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Fourth Circuit Rejects Use Of Workweek Standard Under FLSA White Collar Exemption Short Test, And Adopts Primary Duty Test Based Upon "Totality Of Circumstances" During "Business Cycle"

How Much Nonexempt Work Is Too Much?

Section 7(a) of the Fair Labor Standards Act, 29 U.S.C. section 207(a), requires most employers to pay their employees time and a half for all time worked in excess of forty hours per workweek. Under section 13 of the FLSA, 29 U.S.C. section 213, however, certain employees are exempt from that requirement, and can be paid a flat salary regardless of the number of hours they work.

The FLSA exemptions most often applied are the "white collar" exemptions for employees employed in a "bona fide executive, administrative, or professional capacity." 29 U.S.C. section 213(a). Department of Labor regulations published at 29 C.F.R. Part 541 establish a "long test" and a "short test" for determining whether an employee is subject to each white collar exemption. For example, in regard to administrative employees they establish the following "long test:"

The term employee employed in a bona fide administrative capacity in section 13(a)(1) of the Act shall mean any employee:

(a) Whose primary duty consists of either: (1) The performance of office or nonmanual work directly related to management policies or general business operations of his employer or his employer's customers, or (2) The performance of functions in the administration of a school system, or educational establishment or institution, or of a department or subdivision thereof, in work directly related to the academic instruction or training carried on therein; and

(b) Who customarily and regularly exercises discretion and independent judgment; and

(c)(1) Who regularly and directly assists a proprietor, or an employee employed in a bona fide executive or administrative capacity (as such terms are defined in the regulations of this subpart), or (2) Who performs under only general supervision work along specialized or technical lines requiring special training, experience, or knowledge, or (3) Who executes under only general supervision special assignments and tasks; and

(d) Who does not devote more than 20 percent, or, in the case of an employee of a retail or service establishment who does not devote as much as 40 percent, of his hours worked in the workweek to activities which are not directly and closely related to the performance of the work described in paragraphs (a) through (c) of this section; and

(e)(1) Who is compensated for his services on a salary or fee basis at a rate of not less than $155 per week ($130 per week, if employed by other than the Federal Government in Puerto Rico, the Virgin Islands, or American Samoa), exclusive of board, lodging, or other facilities, or (2) Who, in the case of academic administrative personnel, is compensated for services as required by paragraph (e)(1) of this section, or on a salary basis which is at least equal to the entrance salary for teachers in the school system, educational establishment, or institution by which employed.

29 C.F.R. 541.2. The same regulation also establishes a "short test," under which an employee will be considered an exempt administrative employee if the employee "is compensated on a salary or fee basis at a rate of not less than $250 per week ($200 per week if employed by other than the Federal Government in Puerto Rico, the Virgin Islands, or American Samoa), exclusive of board, lodging, or other facilities" and the employee's "primary duty consists of the performance of work described in paragraph (a) of this section, which includes work requiring the exercise of discretion and independent judgment." 29 C.F.R. 541.2; see also 29 C.F.R. sections 541.201 through 541.215.

As the regulation suggests, an employee need not spend all of his time performing administrative work in order to be an exempt administrative employee. On the other hand, such an employee clearly must perform some amount of administrative work for the exemption to apply. But how much exempt work is enough, and how much nonexempt work is too much?

This question was addressed by the Fourth Circuit in Counts v. South Carolina Electric & Gas Co., No. 02-1131 (4th Cir. 1/31/03). In Counts, the plaintiffs were seventeen salaried administrative employees of a nuclear power plant who, during two five-week plant outage periods in which there were high staffing demands, were assigned to perform duties of a nonexempt nature that were not normally performed by hourly employees, and who therefore claimed they should be paid overtime pay for each of the outage weeks. Their argument in support of their claim was twofold.

Workweek Not Relevant Factor Under Short Test

First, the plaintiffs argued that each workweek should stand alone, and that therefore they should not be considered exempt during the workweeks in which they were assigned to perform nonexempt work. The Fourth Circuit rejected that argument.

Referring to 29 C.F.R. 541.2(d) (limitation based upon "hours worked in the workweek"), the court observed that, "Under the long test, an employee's duties are examined on a workweek basis. If an employee spends more than 20% of his hours in each workweek performing non-administrative duties, then he may not be treated as exempt under this test." The long test, however, did not apply to these employees, because they earned more than $250 per week. "If an employee earns a salary of more than $250 per week," explained the court, "his exempt status is determined using [the] short test."

Turning to the short test, the court stated "under this test, an employee is exempt from the overtime provisions so long as (1) the employee's primary duty consists of the performance of office or non-manual work directly related to management or general business operation; and (2) the employee customarily and regularly exercises discretion and independent judgment." Because 29 C.F.R. 541.2(d) is not incorporated into the short test, the court found that "the short test under which these employees' status must be determined ... contains no mention of a workweek standard." The Fourth Circuit, expressly following Marshall v. Western Union Telegraph Co., 621 F.2d 1246 (3d Cir. 1980), announced that "we hold that the short test does not incorporate a workweek standard." The court explained that the "FLSA was meant to protect low paid rank and file employees, not higher salaried managerial and administrative employees who "are seldom the victims of substandard working conditions and low wages. ... Thus, it was logical for the regulations to provide for greater scrutiny of the day to day duties of lower earning employees in determining their exempt status. Higher earning employees such as the plaintiffs are more likely to be bona fide managerial employees. The regulations reflect a belief that there is no need to examine the actual duties of such employees on a weekly basis to determine their exempt status" (emphasis added).

Primary Duties Determined By Totality of the Circumstances During Business Cycle

Second, the employees argued that their primary duty for the outage periods were duties that were of a nonexempt nature, and therefore the exemption should not apply to them for those periods of time. The Fourth Circuit also rejected that argument.

The Fourth Circuit found that "nothing in the FLSA compels any particular time frame for determining an employee's primary duty." The court noted that "to the extent the regulations refer to time at all, it is only to provide that a good rule

of thumb is that primary duty means the major part, or over 50 percent, of the employee's time." The court further noted that "there is no indication of what time period this percentage is to be evaluated within," and that according to the regulations "time alone ... is not the sole test" and any assessment of primary duty should "be based on all the facts in a particular case."

Therefore, announced the court, "primary duty is meant to be assessed by the totality of the circumstances," and "the language and structure of the FLSA regulations call for an holistic approach to determining an employee's primary duty" (emphasis added). Factors in addition to time which should be considered, according to the court, include but are not limited to "the relative importance of the managerial duties as compared with other types of duties, the frequency with which the employee exercises discretionary powers, his relative freedom from supervision, and the relationship between his salary and the wages paid other employees for the kind of nonexempt work performed by the supervisor."

This left the question of the period of time during which the "totality of the circumstances" should be assessed. The court did not specify any specific period if time to be used for that purpose. It did, however, clearly indicate that evaluation of the primary duty over the course of a "business cycle" would be an appropriate. It stated:

The district court found that the plaintiffs' primary duties were administrative in nature. In doing so, it utilized an eighteen month time frame and found that the performance of nonexempt work for five or six weeks out of every eighteen months could not alter the plaintiffs' exempt status. The use of an eighteen month framework is not compelled by the regulations. But neither is it without basis. Eighteen months comprises the natural business cycle of the power plant Assessing employees' duties on the basis of one business cycle is a common sense means of determining the primary duties of those employees.

Significance for Virginia Employers

Counts v. South Carolina Electric & Gas Co. clearly is good news for Virginia employers, in several respects.
First, the court's rejection of the workweek standard under the short test means that employers will enjoy more flexibility on a weekly basis in assigning nonadministrative duties to administrative employees who meet the salary requirements under the short test. An administrative employee safely can be assigned to nonexempt duties for an entire week without placing the exemption at risk for that workweek. Since the short test only requires a salary of $250 per week ($13,000 per year), the rule announced in Counts will apply to most administrative employees.

Second, the court's adoption of a primary duty test based upon "the totality of the circumstances" during a period of time spanning a business cycle will afford employers greater protection against loss of the exemption when an administrative employee must be assigned to nonexempt duties for significant periods of time. Moreover, this benefit should apply in regard to all administrative employees, since the primary duty test applies to the long test as well as the short test.

Third, although Counts addressed only the administrative employees, it is reasonable to conclude that its ruling also will be applied to executive and professional employees.

The following precautionary notes, however, also are in order.

First, Counts does not stand for the proposition that exempt employees are now interchangable with hourly employees. Excessive assignment of an exempt employee to perform nonexempt tasks may still result in loss of the exemption.

Second, Counts is controlling only in Virginia and the other states in the Fourth Circuit (Maryland, West Virginia, North Carolina, and South Carolina). Virginia employers having employees outside the Fourth Circuit will, for those employees, need to comply with the prevailing law in the circuit where those employees work.

Third, it remains to be seen what position the Department of Labor will take in response to Counts when dealing with employees in the Fourth Circuit. Employers desiring to avoid disputes with DOL should not "push the envelope" to the outer limits of what Counts may permit.

For additional information or assistance with Fair Labor Standards Act compliance, contact attorney Ray Hogge at (757) 640-1500.

Revised 7/18/03