December 9, 2009
On November 20, 2009, the United States Court of Appeals for the Second Circuit issued a decision reversing summary judgment for a financial services firm in a wage and hour action filed under the Fair Labor Standards Act ("FLSA"). Whalen v. J.P. Morgan Chase & Co., No. 08-4092-cv (2d Cir. Nov. 20, 2009), available at http://www.ca2.uscourts.gov/decisions. The decision is out of step with the trend in the other federal appellate courts, evidently due to the Second Circuit’s reliance on regulatory language that was repealed in 2004.
In Whalen, the Second Circuit found that the plaintiff, an underwriter tasked with approving loans, had not been properly classified by his employer as exempt from the FLSA’s overtime pay requirements under the "administrative exemption" because he "did not perform work directly related to management policies or general business operations" of his employer. In reaching this decision, the Second Circuit relied on pre-2004 Department of Labor regulations which corresponded with the dates of plaintiff’s employment and which distinguish "administrative" work from "production" work. Under the "administrative/production dichotomy" in the pre-2004 regulations, the court stated, "Employment may . . . be classified as belonging in the administrative category which falls squarely within the administrative exception, or as production/sales work, which does not." Relying heavily on this distinction, the Second Circuit concluded "that the job of underwriter as it was performed at Chase falls under the category of production rather than of administrative work." It pointed to the fact that underwriters were evaluated on the basis of "productivity" and that the underwriters were directly engaged in creating the very "goods"–loans and other financial services–that were produced and sold by the employer.
The court did not state whether it would have reached the same conclusion if the period of employment in issue had post-dated the Labor Department’s extensive 2004 amendments to its "white collar" regulations, which define exempt administrative, professional, and executive employees.
Prior to the 2004 amendments, the regulations distinguished "activities relating to the administrative operations of a business . . . from ‘production’ or, in a retail or service establishment, ‘sales’ work." 29 C.F.R. § 541.205(a) (pre-2004). The Department of Labor changed this language in 2004, explaining 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." See Final Rule Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 69 Fed. Reg. 22122, 22141 (Apr. 23, 2004) (emphasis added). Rather, it 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."); 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"). In place of the prior regulation’s broad, general language distinguishing administrative work from production work, the Department narrowed the regulations to refer to "administrative work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line . . . ." 29 C.F.R. § 541.201 (a) (emphasis added).
Since that time, the federal appellate courts have followed the Labor Department in placing less weight on whether a job involves "production." For example, in Roe-Midgett v. CC Svcs., Inc., the Seventh Circuit court stated that "the 2004 regulations suggest a more traditional meaning of ‘production’" and that "the so-called production/administrative dichotomy–a concept that has an industrial age genesis–is only useful by analogy in the modern service-industry context." 512 F.3d 865, 872 (7th Cir. 2008). The Seventh Circuit went on to conclude that the administrative/production dichotomy was "not terribly useful" in the case before it because the employees at issue were "obviously neither working on a manufacturing line nor ‘producing’ anything in the literal sense." Id. at 872-73; see also In re Farmers Ins. Exch., 481 F.3d 1119, 1132 (9th Cir. 2007) (a case handled by Gibson Dunn) (finding that application of "administrative/production worker dichotomy" would elevate "form . . . over substance" and instead focusing on the nature of work performed by claims adjusters which "affect[ed] business operations to a substantial degree"); Hamby v. Associated Centers for Therapy, 230 Fed. Appx. 772, (10th Cir. 2007) ("[plaintiff’s] job duties cannot be likened to the type of work performed on a manufacturing production line" and his work in providing services to families was "not akin to production or sale of a commodity"). The Second Circuit’s decision in Whalen–which relied heavily on the pre-2004 regulations–thus appears to be an anomaly that is at odds with the post-2004 amendments to the regulations and with the broader trend in the federal appellate courts to discount the "administrative/production dichotomy."
Gibson, Dunn & Crutcher has extensive experience counseling clients and handling litigation regarding wage and hour compliance and the Department of Labor’s "white collar" regulations. Partner Eugene Scalia had responsibility for the Department’s amendments to the regulations during his tenure as Solicitor of Labor; William J. Kilberg (also a former Labor Solicitor) and Jason Schwartz participated extensively in that rulemaking process. The firm’s Labor and Employment Practice Group is available to assist in addressing any questions you may have regarding the classification of "exempt" and "non-exempt" employees for overtime purposes. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
William D. Claster – Practice Co-Chair, Orange County (949-451-3804, [email protected])
Eugene Scalia – Practice Co-Chair, Washington, D.C. (202-955-8206, [email protected])
William J. Kilberg P.C. – Washington, D.C. (202-955-8573, [email protected])
Jason C. Schwartz – Washington, D.C. (202-955-8242, [email protected])
Christopher J. Martin – Palo Alto (650-849-5305, [email protected])
Jessica Brown – Denver (303-298-5944, [email protected])
Karl G. Nelson – Dallas (214-698-3203, [email protected])
Jesse A. Cripps, Jr. – Los Angeles (213-229-7792, [email protected])
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