FLSA Overtime Exemption May Depend on Amount of Discretion Exercised

by Mark Jeffries

A federal court in Ohio recently decided what it deemed "a close case" regarding overtime exemptions under the Fair Labor Standards Act ("FLSA").  In Foster v. Nationwide Mutual Insurance Company, the court held that Nationwide's special investigators, who investigate potential fraud in Nationwide's claims, were not entitled to overtime pay due to the FLSA's "administrative exemption."

Foster involved a claim by 91 current and former special investigators who alleged that Nationwide improperly classified them as exempt from the FLSA's overtime requirement. The FLSA's administrative exemption apply to those employees (1) who are paid a salary of not less than $455 per week, (2) whose primary duty is performing office or non-manual work directly related to the management or general business operations of the employer, and (3) whose primary duty includes "the exercise of discretion and independent judgment with respect to matters of significance."  Because the court had earlier held that the special investigators met the first two requirements, the case turned on the third factor.

The investigators alleged that they were not exempt from overtime because they did not exercise discretion and independent judgment. The investigators claimed that they were mere fact gatherers who were prevented by Nationwide's policies from providing any opinions on whether a claim was fraudulent.  Nationwide, on the other hand, characterized the investigators as the subject matter experts on fraud who rendered opinions to Nationwide's claims adjusters based on the results of their investigations.

The court agreed with Nationwide.  It determined that the investigators' "primary duty" was conducting investigations into suspicious claims with the goal of "resolving indicators of fraud present in those claims." The court then concluded that this primary duty involved the exercise of discretion and independent judgment respecting matters of significance -Nationwide's decision to pay or deny insurance claims. In examining the level of discretion and independent judgment required to qualify for the exemption, the court noted that this discretion and judgment can take the form of recommendations and can even be met if the employee's decisions or recommendations are subject to some oversight by higher-level managers.

As the court stated, this was a close case.  A federal court in Minnesota, examining investigator positions very similar to those in Foster, came to the opposite conclusion.  What this means to employers is that they must make sure that those employees they classify as exempt from overtime under the FLSA truly exercise some degree of independent judgment and discretion in matters of significance and do not merely gather facts or enter data. On the other hand, employers should note that even employees whose decisions are somewhat restrained by company policy and are subject to review by management may be exempt if they meet the other two requirements of the administrative exemption.

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