The administrative exemption of the Fair Labor Standards Act continues to trip up employers. The administrative exemption is subject to constant challenge and as the latest case reviewing this exemption shows, even federal courts applying the same facts arrive at different conclusions.
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In Calderon v. GEICO General Insurance Co. (4th Cir. 2015) 809 F.3d 111, the U.S. Court of Appeals for the Fourth Circuit held that insurance fraud investigators were misclassified as exempt under the Fair Labor Standards Act’s administrative exemption. Less than two years earlier, the U.S. Court of Appeals for the Sixth Circuit held otherwise for essentially identical employees in Fosters v. Nationwide Mutual Insurance Co. (6th Cir. 2013) 710 F.3d 640. The Fourth Circuit has jurisdiction over Maryland, North Carolina, South Carolina, Virginia, and West Virginia. The Sixth Circuit has jurisdiction over Kentucky, Michigan, Ohio and Tennessee.
Fraud Investigator Duties
GEICO employed fraud investigators in their GEICO’s Special Investigations Unit, which is part of GEICO’s Claims Department. The investigators become involved in the claim process when other personnel refer the claim to him or her on suspicion that the claim is fraudulent. The investigators spend approximately 90% of their time investigatng the suspect claims. Investigations generally entail interviewing witnesses, taking photographs, and reviewing property damage. GEICO has procedures governing how investigators should conduct investigations, but the investigators use their judgment to determine exactly how to conduct their investigations and what inferences to draw from the evidence they uncover, including determining the credibility of insureds or other witnesses. The investigators must submit reports during their investigation to their supervisors prior to the reports being submitted to GEICO’s claims adjusters.
GEICO’s fraud investigators were classified as exempt under the Fair Labor Standards Act, but GEICO, after a federal district court ruled that its auto damages adjusters were misclassified, it questioned the classification of its fraud investigators. However, after reviewing the fraud investigator’s classification twice, GEICO determined that its fraud investigators were properly classified as exempt.
However, the named Plaintiff, Samuel Calderon disagreed. The Plaintiff brought a class action on behalf of himself and all persons who were or had been employed by GEICO as investigators. On summary judgment, the district court rejected GEICO’s contention that the investigators fell within the FLSA’s administrative exemption. GEICO appealed.
Administrative Exemption Test
The FLSA generally requires that employer’s pay overtime for each hour their employees work in excess of 40 hours per week, unless the employee is employed in a bona fide executive, administrative, or professional capacity. Under the current U.S. Department of Labor regulations, the administrative exemption covers employees (1) who are compensated at a rate of not less than $455 per week; (2) whose primary duty is 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) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
On appeal, the court focused on whether the investigators’ duties were directly related to the “management of general business operations of the employer.” The court reasoned that to meet this requirement an employee must perform work directly related to the running of the business as opposed to the day-to-day carrying out of the business’ affairs.
The court reviewed the examples provided by the Department of Labor regulations in its consideration of whether the investigative work performed by the investigators was qualifying work. The regulation’s examples, 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.
Although the court held that the investigators were not production workers per se, it held that the investigator’s primary duty was too far removed from GEICO’s management or general business operations to satisfy the directly related element. The court reasoned that the investigators in no way were part of the management of GEICO and do not run the general business operations, but rather their duties consisted of the “day-to-day carrying out” of GEICO’s business’ affairs.
The court supported its interpretation that the investigators were misclassified with Department of Labor regulations and opinion letters which provide that employees whose primary duty is to conduct factual investigations do not qualify as exempt administrative employees because their primary duty is not the performance of work directly related to the management or general business operations of the employer or the employer’s customers as required by the regulations.
Accordingly, the court affirmed the district court’s decision. However, the court’s decision was not a complete loss, as the court held that GEICO’s misclassification was not willful and thus limited the liability period to two years. The court also upheld the district court’s refusal to impose liquidated damages. The court reasoned because the question of whether the investigators are exempt was a close and complex question and GEICO had made a genuine effort to examine the investigators’ classification, there was no reasonable basis for finding that GEICO’s decision was reckless and there was sufficient evidence to demonstrate that GEICO acted in good faith.
Employers in the Fourth Circuit especially should reconsider any investigators classified as exempt. Employers in other circuits should also reconsider its investigators’ classification with counsel as this decision indicates that there may be further disagreement within the circuits on the administrative exemption’s application to investigators. Employers should also reconsider all workers classified as exempt under the administrative exemption because this recent Fourth Circuit interpretation reveals that courts may be inclined to narrow the application of the exemption to those limited employees who satisfy the “directly related” element of the administrative test.