6th Circuit confirms 'fair reading' standard for all overtime exemptions

Ensuring correct employee classification for purposes of compliance with wage and hour laws is one of the most daunting challenges employers face. Classification criteria such as being engaged in "management" and use of discretion and independent judgment can be subjective, and it's often difficult to predict how a court would weigh in if an exempt classification is challenged. Take note of this recent decision from the U.S. 6th Circuit Court of Appeals (whose rulings apply to all Tennessee employers), which provides some helpful language to support exempt classifications.

Facts

This case involved two individuals who served as "battalion chiefs" in the City of Battle Creek Fire Department. The battalion chief role served as second-in-command to the fire chief. The job duties for the battalion chief position included supervising rank-and-file firefighters, creating daily and weekly work plans, administering disciplinary actions, inspecting and maintaining equipment, coordinating duties at the scene of fires, and various administrative tasks. While the battalion chiefs didn't have hiring and firing authority, they did conduct performance evaluations that affected pay and advancement decisions. The city classified the battalion chiefs as exempt employees, meaning they weren't entitled to overtime pay under the Fair Labor Standards Act (FLSA).

Battalion chiefs were required to be "on standby" while off duty and were expected to report to fire scenes if needed. Although they received extra pay for actually working outside their regularly scheduled hours, they didn't receive pay just for being on standby. Some battalion chiefs claimed they were so restricted during periods of being on standby, they should be paid for the time. As exempt employees, however, they wouldn't be entitled to any extra pay under the FLSA. They therefore also challenged their exempt status. They filed a lawsuit against the city alleging they had been misclassified and were entitled to overtime pay, including for the standby time.

The case was tried in a bench trial (meaning, without a jury). The parties presented testimony from various city personnel, including current and former chiefs and battalion chiefs. The trial court concluded the battalion chiefs were correctly classified as exempt from the FLSA's overtime requirements under both the executive and administrative exemptions and thus weren't entitled to be paid for standby time. They appealed to the 6th Circuit, claiming the trial court got it wrong and their job duties didn't support exempt status.

Appeals court's ruling

The appeals court reminded the parties of the general rule that a trial court has the right to make decisions regarding which evidence or testimony is most persuasive and that its decisions will be overturned only if clearly erroneous. The 6th Circuit then stated the basic rules under the FLSA—namely, employees are entitled to be paid at one and one-half times their regular pay rate for all hours over 40 in a workweek, unless the employer can prove an exemption applies. It also reminded everyone that until recently, applicable legal precedent from the 6th Circuit held that FLSA exemptions must be "narrowly construed." In other words, until recently, it could be very difficult for an employer to prove an employee's exempt status in the 6th Circuit.

The Supreme Court of the United States (SCOTUS) seemed to change course on the issue, however, in its 2018 decision in Encino Motorcars, LLC v. Navarro, in which it ruled that rather than narrowly construing exemptions, courts should instead apply a "fair reading" to exemptions. Following the SCOTUS's lead, the trial court in this case had applied a "fair reading" standard in finding the battalion chiefs were correctly classified as exempt employees.

The battalion chiefs argued the trial court got it wrong because Encino was about the salesperson exemption under the FLSA, so the Court's statements in Encino shouldn't be applied to a case involving the executive and administrative exemptions. The 6th Circuit disagreed, stating that even if the "fair reading" language in Encino was mere "dicta" (meaning just editorializing by the court and not determinative of case outcome), it should still be followed unless intervening decisions had cast doubt on the analysis. There haven't been any intervening decisions from SCOTUS, so the trial court was correct in relying on Encino, including the "fair reading" language, in determining the exempt status of the employees in this case.

The 6th Circuit reviewed the testimony presented at trial, acknowledging that some of it didn't support exempt status. For instance, the executive exemption requires the employee's primary duty to be that of "management of the enterprise," but some witnesses testified that the battalion chiefs' primary job duty was to be firefighters, with their supervisory and administrative duties being minimal or arising only in certain situations. Other witnesses testified the battalion chiefs were truly "in charge" and even referred to themselves as "management" in internal memoranda. The 6th Circuit held the trial court was entitled to weigh the evidence and determine which testimony it found more persuasive, and there was no "clear error" in the trial court's ruling in favor of the city even though not all the evidence in the record supported the city's position.

The 6th Circuit also commented on the requirement under the FLSA executive exemption that an exempt employee's input into hiring and firing decisions be given "particular weight." The battalion chiefs argued they didn't have independent authority to hire, fire, or suspend personnel and testified regarding incidents in which their recommendations on personnel matters weren't taken by their superiors. There was also testimony, however, that the chiefs "specifically requested" the battalion chiefs' input on "almost all" personnel decisions and that their input was given due consideration even if it wasn't always determinative. In addition, there was evidence the battalion chiefs played a "significant role" in hiring decisions and administered virtually all discipline short of suspension and termination.

The 6th Circuit held that an employer doesn't have to show a supervisor's recommendations are followed on all occasions to establish the supervisor's input is given "particular weight" with respect to hiring and firing decisions. Again, it found the trial court hadn't committed "clear error" in siding with the city. At the end of the day, the 6th Circuit affirmed the trial court's decision, concluding the battalion chiefs had been correctly classified as exempt and weren't owed any overtime. Holt et al. v. City of Battle Creek, No 18-1981 (6th Circuit).

Bottom line

When SCOTUS issued its ruling in Encino last year, commentators wondered whether courts would apply the more expansive "fair reading" language for exemptions in cases not involving the salesperson exemption. In the 6th Circuit, at least, it's now clear the broader and more lenient interpretation of exempt status will be applied to all exemptions. That's obviously great news for employers seeking to use or defend exempt classifications.

Keep in mind, however, that despite the recent helpful language from SCOTUS and the 6th Circuit regarding exempt classifications, exemptions are still exceptions to the rule that overtime is owed. You still have the burden of proving exempt status. If you intend to treat certain positions or job categories as exempt from overtime, be sure you have conducted an analysis taking into account the particular pay and duties criteria for the exemption you are relying on, and be prepared to state the grounds for your classification decisions and process if challenged. When in doubt about your personnel's classification status, it's always best to consult with an experienced employment attorney.

Kara Shea is a partner with the Nashville office of Butler Snow and may be reached at kara.shea@butlersnow.com.

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