Federal Court of Appeals in Chicago Finds Software Account Manager Exempt from Overtime Under FLSA's Administrative Exemption


By: Jeffrey C. Freedman
June 03, 2011

Those of us charged with understanding and interpreting the Fair Labor Standards Act (FLSA) have torn our hairs out for years trying to understand and apply the exemptions. The criteria for the professional and executive exemptions are relatively clear although sometimes confusing. However, the most elusive is the so called "administrative" exemption. Now, in a decision named Verkuilen v. MediaBank, the US Court of Appeals for the 7th Circuit (Chicago) has applied the administrative exemption to an account manager for a company that provides computer software to advertising agencies.

Plaintiff Verkuilen held job duties as an account manager in which she served as a bridge between the software developers and MediaBank's customers, helping to determine the customers' needs and then relaying those needs to the developers to assist in the customization of software and finally helping the customers use the customized software. She brought suit against MediaBank for unpaid overtime but the court ruled that she was an exempt administrative employee and thus not entitled to overtime compensation. The appeals court's opinion, authored by long time Judge Richard Posner (30 years on the court,) concluded that Verkuilen was an exempt administrative employee because her primary duty was directly related to the general business operations both of her employer and, in a consulting capacity, of her employer's customers.

The FLSA regulation defining the administrative exemption requires that the employee's primary duty must be both "the exercise of discretion and independent judgment with respect to matters of significance" and "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." The regulation gives as example of employees whose work may be directly related to customer's business those "acting as advisors or consultants to their employer's clients or customers."

Judge Posner concluded that Verkuilen's duties fell within the definition of the  "administrative capacity" because her "primary duty" was, in the Court's terms, a "picture perfect example of a worker for whom the Act's overtime provision is not intended." According to the Court, Verkuilen as an account manger:

"Is not a salesman for Best Buy or a technician sitting at a phone bank fielding random calls from her employer's customers – instead she's on the customer's speed dial during the testing and operation of the customer's MediaBank software. As the intermediary between employees of advertising agencies struggling to master complex software and the software developers at MediaBank, she has to spend much of her time on customers' premises training staff in the use of the software, answering questions when she can and when she can't taking them back to MediaBank's software developers, and then explaining her answers to the customer and showing the customer how to implement the answers in its MediaBank software. Identifying customers' needs, translating them into specifications to be implemented by the developers, assisting the customers in implementing the solutions – in the word of MediaBank's chief operating officer, account mangers are expected to ‘go out, understand [the customers' requirements], build specifications, understand the competency level of our customers. Then they will build functional and technical specifications and turn it over to… developers who will then build the software,… checking in with the account manger, making sure what they are building is ultimately what the customer wanted.'"

Based on these observations, the Court concluded that Verkuilen's primary duty was directly related to the general business operations both of her employer and, as a consultant, of MediaBank's customers. As a result, Verkuilen was exempt and not entitled to overtime compensation. Thus, she could lawfully be salaried.

Whether the same result would have been obtained under California law is questionable.  The California Wage Order that would have applied to Verkuilen (Wage Order No. 4-2001 covering professional, technical, clerical, mechanical and similar occupations) defines the administrative exemptions in terms very similar to the FLSA regulation. However, the term "primary duty" is construed in California law on a quantitative rather than a qualitative basis. Thus, assuming Verkuilen's job duties would have qualified under the California definition of the administrative exemption, the opinion does not indicate whether she sent more than 50% of her time exclusively devoted to the exempt functions. A percentage majority is not required by FLSA; the term "primary duty" means the most important function, not the one which takes up the majority of the employee's time, as is required in California.

The concept of the administrative exemption is widely misunderstood and is most difficult to apply. A common analogy is to consider an administrative employee in a manner similar to a military staff officer rather than a line officer. A line officer in the military is involved with combat units rather than working in support functions such as in a headquarters or planning office. In an industrial context, a line officer is one who is involved in making, selling or otherwise participating in the creation of the product or service which the business exists to sell. A staff officer in this context is one who is an assistant to an executive and works on projects not directly related to the creation of the company's product or service. Whether Ms. Verkuilen is truly a "staff officer" using that analogy is questionable as she was directly involved with the product that MediaBank exists to sell to its customers.

Determination of exempt status requires a detailed factually exhaustive inquiry on a job-by-job basis and no general statements can be made without such an analysis as to whether any particular employee is or is not exempt. Since both federal and state law place the burden of proof on the employer to establish the validity of an exemption, caution is required before a determination is made that any employee is indeed exempt, can be salaried rather than hourly, and thus not entitled to overtime compensation.

This article was written by Jeffrey Freedman, an attorney with the labor and employment law firm of Liebert Cassidy Whitmore.  Mr. Freedman is a Partner in the Los Angeles office and can be reached at (310) 981-2000 or jfreedman@lcwlegal.com.  For more information regarding the discussion above or on our firm please contact one of our offices below.

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