The United States Department of Labor is the agency responsible for administering many of the federal laws governing the American workplace. To handle its wide-ranging responsibilities, the DOL is organized into smaller bureaus. The Wage Hour Division (“WHD”) is responsible for the enforcement and interpretation of the FLSA and the FMLA.

Considered by some to be a “sleeping giant” during the Bush administration, the DOL is newly invigorated. The WHD, for example, announced in March 2009 the addition of 250 field investigators, a 33% increase. In addition to new personnel, the WHD has begun issuing a new form of informal enforcement guidance, called Administrator Interpretations.

The WHD’s first three forays into Administrator Interpretations involve the application of the “administrative exemption” to the FLSA’s minimum wage and overtime provisions, the definition of “clothes” for purposes of determining whether changing time is compensable under the FLSA, and the definition of “in loco parentis” under the FMLA.

Employers and their lawyers should take notice. The common theme among these Administrator Interpretations is expansion of the law without new legislation or regulation, resulting in increased liability for employers. The Interpretations foreshadow the enforcement position the WHD will take when investigating complaints against employers and undertaking audits. They may influence courts’ decisions. They also will provide the basis for more formal agency action, such as future regulations or additional Administrator Interpretations. This article summarizes the Interpretations and their effect on existing law.

A.

WHAT ARE ADMINISTRATOR INTERPRETATIONS?

Like other administrative agencies, the Department of Labor issues formal regulations to implement and administer the laws within its purview. Courts give significant deference to an agency’s properly promulgated regulations. Issuing new or revised regulations is a long slog, though, because of the Administrative Procedures Act’s requirements. Additionally, regulations cannot address all of the questions employers and their lawyers may have about the application of the laws and the regulations themselves.

To provide guidance without issuing new regulations, the WHD issues materials such as “fact sheets,” and even publishes its “Field Operations Handbook,” originally intended to guide investigators’ determination of violations. The WHD in the past issued “opinion letters,” in which the WHD Administrator or staff would respond to employers’ questions about the Fair Labor Standards Act and the Family and Medical Leave Act. Although courts do not defer to these letters as readily as regulations, judges are free to give them the weight they deserve.

The WHD has decided to replace opinion letters with “Administrator Interpretations.” The WHD explains its reasons for this change on its website:

    the Wage and Hour Administrator will issue Administrator Interpretations when determined [sic] . . . that further clarity regarding the proper interpretation of a statutory or regulatory issue is appropriate. Administrator Interpretations will set forth a general interpretation of the law and regulations, applicable across-the-board to all those affected by the provision in issue. Guidance in this form will be useful in clarifying the law as it relates to an entire industry, a category of employees, or to all employees. The Administrator believes that this will be a much more efficient and productive use of resources than attempting to provide definitive opinion letters in response to fact-specific requests submitted by individuals and organizations, where a slight difference in the assumed facts may result in a different outcome. . . .

Thus, the WHD expressly intends Administrator Interpretations to apply generally, not in connection with a single set of facts. Intended to “clarify regarding the proper interpretation of a statutory or regulatory issue,” “clarity” comes in the form of significant changes to the WHD’s policies and enforcement positions, at least in the case of the first three Interpretations discussed below.

B. ADMINISTRATOR INTERPRETATION 2010-1: APPLICATION OF THE ADMINISTRATIVE EXEMPTION UNDER SECTION 13(A)(1) OF THE FAIR LABOR STANDARDS ACT, 29 U.S.C. § 213(A)(1), TO EMPLOYEES WHO PERFORM THE TYPICAL JOB DUTIES OF A MORTGAGE LOAN OFFICER.

The inaugural Administrator Interpretation, No. 2010-1, is an analysis of whether the “administrative exemption” to the FLSA applies to mortgage loan officers. In the Administrator’s view, it does not.

1. The Administrative Exemption Generally

The FLSA does not define what constitutes an “administrative” employee. The DOL’s regulations explain:

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

    (1) Compensated on a salary or fee basis at a rate of not less than $455 per week . . . exclusive of board, lodging or other facilities;

    (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.

Generally, all of these elements must be satisfied. However if the employee earns over $100,000 in total compensation (including commissions), the exemption applies if the employee “customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee . . . .”

2. The Administrator’s Interpretation

The Administrator set out what she found to be “typical” duties of mortgage loan officers:

    Mortgage loan officers collect required financial information from customers they contact or who contact them, including information about income, employment history, assets, investments, home ownership, debts, credit history, prior bankruptcies, judgments, and liens. They also run credit reports. Mortgage loan officers enter the collected financial information into a computer program that identifies which loan products may be offered to customers based on the financial information provided. They then assess the loan products identified and discuss with the customers the terms and conditions of particular loans, trying to match the customers’ needs with one of the company’s loan products. Mortgage loan officers also compile customer documents for forwarding to an underwriter or loan processor, and may finalize documents for closings.

The Administrator’s conclusion that mortgage loan officers typically are non-exempt is based on its analysis of the second prong of the exemption test discussed above: whether the employee’s “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.”

a. The Production / Administrative Dichotomy

The Administrator decided that mortgage loan officers were more akin to sales employees than financial consultants. That is, they are a part of the “production” process of loan sales. Relying on the “production versus administrative dichotomy,” the Administrator noted mortgage loan officers do not service the employer’s internal needs as “staff” (such as accounting and human resources), which is required for the administrative exemption.

The Administrator found significant that many mortgage loan employees are evaluated based on the number of mortgages closed and provided sales training. Many mortgage loan officers are paid on commission, which also is indicative of a sales function. In fact, the Administrator noted, employers sometimes argued in litigation that mortgage loan officers were exempt as both “outside sales” employees under 29 U.S.C. § 213(a), and “inside sales” employees under 29 U.S.C. § 207(i). Because a salesperson cannot be exempt under the administrative test, the Administrator concluded that the job of mortgage loan officer normally would not qualify for the administrative exemption.

b. Administrative Work for Customers

The Administrator rejected the notion that mortgage loan offers perform administrative work on behalf of their customers, rather than for the employer, another way to meet the requirements of the administrative exemption. The Administrator distinguished between providing advice and administrative work for an individual’s personal needs, rather than for a business’ needs:

    work for an employer’s customers does not qualify for the administrative exemption where the customers are individuals seeking advice for their personal needs, such as people seeking mortgages for their homes. Individuals acting in a purely personal capacity do not have “management or general business operations” within the meaning of this exemption.

However, the Administrator noted, if an employee were advising a business about financial management, or even real estate purchases (such as a consultant might do), the work could be exempt.

c. Rejection of Wage and Hour Opinion Letter FLSA 2006-31 (Sept. 8, 2006)

The production/administrative dichotomy is not new, and neither is the principle that “sales” employees are not exempt under the administrative test. But Administrator Interpretation 2010-1 is directly contrary to the Administrator’s Opinion Letter FLSA 2006-31, issued on September 8, 2006.

In Opinion Letter 2006-31, the previous WHD Administrator decided that mortgage loan officers likely were exempt under the administrative test. The previous Administrator relied on 29 CFR § 541.203(b), a regulation suggesting that financial services employees could qualify as exempt, when their duties include:

    collecting and analyzing information regarding the customer’s income, assets, investments or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing or promoting the employer’s financial products. However, an employee whose primary duty is selling financial products does not qualify for the administrative exemption.

The mortgage loan officers’ duties are described similarly in Opinion Letter 2006-31 and Administrator Interpretation 2010-1. However, the Administrator in Interpretation 2010 1 decided § 541.203(b) did not require the conclusion that mortgage loan officers perform exempt duties. The Administrator suggested that Opinion Letter 2006-31 in essence was an “end run” around the general administrative test contained in § 541.200. In so doing, the Administrator narrowed § 541.203 by (1) holding that the term “customer” in § 541.203(b) must apply only to business, not individual, customers, and (2) deciding that work such as analyzing information, deciding which financial products meet the customer’s needs, etc. were simply part of the sales process. The current Administrator resolved the inconsistent analyses by disapproving Opinion Letter 2006-31. It is now marked “withdrawn” on the WHD’s website.

3. The Effect of Administrator Interpretation 2010-1

Unfortunately, the Administrator failed to address the “high compensation” exemption contained in 29 CFR 541.601. Therefore, it remains to be seen whether the Interpretation 2010-1 will apply to employees earning more than $100,000 per year.

The Administrator’s emphasis in Interpretation 2010-1 on the difference between individual and business customers may affect the exempt status of jobs in which employees service individual customers’ needs. The WHD’s enforcement position is that advising individuals regarding financial matters likely is not considered exempt work.

Under the Administrator Interpretation, employees paid on commission, who attend sales training, and who are evaluated based on sales productivity may well fall on the “production” side of the “dichotomy,” failing the exemption test.

Finally, the Administrator Interpretation expressly does not apply to outside sales workers. The Administrator also leaves open the possibility that commission-based employees qualify under the special inside sales exemption applicable to retail or service establishments. However, employers should proceed cautiously, because many financial services employers may lack a sufficient “retail concept” to qualify under the exemption.

C. ADMINISTRATOR INTERPRETATION NO. 2010-2: SECTION 3(O) OF THE FAIR LABOR STANDARDS ACT, 29 U.S.C. § 203(O), AND THE DEFINITION OF “CLOTHES.”

The second Administrator Interpretation is the latest see-saw move in the WHD’s enforcement position regarding payment for “donning and doffing” work clothes and protective gear.

1. FLSA § 3(o) and the Portal-to-Portal Act

The Portal-to-Portal Act amended the FLSA to exclude from compensable work time activities that are preliminary and “postliminary” to the employees’ principal work activities, including walking between the workplace entrance and the work site. Separately, § 3(o) of the FLSA provides that time spent “changing clothes or washing at the beginning or end of each workday” is excluded from compensable time, if the employer and union expressly or by “custom and practice” agree to exclude it.

The interplay between these provisions is significant. If employees’ change into safety equipment or protective gear, the argument arises that the time is not spent “changing clothes,” is not excluded under § 3(o) and, therefore, is compensable work time. When changing is not excluded under § 3(o) and is considered part of the employee’s “principal” work activity, then the Portal-to-Portal Act does not apply. Consequently, even the time spent walking to and from the plant entrance becomes compensable under the “continuous workday rule.” A less common question is whether changing clothes alone, which is not compensable under § 3(o), nevertheless can be a “principal activity,” rendering subsequent time compensable. The WHD took up these issues in Administrator Interpretation 2010-2.

2. Administrator Interpretation 2010-2

The Administrator made two significant changes to its enforcement policy. First, the term “clothes” under § 3(o) of the FLSA “does not extend to protective equipment worn by employees that is required by law, by the employer, or due to the nature of the job . . . .” Second, the Administrator opined that even changing “clothes,” which is not compensable under § 3(o), can constitute a “principal activity” under the Portal-to-Portal Act. As a result of this second opinion, the time walking to and from the work site would be compensable.

a. Protective Equipment Is Not “Clothes”

The Administrator’s “new” interpretation of “clothes” under § 3(o) of the FLSA is a return to the WHD’s enforcement position, as explained in a WHD Opinion Letter dated December 3, 1997. There, an employer in the meat-packing industry requested an opinion regarding whether “sharpening knives, waiting in line at wash stations, cleaning equipment, and putting on and taking off required safety gear” were considered changing clothes under § 3(o).

The Administrator deemed § 3(o) to be an “exemption” from compensable work time. This is significant because exemptions to the FLSA are construed narrowly, and the burden is on the employer to prove they apply. The Administrator then concisely opined:

    The plain meaning of “clothes” in section 3(o) does not encompass protective safety equipment; common usage dictates that “clothes” refer to apparel, not to protective safety equipment which is generally worn over such apparel and may be cumbersome in nature.

However, the WHD in 2002 reversed its 1997 interpretation. In Wage and Hour Opinion Letter FLSA 2002-2, the Administrator opined that “clothes” under § 3(o) included the protective equipment typically worn by meat packing employees. In 2007, the Administrator reaffirmed this position.

In Administrator Interpretation 2010-2, the WHD withdrew the 2002 and 2007 letters and restored its 1997 interpretation of “clothes.” The Administrator cited several opinions in which courts held that “clothes” did not include protective equipment such as face shields, helmets, smocks, plastic aprons, arm guards, belly guards, plastic arm sleeves, a variety of gloves, a hook, knife holder, a piece of steel to straighten the edge of a knife blade, and knives. In a footnote, however, the Administrator conceded that two courts of appeals had held certain safety equipment could constitute clothes, but then disagreed with those opinions.

b. The Sixth Circuit Rejects the Administrator’s Definition of “Clothes”

Barely six weeks after the WHD issued Administrator Interpretation 2010-2, the Sixth Circuit in Franklin v. Kellogg Corp., rejected the Administrator Interpretation’s narrow definition of “clothes.” There, hourly employees wore company-provided uniforms, which consist of pants, snap-front shirts, and slip-resistant shoes. In addition, hourly production and maintenance employees wore “standard equipment,” including hair nets, beard nets, safety glasses, ear plugs, and bump caps.

The court of appeals first held, contrary to the Administrator, that the § 3(o) exclusion is not an “exemption,” but is merely part of the definition of hours worked. Therefore, the burden of proving the exclusion does not apply rests with the plaintiff.

The court also refused to give deference to the Administrator Interpretation: “The DOL’s position on this issue has changed repeatedly in the last twelve years, indicating that we should not defer to its interpretation. Additionally, we find its interpretation to be inconsistent with the language of the statute.”

The court then explained that the uniforms and standard equipment were “clothes”:

    Given the context of the workday, § 203(o) clearly applies to the uniform at issue in the case at hand. The remaining items–hair and beard nets, goggles, ear plugs, non-slip shoes, and a bump cap–are also properly construed as clothes within the meaning of § 203(o). Each of these items provides covering for the body. Although they also provide protection to the body, we see no reason to distinguish between protective and non-protective clothes.

Thus, the Administrator’s restricted view of “clothes” will be the subject of continued challenges unless or until the Supreme Court steps in to settle the matter, Congress amends the FLSA, or the DOL adopts formal regulations.

c. Changing Clothes Can Be a “Principal Activity,” Triggering the Start of the Compensable Work Day

Administrator Interpretation 2010-2 also states that even clothes-changing that would not be compensable time under § 3(o) still may constitute a “principal activity” under the Portal-to-Portal Act. As the Administrator points out: “Where that is the case, subsequent activities, including walking and waiting, are compensable.”

This opinion will have more significant effects than the definition of “clothes.” The § 3(o) exclusion applies only in unionized settings. And many employers require changing into uniforms and other “clothes” without the addition of safety gear and other items not considered “apparel.”

The Administrator cited as the “leading case,” Figas v. Horsehead Corp., 2008 WL 4170043 (W.D. Pa. 2008), a district court opinion not published in the official reports. In Figas, the plaintiffs claimed that changing into protective coveralls at a chemical plant was not changing “clothes” under § 3(o), and that the time spent changing, as well as all subsequent time, was compensable.

The district court held that the time spent changing was indeed excluded under § 3(o) because the protective clothing constituted “clothes.” However, the court denied the employer’s motion for summary judgment on the plaintiffs’ claim that the time walking to the work area following clothes-changing was compensable.

The court held non-compensable changing time could be part of the workers’ “principal activities,” triggering the beginning of compensable work time. The Administrator noted two district courts had held that clothes-changing excluded from work time under § 3(o) could not be “principal activities,” but stated the “weight of authority is to the contrary” and cited a handful of other district court decisions.

The court of appeals in Franklin v. Kellogg, discussed above, is possibly the first appellate court to have considered the issue. The court agreed with the Administrator on this point. The court held that § 3(o) simply means that changing clothes itself is not a compensable activity. But § 3(o) does not preclude the conclusion that donning and doffing clothes are part of the worker’s principal activity.

d. When Is Changing Clothes Considered a “Principal Activity”

There are regulations and numerous court cases analyzing the breadth of the term “principal activity” and its application to “donning and doffing.” Principal activities may include not only the work itself, but also activities, such as donning safety equipment, that are “integral” and “indispensable” to the principal activity (usually the work performed).

The court in Franklin analyzed “‘(1) whether the activity is required by the employer; (2) whether the activity is necessary for the employee to perform his or her duties; and (3) whether the activity primarily benefits the employer.'” Based on this test, the court held the Kellogg employees’ donning and doffing their uniforms were integral and indispensable to their work at the factory:

    First, the activity is required by Kellogg. Second, wearing the uniform and equipment primarily benefits Kellogg. Certainly, the employees receive protection from physical harm by wearing the equipment. However, the benefit is primarily for Kellogg, because the uniform and equipment ensures sanitary working conditions and untainted products. Because Franklin would be able to physically complete her job without donning the uniform and equipment, unlike the plaintiffs in Steiner, it is difficult to say that donning the items are necessary for her to perform her duties. Nonetheless, considering these three factors, we conclude that donning and doffing the uniform and standard equipment at issue here is a principal activity.

3. Compliance Following Administrator Interpretation 2010-2

Employers in unionized settings must consider whether § 3(o) and their collective bargaining agreements or practices will insulate them from liability for unpaid changing time. The courts are not in agreement regarding whether “clothes” includes only apparel, as the Administrator opined, or also protective clothing and equipment.

All employers, however, must consider whether clothes-changing is a an “integral” or “indispensable” part of employees’ principal activities. As discussed above, the Administrator’s opinion that even donning wearing apparel can be part of employees’ principal activities may create liability for employers who do not pay for time spent walking to the work area. Under the test endorsed in Franklin, employees may argue that merely donning and doffing required uniforms are sufficiently related to principal work that all time between changing in and out of the uniform must be paid. That argument, if accepted by courts, potentially could result in major unforeseen wage and hour liability and a new round of class actions.

D. ADMINISTRATOR INTERPRETATION 2010-3: CLARIFICATION OF THE DEFINITION OF “SON OR DAUGHTER” UNDER SECTION 101(12) OF THE FAMILY AND MEDICAL LEAVE ACT (FMLA) AS IT APPLIES TO AN EMPLOYEE STANDING “IN LOCO PARENTIS” TO A CHILD

Administrator Interpretation 2010-3 re-defines who is entitled to take leave under the Family and Medical Leave Act. The Secretary of Labor, Hilda Solis, has written that Administrator Interpretation 2010-3 is an expansion of the law through “interpretation.” She is correct. If courts adopt the Administrator’s new construction of the FMLA, more FMLA claims and, therefore, more litigation over denial of leave, discrimination, and retaliation will result. The Interpretation also makes it nearly impossible to verify the bona fides of who is entitled to leave.

1. FMLA Leave Related to a Son or Daughter

The Family and Medical Leave Act of 1993, as amended, allows eligible employees to take up to 12 workweeks of job-protected, unpaid leave in any 12-month period for, among other reasons, the birth of a “son or daughter,” to bond with a newborn or newly placed adopted child, or to care for a “son or daughter” with a serious health condition.

The FMLA and the DOL’s regulations define a “son or daughter” as: a biological, adopted or foster child, a step child, a legal ward, or a child of a person standing in loco parentis, if that child is either under 18 years old, or is 18 years or older and incapable of self care because of a mental or physical disability.

The DOL’s regulations also define who is “a person standing in loco parentis” as follows:

    Persons who are “in loco parentis” include those with day-to-day responsibilities to care for and financially support a child, or, in the case of an employee, who had such responsibility for the employee when the employee was a child. A biological or legal relationship is not necessary.

2. Administrator Interpretation 2010-3

The definition of “in loco parentis” quoted above expressly requires the person seeking leave to (1) have day-to-day responsibilities to care for and (2) financially support a child. But the Administrator wrote: “the regulations do not require an employee who intends to assume the responsibilities of a parent to establish that he or she provides both day-to-day care and financial support in order to be found to stand in loco parentis to a child.”

Because there is no requirement of “financial support,” nearly anyone who helps “care” for a child may now claim FMLA leave:

    where an employee provides day-to-day care for his or her unmarried partner’s child (with whom there is no legal or biological relationship) but does not financially support the child, the employee could be considered to stand in loco parentis to the child and therefore be entitled to FMLA leave to care for the child if the child had a serious health condition. The same principles apply to leave for the birth of a child and to bond with a child within the first 12 months following birth or placement.

The Administrator then opined that persons may stand “in loco parentis” regardless of whether the child already has two parents:

    the fact that a child has a biological parent in the home, or has both a mother and a father, does not prevent a finding that the child is the “son or daughter” of an employee who lacks a biological or legal relationship with the child for purposes of taking FMLA leave. Neither the statute nor the regulations restrict the number of parents a child may have under the FMLA. For example, where a child’s biological parents divorce, and each parent remarries, the child will be the “son or daughter” of both the biological parents and the stepparents and all four adults would have equal rights to take FMLA leave to care for the child.

After granting nearly anyone who knows a child the right to take FMLA leave, the Administrator then relaxed the documentation requirement:

    Where an employer has questions about whether an employee’s relationship to a child is covered under FMLA, the employer may require the employee to provide reasonable documentation or statement of the family relationship. A simple statement asserting that the requisite family relationship exists is all that is needed in situations such as in loco parentis where there is no legal or biological relationship.

In support of this statement, the Administrator cites 29 CFR § 825.122(j), a regulation that indeed says the employer may accept an employee’s “simple statement.” But the Administrator omitted the portion of the regulation allowing the employer to require “reasonable documentation,” which may include “a child’s birth certificate, a court document, etc.”

3. Employers’ Strategies

Given that Administrator Interpretation 2010-3 contradicts the DOL’s own regulations, and appears to expand FMLA coverage without congressional authority, the courts may accord this Administrator Interpretation little deference. However, employees merely “attempting” to obtain FMLA leave are protected from retaliation. The Interpretation at minimum will result in more employees covered by the anti-retaliation provisions.

Although the term “in loco parentis” previously existed in the law, the Administrator Interpretation expands the term’s usual meaning. Employers choosing to follow the Interpretation will face claims for leave by relatives such as aunts and grandparents, boyfriends, roommates, and other persons who care for an employee’s children.

One might argue this Interpretation also facilitates potential abuse of FMLA leave. It is likely employers will see more claims for leave coinciding with holidays, and in response to negative performance reviews. Employers will be faced with the Hobson’s choice of denying potentially bona fide leave and risking litigation, or running short-handed.

Employers have little recourse except to insist on the minimal documentation permitted under the regulations. Documentation in the form of the employee’s own “simple statement” does not impose much of a procedural hurdle. Nevertheless, to determine “in loco parentis” status, courts consider factors such as the child’s age, the amount of financial support provided, if any, and the “parental duties” assumed by the person seeking in loco parentis status. The “simple statement” may be evaluated under these factors to see if the employee indeed qualifies.

Finally, employers may wish to ensure that employees seeking leave are otherwise eligible (e.g., have one year of service, etc.), and that the employee seeks leave for a covered reason (e.g., to bond with or care for a child’s serious health condition). There are additional verification and documentation requirements associated with these issues.

Reprinted from HR Advisor: Legal and Practical Guidance. Copyright Ω 2010 Thomson Reuters/West. For more information about this publication please visit www.west.thomson.com.

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