55 Also, Cooper's inside salespersons do not affect[ ] [Cooper's] business operations to a substantial degree within the meaning of 29 C.F.R. Sec. 541.205(c). We read that requirement of the regulation as meaning that only employees whose work substantially affects the structure of an employer's business operations and management policies may be characterized as administrative workers. We conclude the district court's finding that the nature of an inside salespersons [sic] work is to produce sales for Cooper Electric, not to develop or implement specific work assignments consistent with an overall company policy, is not clearly erroneous, and it supports the legal conclusion that inside salespersons do not affect Cooper's business operations to a substantial degree within the meaning of 29 C.F.R. Sec. 541.205(c). The factual finding and the record as a whole indicates Cooper's inside salespersons are not involved directly or indirectly in the determination, administration or implementation of Cooper's management or operational policies. 56 We reject amici 's argument that inside salespersons affect Cooper's business operations to a substantial degree simply because their collective efforts account for so much of Cooper's annual sales. 9 The financial effect of employee activity cannot alone show work of substantial importance to the management or operation of an employer's business within the meaning of 29 C.F.R. Sec. 541.205(a) & (c). Otherwise, any subset of employees whose work as a group determines an enterprise's financial health might qualify as administrative employees within the meaning of these regulations, no matter how insignificant any one employee's role is to the enterprise. Such a result is inconsistent with section 13(a)(1) of the Act and 29 C.F.R. Sec. 541.205(c). See Dalheim, 918 F.2d at 1231 (that a worker's poor performance may have a significant profit-and-loss impact is not enough to make that worker an exempt administrator). 57 Labor's regulation at Sec. 541.205(c)(2) clearly indicates that an employee does not perform administrative work of substantial importance just because his employer will experience financial losses if the employee fails to perform his job properly. Also, whether inside salespersons perform work of substantial importance to the management or operation of Cooper's business must be addressed in terms of the consequences of each employee's efforts alone, not the effect of the salespeople as a group. 29 C.F.R. Sec. 541.205(c)(6). 58 We also reject Cooper's argument on appeal that the job-related skill and knowledge of Cooper's inside salespersons justify a conclusion that their work substantially affects Cooper's business operations. Such expertise is inevitably developed and applied by the salespeople in the course of making routine sales; the record indicates inside salespeople do not apply their skill and knowledge so as to affect the structure of Cooper's management policies or operations. 59 In summary, we find no error in the district court's reasoning and judgment that Cooper's inside salespersons fail to qualify for section 13(a)(1)'s administrative exemption from the Act's overtime requirements because these employees do not satisfy the first prong of the short test. 10 We must, however, reverse the lower court's refusal to award liquidated damages. 60