Are Your Administrative Employees Really Exempt From Overtime Pay?

On December 23, 2015, the Fourth Circuit Court of Appeals ruled that insurance investigators who work in a special investigative unit of GEICO’s claims department do not come within the administrative exemption under the federal Fair Labor Standards Act (FLSA) and, thus, are entitled to overtime pay. The case is Calderon v. GEICO Gen. Ins. Co., 4th Cir., No. 14-2111, Dec. 23, 2015. The plaintiff investigators spend 90% of their time investigating whether various insurance claims may be fraudulent and perform their duties according to specific company-mandated procedures. GEICO had long classified the investigators as exempt administrative employees. The plaintiffs contended that they were entitled to unpaid overtime, liquidated damages, interest, and attorneys’ fees.

Under the FLSA, an employee who works more than forty hours a week is entitled to be paid overtime for each hour over forty, unless an exemption applies. The Act exempts “any employee employed in a bona fide executive, administrative, or professional capacity.” 29 U.S.C. §213(a)(1). The administrative exemption applies to employees who: (1) are compensated on a salary basis in an amount of not less than $455 per week (this amount is proposed to increase this year); (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 involves the exercise of discretion and independent judgment. 29 C.F.R. §541.200(a).

The district court in Calderon determined that the plaintiffs were entitled to summary judgment on their claim for unpaid overtime because GEICO failed to establish the third element for exemption as an administrative employee--that the employees’ primary duty involved the exercise of independent judgement and discretion. However, the Fourth Circuit determined that, “in our view, the plaintiffs were entitled to summary judgment on the basis of the directly related element.” The court of appeals found that there was no question that the investigators’ primary duty was “the investigation of suspected fraud, including reporting their findings.” If that primary duty did not constitute exempt work, then the investigators should be classified as non-exempt. The court of appeals, citing its prior decision in Desmond v. PNGI Charles Town Gaming, L.L.C., 564 F.3d 688 (4th Cir. 2009), reiterated that, “Both the FLSA and its regulations make clear that an employee is exempt based on the type of work performed,” and emphasized the requirement in the pertinent regulation that the exempt administrative employee must perform work directly related to assisting with the “running or servicing of the business.” The court stated, “Thus, in the end, the critical focus regarding this element remains whether an employee’s duties involve the ‘running of the business’ as opposed to the mere ‘day-to-day carrying out of [the business’s] affairs.’”

The investigator’s primary duty, the court reasoned, was too far removed from GEICO’s management or general business operations to satisfy the directly related element. Although their work was important to GEICO's business, it is the “nature of the work not its ultimate consequence” that determines whether the exemption applies. The court recognized that the issue in the case “presents a very close legal question,” but concluded that GEICO had failed to show that the investigators’ primary duty was directly related to the management or general business operations of the company.

The Calderon case is important as a reminder that correctly applying the administrative exemption can be difficult and that, at least in the Fourth Circuit, the exemption will be narrowly construed against the employer and must be proved by clear and convincing evidence. Employers should carefully consider whether they are correctly applying the administrative exemption.