Upcoming Supreme Court Decision May Make HR’s Exemption Analysis Less Costly

The U.S. Supreme Court announced recently that it will decide what evidentiary standard employers must meet to show that an employee is exempt from the Fair Labor Standards Act’s (FLSA’s) overtime requirements. The court’s upcoming decision might help ease HR’s exemption analysis in states within the 4th U.S. Circuit Court of Appeals—Maryland, North Carolina, South Carolina, Virginia, and West Virginia—if the heightened standard applied in those states is overruled. These changes could translate into lower FLSA compliance costs.

HR’s Burden of Proof

The question before the court is whether employers must show just some evidence that an FLSA exemption applies or if they must show “clear and convincing” evidence. The 4th Circuit has said the latter standard applies, which is a heightened standard that has resulted in plaintiffs seeking to bring cases in the 4th Circuit and employers there facing more challenges when classifying someone as exempt.

“The 4th Circuit’s clear and convincing burden is an outlier,” said Justin Barnes, an attorney with Jackson Lewis in Atlanta. The six other federal courts of appeal that have addressed the issue have ruled that the proper standard for determining whether an exemption applies is the lower preponderance of the evidence burden, he said.

A higher evidentiary burden can make it harder to determine whether an FLSA exemption applies, Barnes explained.

As a practical matter, were the Supreme Court to adopt the 4th Circuit’s standard and apply it more widely, “the administrative burden of documenting the specific facts and factors used by HR professionals, compensation analysts, and inside counsel in performing an exemption analysis could increase significantly, as could the risk profile for the classification decisions,” he said.

The U.S. Department of Justice has urged the Supreme Court to summarily reverse the 4th Circuit’s ruling, noted Chuck McDonald III, an attorney with Ogletree Deakins in Greenville, S.C.,  because the decision applying a clear and convincing standard of proof is an “obvious error.”

Background on the Case

In this case, three sales representatives for a food distribution company, E.M.D. Sales Inc., filed a lawsuit claiming that the employer failed to pay them the overtime compensation that they were due under the FLSA.

The employer argued that the FLSA’s outside sales exemption applied and thus they were not entitled to overtime. The employer has the burden of showing that an FLSA exemption applies to the plaintiffs, Barnes said.

The parties disputed what evidentiary standard applied. The plaintiffs said the employer had to show through clear and convincing evidence that the exemption applied. The employer argued that a less rigorous preponderance of the evidence standard applied.

The district court applied the clear and convincing evidence standard and determined that the employer did not satisfy the burden of showing that the outside sales exemption applied. A 4th Circuit panel agreed, and the en banc (all judges) 4th Circuit declined the employer’s petition for review.

The Supreme Court will resolve the split among the circuits on the question of what standard an employer must meet to prove FLSA exemptions.

Cost Concerns

The FLSA exempted 19 different categories of jobs, the U.S. Chamber of Commerce noted in a brief in support of the Supreme Court reviewing the case. Whether someone is exempt is frequently litigated, often in collective actions.

“Any decision concerning an FLSA exemption can have significant financial consequences. Employers may end up saddled with liability in the form of backpay, but also additional penalties for certain FLSA violations,” the Chamber of Commerce said.

“The figures at stake can be staggering,” it added, noting that a jury awarded employees more than $22 million in overtime compensation in one case last year and observing that “settlements routinely exceed $1 million.”
A uniform standard that rejects the 4th Circuit’s approach “would be welcome news for employers with operations both within and outside the 4th Circuit,” Barnes said.