October 28, 2021

Volume XI, Number 301

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WHD Releases Six New FLSA Opinion Letters in January 2021 Addressing Exemptions, Overtime Pay Calculations for Tipped Employees, and the “Establishment” Requirement

The Wage and Hour Division of the U.S. Department of Labor (“WHD”) issued six opinion letters in January 2021.[1]  They address a number of important issues under the Fair Labor and Standards Act (“FLSA”).  To ensure wage and hour compliance, we recommend reviewing these letters closely and consulting counsel with any questions as to how they may apply to a specific business situation.

FLSA2021-1

In FLSA2021-1, the WHD addressed whether account managers employed by a life science products manufacturer were properly classified as exempt from the FLSA minimum wage and overtime provisions under the administrative employee exemption.  The administrative exemption applies to employees earning no less than $684 per week in salary or fee-basis compensation whose primary core duty is office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers and includes the exercise discretion and independent judgment regarding matters of significance.  29 C.F.R. § 541.200(a).   The WHD concluded that the account managers qualified as administrative employees because they met all three of these requirements.

Salary:  The account managers received a base salary ranging from $60,000 to $90,000 and typically earned in excess of $107,432 per year in combined base salary and commissions.  They earned a guaranteed base of at least $684 per week.

Office or non-manual work related to management or general business operations:  The account managers developed relationships with target customers in order to facilitate a sales process, which required them to learn the potential customers’ business needs and requirements, and determine the services or products that the customer was most likely to purchase.  Account managers had broad discretion in targeting and working with potential customers.  They were the principal ongoing representatives of the company and served as a conduit for technical scientific customer information.  In addition, the account managers’ duty of promoting sales through a sophisticated consultative marketing process, in which they engaged with highly educated scientists and other professionals to assess their research needs and to recommend products, was related to the management of the client’s operations.

Discretion and independent judgment with respect to matters of significance:  Account managers had wide latitude in promoting and marketing products, designing portfolios of productions and solutions for potential clients, advising potential and prospective clients, and performing other consultative or servicing activities in support of a prospective or current client’s use of the employer’s products.  Although the employer provided training on sales techniques, the account managers were expected to independently develop account plans and strategies under minimal supervision and to build relationships with potential customers.  In other words, the account managers performed their duties with a high degree of independence.  In addition, the account managers could independently decide how to prospect customers and determine product solutions based on their technical knowledge and previous customer interactions—both activities requiring careful consideration of available products and client needs, and gathering and interpretation of sophisticated, unstructured data.  The employer indirectly increased its market share through the account managers’ work to build and maintain chief relationships with customers and other professionals.

All of these factors led the WHD to conclude the account managers were exempt administrative employees.

FLSA 2021-2

In FLSA2021-2, the WHD addressed whether the ministerial exception allows a private religious daycare and preschool to pay its teachers on a salary basis that would not otherwise conform to the FLSA’s requirements.  The ministerial exception applies to employees, regardless of their title, whose role is to convey a religious institution’s central message and carry out its mission.  See Our Lady of Guadalupe Sch. v. Morrisey-Berru, 140 S. Ct. 2049, 2060 (2020); U.S. Const. amend. I, cls. 1-2.  There is no rigid formula to determine application of this exception.  Under this test, teachers at religious schools can be ministers, and ministers are exempt from the FLSA’s wage and hour requirements.  See, e.g., WHD Opinion Letter FLSA2018-29 (Dec. 21, 2018).

While the WHD did not ultimately decide whether the teachers here qualified as ministers, it did reiterate that the critical inquiry is the employee’s duties, particularly whether they implicate the fundamental purpose of the exception.  To that point, the WHD noted that the Supreme Court recently observed that “educating young people in their faith, inculcating its teachings, and training them to live their faith are responsibilities that lie at the very core of the mission of a private religious school.”  Our Lady of Guadalupe, 140 S. Ct. at 2064.  In conclusion, the WHD confirmed that if the teachers qualify as ministers under the exemption, the school can pay them as salaried exempt employees or on any other basis it chooses.

FLSA 2021-3

In FLSA 2021-3, the WHD addressed whether three entities satisfied the requirements of FLSA Section 13(a)(3), pursuant to which employees of an amusement or recreational establishment, organized camp, or religious or non-profit education conference center are exempt from the federal minimum wage and overtime requirements if the entity meets one of two tests of seasonality.  The first entity organized, led, and facilitated nature walks, hikes, day-trips and other backpacking and overnight camping excursions for children.  Although the entity provided shorter events and day hikes throughout the year, it did not offer overnight trips during the colder months between November and April.  The events took place throughout nearby forests, rivers, mountains, fields, and beaches; the entity did not have a permanent establishment other than administrative offices with no programmatic function.  The second entity was a non-profit religious ministry that ran a ranch-style camp and retreat center with distinct high and low seasons.  This entity used the accrual method of accounting for tax and accounting purposes and received donations.  The third entity, a family-owned and operated employer, produced events for individuals, companies, non-profits, schools, universities, and public entities at a variety of event sites by planning and delivering, installing, and often operating amusement rides, attractions, entertainment concession equipment, personnel, and related items.  It maintained a warehouse and administrative offices where it stored and maintained inventory and conducted year-round sales and business activities, but did not offer any of its event services to the public at this location.

To provide context, unlike the white collar exemptions, the exemption available under Section 13(a)(3) turns on the attributes and operations of the employer.  Although Section 13(a)(3) does not define the phrase “amusement or recreational establishment,” the WHD’s interpretive regulations adopt the Supreme Court’s construction of “establishment” for the retail and service establishments exemption in since-repealed Section 13(a)(2), which states simply that an “establishment” is a distinct physical place of business.  29 C.F.R. §§ 779.23, 779.303-.305; A.H. Phillips, Inc. v. Walling, 324 U.S. 490 (1945); Mitchell v. Bekins Van & Storage Co., 352 U.S. 1027 (1957).  Several business operations on the same premises and even under the same roof may constitute separate establishments if each operation is physically separated, functionally operates as a separate unit with separate records and bookkeeping, and does not exchange employees more than occasionally.  See 29 C.F.R § 779.305.

Next, the WHD explained that an establishment is an “amusement or recreational” establishment if it is frequented by the public for its amusement or recreation.  In other words, it must be generally acceptable to the public and must exist for the purpose of amusement of recreation.  While this inquiry takes into account all relevant circumstances, one key factor is the amount of income derived from the recreational or amusement aspects of the entity, compared to other aspects.  Applying these standards, the WHD has found that recreational areas, parks, tennis courts, swimming pools, golf and miniature golf courses, ice skating rinks, football and hockey fields, playgrounds, stadiums, zoos, fairgrounds, theaters, campsites, beaches, boardwalks, and museums may all generally qualify as amusement or recreational establishments under Section 13(a)(3).  In contrast, hotels, motels, conventions, restaurants, municipal governments or departments, marinas, and apartment or condominium facilities with amenities generally do not qualify.

The WHD then turned to the Calendar Test and Receipts Test, which are designed to ensure that only truly seasonal employers qualify for the Section 13(a)(3) exemption.  Under the Calendar Test, an establishment must not operate for more than seven months in any calendar year (i.e., the period beginning January 1 and ending December 31), except some exempt employees may work more than seven months in the year or year-round so long as the facility is not open as the amusement or recreational establishment for more than seven months.  Under the Receipts Test, the establishment’s average receipts for any six months of the preceding calendar year must be no more than 33-1/3% of its average receipts for the other six months of the year.  To determine whether an establishment satisfies the Receipts Test, the WHD assesses whether the average total receipts for the six months in which receipts were largest is more than 3 times the average receipts for the remaining six months in which receipts were smallest.  An amusement or recreational establishment that does not satisfy either of the Calendar Test or Receipt Test will not qualify for the exemption.

Applying these standards, the WHD assessed each of the three entities in turn.

Entity One:  The WHD concluded the first entity was not a qualifying establishment for purposes of Section 13(a)(3).  Although the WHD accepted the entity’s representation that it satisfied the Receipts Test and found that the entity’s business of facilitating hikes, camping trips, and other outdoor events had an amusement or recreational character, the various outdoor locations—and lack of a fixed, non-administrative location—did not square with the concept of “establishment” required for the exemption to apply.  As the WHD explained, an entity that offers amusement or recreational services must have a physical location that is in some way used in any one of the activities that comprise its amusement or recreational character, even if such use is minimal, occasional, or infrequent, such as carnivals or festivals.  Here, the entity’s only distinct physical location, the administrative office, was entirely divorced from its amusement or recreational functions.  Moreover, the outdoor locations at which it held its events were not distinct physical places of business because the entity did not occupy and control it for the duration of its presence or transform it in any way into its place of business.

Entity Two:  For the second entity, the WHD addressed only whether its use of the accrual method of accounting for tax and other purposes could satisfy the Receipts Test, and relatedly, whether the entity should include some or all types of discretionary charitable donations when calculating average receipts.  Although the WHD previously had not answered this question or addressed it in its opinion letters, it relied on the plain meaning of the term “receipts”—the act of receiving money paid for goods or services—to conclude that Section 13(a)(3) refers to the money actually received in exchange for goods or services at the time it was received, without incorporating concepts of accrual accounting.  The WHD acknowledged the potential policy merits of using an accrual method of accounting to determine seasonality, noting that it was more widespread and more accurately reflects the operation of most businesses than a case receipts method.  Nevertheless, the WHD opined that the FLSA currently forecloses the consideration of such factors.  Turning to the second question of whether charitable gifts and donations constitute receipts, the WHD concluded that such payments are not counted under the Receipts Test because they are not in exchange for an amusement or recreational product or service provided by the entity to the donor.

Entity Three:  In assessing whether the third entity qualified for the Section 13(a)(3) exemption, it reverted to the analysis of the “establishment” requirement.  Specifically, while the third entity provided amusement and recreational activities, it did not do so at its own location or at a fixed location.  Instead, it had a warehouse and administrative offices that it used exclusively in a support capacity.  In addition, while the third entity supplied, installed, and in some cases, operated amusement rides and other attractions, such events did not appear to involve taking temporary possession of an event space, such as a fairground or a convention center, and converting it into its place of business.  It merely helped clients produce events on the client’s premises, for a very limited duration.

FLSA 2021-5

In FLSA 2021-5, the WHD addressed the proper calculation of overtime pay when a tipped employee works as a server and bartender, and receives tips and amounts charged as automatic gratuities or service charges.  Per the tip credit provision in Section 3(m)(2) of the FLSA, an employer who pays it tipped employees at least $2.13 per hour in cash wages can take a “tip credit” equal to the difference between the cash wages paid and the federal minimum wage (i.e., $7.25 per hour), provided it doesn’t exceed the amount of tips actually received or $5.12 per hour ($7.25 – $2.13).  29 U.S.C. § 203(m)(2)(A); 29 C.F.R. §§ 531.59-60.  Tips received by an employee in excess of the tip credit need not be included in the regular rate.  In contrast, a mandatory service charge, such as 15 percent of the bill, is not a tip and must be included in the regular rate when paid to employees.  29 C.F.R. §§ 531.52, 531.55.  For a tipped employee, the regular rate of pay consists of both the cash wage and any tip credit.  29 C.F.R. § 531.60.   For employees who within a single workweek work at two or more different types of work with different non-overtime rates of pay, the regular rate of pay is the weighted average of such rates.  29 C.F.R. § 778.115.  In other words, the employee’s total earnings include the employee’s compensation during the workweek from all such rates, which then divide into the total number of hours worked at all jobs to determine the regular rate of pay.

Applying these principles, the WHD provided the overtime pay calculation for an employee who, within a single workweek, worked 18 hours as a server earning $2.13 per hour as a cash wage and three eight-hour shifts as a bartender earning a $75 per shift wage, and also received $732 in tips and $160 in service charges:

Total Straight Time (i.e., Non-Premium) Wages:

  • 18 hours worked as a server x $7.25 per hour ($2.13 cash wage + $5.12 tip credit) = $130.50

  • 3 bartender shifts x $75 per shift = $225

  • $130.50 + $225 + $160 in service charges = $515 (total straight time pay)

Regular Rate of Pay Calculation:

  • $515.50 (total straight time pay) / 42 total hours worked = $12.27 regular rate of pay

Overtime Premium Due:

  • $12.27 (regular rate of pay) x .5 (half-time due for all hours worked over 40) x 2 overtime hours = $12.27 (overtime premium due)

The WHD noted that it included the total service charges in this calculation on the assumption that they were paid only for the bartending shifts, explaining that if the service charges were also paid for the time worked as a server, it would lower the regular rate because part of the service charge would be credited toward the cash wage paid for server hours, thereby diminishing the amount of service charge included.

FLSA2021-6

In FLSA2021-6, the WHD addressed whether staffing firms that recruit, hire, and place employees on temporary assignments with clients can fall under the “retail or service establishment” exemption of Section 7(i) of the FLSA.  The retail or service establishment exemption applies to employees of a retail or service establishment paid at a rate that is in excess of one and one-half times the minimum hourly rate applicable to them and who receive at least half of their compensation from commissions on goods or services for a representative period of not less than one month.  29 U.S.C. § 207(i).  The Opinion Letter addressed the first prong of this exemption.

A business qualifies as a “retail or service establishment” if it (a) engages in the making of sales of goods or services, (b) 75 percent of its annual dollar volume of sales of goods or services (or of both) “is recognized as retail sales or services in the particular industry,” and (c) “not over 25 percent of its sales of goods or services, or of both, [are] for resale.”  29 C.F.R. § 779.313.  The WHD opined that the staffing firms under review likely meet this definition.

First, the WHD found the staffing firms may be considered engaged in the making of sales of goods or services.  The WHD explained that “courts have repeatedly held that businesses may qualify as retail or service establishments when their customers are predominantly commercial entities.”  Thus, reasoned the WHD, since staffing firms sell “services” to commercial entities—namely, the services of temporary workers—they may meet this first part of the definition of retail or service establishment.

Second, the WHD found that the staffing firms could also meet the second part of the definition.  The DOL previously considered “employment agencies” among a list of establishments that categorically could not qualify as a “retail or service establishment” under any circumstance because they lacked a retail concept.  However, some federal courts found these categorical exclusions to be arbitrary and “contrary to reason.”  See, e.g., Martin v. Refrigeration Sch., Inc., 968 F.2d 3, 7 n. 2 (9th Cir. 1992).

Accordingly, the DOL recently repealed these categorical exclusions, instead applying its “retail concept” to all establishments.  The WHD held that the staffing agencies under review have a retail concept because their services are offered to businesses in the general public, at the “end of the stream of distribution,” not in bulk, and do not involve the manufacturing process.  See 29 C.F.R. § 779.318(a).

Finally, the WHD found that the staffing agencies under review could meet the third (and last) component of the retail or service establishment definition because they “rarely, if ever, ‘re-sold’” temporary employees to “other businesses.”  The WHD noted, however, that in the staffing context, employees may be “resold” where, for example, “one staffing firm refers a worker (for a fee) to a second staffing firm that ultimately assigns the worker to a business.”

The upshot of the Opinion Letter is that in line with exemptions now being given a “fair read,” as opposed to being narrowly construed, all businesses may potentially fall under the “retail or service establishment” exemption.  However, as there are numerous requirements to satisfy this exemption (including ones that were not addressed in the Opinion Letter), businesses would be wise to enlist employment counsel before classifying their workers under this exemption.

FLSA2021-7

In FLSA2021-7, the WHD addressed whether certain small-town and community news source journalists are creative professionals under Section 13(a)(1) of the FLSA and, therefore, exempt from the FLSA’s minimum wage and overtime requirements.  An artistic or creative professional is exempt if the employee’s primary duty requires invention, imagination, originality, or talent in a recognized field of artistic or creative endeavor as opposed to routine mental, manual, mechanical or physical work.  29 C.F.R. § 541.302(a).  Recognized fields of artistic or creative endeavor include music, writing, acting, and the graphic arts.  Id. at § 541.302(b).

At one time, the WHD took the position that newspaper reporters generally did not fall under this exemption, based on the belief that only a “minority [of reporters’] work depends primarily on invention, imagination, or talent.”  14 FR 7730, 7741 (Dec. 28, 1949).  Eschewing broad generalizations, the WHD amended its regulations in 2004 and recognized that journalists’ duties “vary along a spectrum from the exempt to the nonexempt,” which requires a “case-by-case” analysis.  69 FR 22,121, 22,158 (Apr. 23, 2004).

A lingering question remained as to whether a distinction should be made between small-town journalists and journalists working for major, national publications, such as the New York Times or Washington Post.  Some court rulings suggest that small-town journalists are less likely to be exempt.

Giving the exemption a “fair read,” as opposed to narrowly construing it, the WHD opined that such a distinction should not be made, and found that the employer’s journalists likely met the duties test of the creative professional exemption.  The journalists’ duties included:

  • Originating and developing creative, engaging, shareable, content-driven stories and live shots, relying on creativity, memorable storytelling, and unique perspectives;

  • Identifying, researching, and, when appropriate, interviewing sources of background information, including witnesses;

  • Composing and producing unique and captivating stories;

  • Interpreting and analyzing developing news stories; and

  • Operating autonomously and without constant supervision, subject to occasional check-ins and final editorial review for print or broad.

This Opinion Letter provides good authority for the proposition that there is no presumption that small-town journalists are non-exempt.  This is a welcome development for small newspapers and other media outlets.

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[1] The WHD originally issued nine opinion letters but subsequently withdrew opinion letters FLSA 2021-4, FLSA2021-8, and FLSA2021-9 for the purported reason that they are based on rules that have not gone into effect.

 

©2021 Epstein Becker & Green, P.C. All rights reserved.National Law Review, Volume XI, Number 34
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Carly Baratt, Epstein Becker Law Firm, New York, Health Care, Labor and Employment Litigation Attorney
Associate

Carly Baratt is an Associate in the Employment, Labor & Workforce Management and Litigation & Business Disputes practices, in the New York office of Epstein Becker Green.

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ADRIANA S. KOSOVYCH, Epstein Becker Green, Pre-Employment Considerations Lawyer, Workforce Management Attorney, New York
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ADRIANA S. KOSOVYCH is an Associate in the Employment, Labor & Workforce Management practice, in the New York office of Epstein Becker Green.

Ms. Kosovych’s experience includes:

  • Representing clients in employment-related litigation on a broad array of matters, including claims of discrimination, harassment, retaliation, failure to accommodate disabilities, breach of employment contracts and restrictive covenants, and wage and hour disputes, in state and federal courts and before various...

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Kyle D. Winnick Labor and Employment Attorney Epstein Becker Green
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Kyle Winnick defends employers of all sizes, from startups to Fortune 500 companies, in all aspects of labor and employment-related litigation. He draws upon his practical experience and creative legal thinking to craft effective litigation strategies. Kyle has represented clients before federal and state trial and appellate courts, arbitration tribunals, and administrative agencies, such as the Equal Employment Opportunity Commission, the U.S. Department of Labor, and the National Labor Relations Board.

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