Are inside sales representatives working for a construction supply company entitled to overtime pay? The United States Supreme Court, in declining further review, has let stand a federal appellate court’s decision that the employees were misclassified as exempt and are entitled to overtime pay.

In Su v. FW Webb Company, a wholesale plumbing and HVAC supply company, F.W. Webb Company (Webb), classified its Inside Sales Representatives (ISRs) as administrative employees. After concluding an investigation that began in 2017, the U.S. Department of Labor’s (DOL) Wage and Hour Division filed suit against Webb in 2020 alleging Webb violated the Fair Labor Standards Act (FLSA) by misclassifying its ISRs as administrative employees exempt from the FLSA’s overtime and recordkeeping requirements. The lawsuit also alleged Webb failed to maintain records of hours worked for employees who were non-exempt.

Under the FLSA, employers are required to pay certain employees, classified as “non-exempt,” overtime and maintain records of employees’ work hours. The FLSA contains an exemption for “any employee employed in a bona fide executive, administrative, or professional capacity…as such terms are defined and delimited from time to time by regulations of the Secretary [of the DOL].”  A three-prong test is applied to determine whether an employee working in an “administrative” capacity exempt from the FLSA’s overtime and recordkeeping requirements. It is the employer’s burden to establish that its employee satisfies all three of the following requirements to be classified as exempt.

(1) Employee is compensated on a salary or fee basis at a rate of not less than $844 per week;
(2) Employee’s primary duty is the performance of office or non-manual work directly related to the management of general business operations of the employer or its customers; and
(3) Employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.

In the DOL’s lawsuit against Webb, it was undisputed that Webb’s ISRs satisfied the first and third prongs of the test. Therefore, the Court of Appeals’ analysis focused on prong 2: Whether Webb’s ISRs’ primary duty is the performance of office or non-manual work directly related to the management of Webb’s general business operations or its customers.

The appellate court, the United States Court of Appeals for the First Circuit, explained that FLSA regulations define an employee’s “primary duty” as “the principal, main, major or most important duty that the employee performs,” which “must be based on all the facts in a particular case, with the major emphasis of the character of the employee’s job as a whole.” In addition to the amount of time an employee spends performing exempt work, factors such as “the relative importance of the exempt duties as compared with other types of duties” and “the employee’s relative freedom from direct supervision” are considered in determining an employee’s primary duty. Under the regulations, an employee satisfies the primary duty requirement only if they “perform work directly related to assisting with the running or servicing of the business[.]”

The Court of Appeals used the “relational analysis test” to determine whether Webb’s ISRs were misclassified as exempt from the FLSA. The “relational analysis test” compares the employee’s primary duty to the employer’s business purpose to determine whether their primary duty “directly relates to the business purpose of the employer” or to the “running or servicing of the business.”

The district court identified Webb’s business purpose as “produc[ing] wholesale sales of its products to its customers.” Webb argued the ISRs were responsible for the “general” promotion and overall success of the business, acting as “advisers, consultants and concierges” to “deliver solutions.” Webb’s ISRs did not work in marketing, did not have any policymaking authority, and did not have managerial duties over other employees. The district court found, and the Court of Appeals agreed, that Webb’s ISRs did not “promote sales generally.” Instead, Webb’s ISRs’ duties are limited to the context of making sales or sales that had been made. Therefore, the First Circuit upheld the district court’s finding that the ISRs’ did not satisfy prong two of the three-prong test for classifying an employee as exempt from the FLSA, because their primary duty was not “directly related to the management or general business operations of the employer.” Because Webb’s ISRs did not satisfy all three requirements to qualify as exempt from the FLSA, the First Circuit upheld the district court’s ruling that Webb misclassified its ISRs as administrative employees exempt from the FLSA’s overtime and recordkeeping requirements.

The misclassification of employees as exempt can have tremendous legal repercussions for employers. Aside from the time expended in responding to DOL audits or lawsuits filed by employees claiming to be owed overtime, the costs for defending these types of claims can be staggering.  While the actual amount of overtime owed to misclassified employees may be small, the cost of defending  against lawsuits relating to improperly withheld overtime pay can many times dwarf the actual damages and drive larger settlement value. Understanding the factors courts use to classify exempt and non-exempt employees, and adopting and enforcing policies that allow for monitoring of hours worked are frequently an employer’s best and most time- and cost-efficient forms of deterrence.

The attorneys in our Austin and Dallas office routinely advise on employment matters. If you should have any questions, please contact us at info@gstexlaw.com.

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