Clements v. Serco, Inc.

FILED
United States Court of Appeals
Tenth Circuit

July 1, 2008
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

GARY CLEMENTS and DAVID
GERBER,

Plaintiffs-Appellees/
Cross-Appellants,
v. Nos. 06-4316 & 07-4005
SERCO, INC.,

Defendant-Appellant/
Cross-Appellee,
____________________________

FAIRFAX COUNTY CHAMBER OF
COMMERCE,

Amicus Curiae.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF UTAH
(D.C. NO. 04-CV-1008-DB)

Lino S. Lipinsky de Orlov (Herbert L. Fenster and Jennette Campopiano Roberts
with him on the briefs), McKenna Long & Aldridge LLP, Denver, Colorado, for
Defendant-Appellant/Cross-Appellee.

Richard M. Hymas (Erin T. Middleton with him on the briefs), Durham Jones &
Pinegar, Salt Lake City, Utah, for Plaintiffs-Appellees/Cross-Appellants.

Daniel B. Abrahams and Shlomo D. Katz, Epstein Becker & Green, P.C.,
Washington, D.C., on the brief for Amicus Curiae.
Before MURPHY, SEYMOUR, and McCONNELL, Circuit Judges.

MURPHY, Circuit Judge.

Serco, Inc. (“Serco”) appeals the district court’s ruling on summary

judgment that civilian military recruiters employed by the company are entitled to

overtime compensation under the Fair Labor Standards Act (“FLSA”). We

conclude that because Serco’s employees did not obtain commitments from

recruits, they were not engaged in sales. They therefore do not fall under FLSA’s

“outside salesmen” exemption. The employees, Gary Clement and David Gerber

(“Employees”), cross-appeal the district court’s calculation of back-pay based on

the “fluctuating workweek” approach, and ask this court to remand for calculation

under the “time-and-a-half” method. Exercising jurisdiction pursuant to 28

U.S.C. § 1291, we affirm the district court’s summary judgment ruling and its

calculation of back-pay.

I. Factual Background

The United States Army contracted with Serco 1 in 2002 to provide

recruiting services to the Army and the Army Reserves. Under the Army-Serco

contract, Serco was paid every time its recruiting efforts resulted in one of the

1
The original contract was signed by Resource Consultants, Inc. On
December 31, 2006, Resource Consultants was merged into Serco. Serco was
then substituted for Resource Consultants in this litigation.

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following: (1) a recruit with no prior military experience enlisted in the U.S.

Army or the U.S. Army Reserves; (2) a member of the U.S. Army Reserves

transferred to the U.S. Army; (3) a former member of the military enlisted in the

U.S. Army or U.S. Army Reserves; or (4) an applicant shipped to his or her

assigned training center. Both Clements and Gerber were hired by Serco in

September 2002 to recruit potential applicants for the U.S. Army and U.S. Army

Reserves. Gerber’s employment ended in June 2003 and Clements’ in August

2003.

The parties describe the Employees’ duties differently. The Employees

characterize their jobs as cold-calling individuals to inform them about

opportunities to serve in the U.S. Army or U.S. Army Reserves. The Employees

testified that they spent most of their time in Serco’s office making phone calls to

prospective recruits. Serco, on the other hand, cites to deposition testimony and

affidavits describing the nature of the job as one in which the Employees were

expected to be in the community, actively recruiting applicants. 2 The job

description required recruiters to establish a working relationship with

2
Serco included two government documents discussing military recruiting
and portions of the Army-Serco contract in their appendix. These materials were
not before the district court. As such, we decline to consider them in our review.
See United States v. Kennedy, 225 F.3d 1187, 1191 (10th Cir. 2000) (“This court
will not consider material outside the record before the district court.”); Tamari v.
Bache & Co. (Lebanon) S.A.L., 838 F.2d 904, 907 (7th Cir. 1988) (“A litigant
cannot put in part of his case in the trial court and then, if he loses, put in the rest
on appeal.”).

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representatives of educational, parental, civic, military, religious, social, and

fraternal organizations and to give formal and informal presentations on the

advantages of serving in the Army. Recruiters were also to distribute and display

publicity materials to high school and college students.

Once a recruit expressed interest, the Employees set up an initial interview

and administered pre-screening math and English tests to determine if the recruit

met the minimum requirements for enlistment. If the requirements were met, the

Employees maintained contact with the recruit and engaged in other follow-up

activities, such as obtaining background checks, court records, birth certificates,

health records, and other documents required for enlistment.

The Employees had no authority to enlist a recruit. Instead, recruits were

enlisted at a Military Entrance Processing Station (“MEPS”), owned and operated

by the United States. At the MEPS, a recruit first underwent a physical exam. If

she passed, she interviewed with U.S. Army officials and decided whether to

enlist. Recruits also met with guidance counselors to discuss the various jobs

available to the recruit. Recruits spent an entire day at the MEPS, usually starting

at six o’clock in the morning and ending at three or four o’clock in the afternoon.

A recruit could only sign an Oath of Enlistment in the Armed Forces of the

United States at the MEPS. The Employees, although unable to enlist a recruit,

often drove their recruits to the MEPS, and then returned at the end of the day to

give them a ride home.

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 After a recruit enlisted, the Employees met with recruits regularly. They

provided additional training and often made telephone calls to the recruits to

reinforce their decision to join the U.S. Army or U.S. Army Reserves. The goal

of this continued contact was to keep the recruits enthused about their decision to

enlist.

Serco paid the Employees a starting salary of $600.00 per week. The

Employees’ salaries were nominally increased in February 2003. Additionally,

Serco paid a commission if the Employees reached established quotas for recruits

who enlisted and reported to their assigned training center. The Employees kept

time cards which were submitted to a supervisor at the end of each week or pay

period. Clements worked 480 overtime hours and Gerber worked 596.5 overtime

hours. Serco, however, did not pay either employee overtime.

II. Analysis

Congress enacted the FLSA in order to improve “labor conditions

detrimental to the maintenance of the minimum standard of living necessary for

the health, efficiency, and general well-being of workers.” 29 U.S.C. § 202(a).

To further this remedial aim, the FLSA requires employers to pay time and one-

half to employees who work more than forty hours a week and who are not

exempt. 29 U.S.C. § 207(a)(2)(C). The FLSA exempts employees who are

classified as “outside salesmen” from the overtime-pay requirement. 29 U.S.C.

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§ 213(a)(1). Congress delegated authority to the Secretary of Labor to define this

exemption. Id.

Exercising the delegated authority, the Secretary promulgated 29 C.F.R.

§ 541.500, defining “outside salesman” as any employee:

(a) who is employed for the purpose of and who is customarily and
regularly engaged away from his employer’s place or places of
business in:

(1) making sales within the meaning of section 3(k) of the Act;
or

(2) Obtaining orders or contracts for services or for the use of
facilities for which a consideration will be paid by the client or
customer; and

(b) Whose hours of work of a nature other than that described in
paragraph (a)(1) or (2) of this section do not exceed 20 percent of the
hours worked in the workweek by nonexempt employees of the
employer: Provided, that work performed incidental to and in
conjunction with the employee’s own outside sales or solicitations,
including incidental deliveries and collections, shall not be regarded
as nonexempt work.

29 C.F.R. § 541.500 (2003). 3 Under § 3(k) of the FLSA, the word “‘[s]ale’ or

‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment

for sale, or other disposition.” 29 U.S.C. § 203(k). The district court ruled the

Employees were not “outside salesmen” as defined by the regulations because the

recruiters were not engaged in sales and, even if the Employees were engaged in

3
The regulations governing the “outside salesman” exemption were
amended on August 23, 2004. The prior regulations, however, govern this case
and all citations to the C.F.R. herein refer to the 2003 version of the regulations.

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sales, Serco failed to prove the Employees’ nonexempt work did not exceed

twenty percent of the hours worked, as required by 29 C.F.R. § 541.500(b).

We review the grant of a summary judgment motion de novo, viewing all

evidence and reasonable inferences in the light most favorable to the nonmoving

party. Fye v. Okla. Corp. Comm’n, 516 F.3d 1217, 1222-23 (10th Cir. 2008).

“[I]n light of the FLSA’s broad remedial aims, exemptions must be narrowly

construed.” Ackerman v. Coca-Cola Enters., Inc., 179 F.3d 1260, 1264 (10th Cir.

1999). Further, as the employer, Serco bears the burden of proving that the

Employees fit “plainly and unmistakably within the exemption’s terms.” Id.

(quotation and alteration omitted); see also Arnold v. Ben Kanowsky, Inc., 361

U.S. 388, 392 (1960). “The Department of Labor regulations are entitled to

judicial deference and are the primary source of guidance for determining the

scope of exemptions to the FLSA.” Ackerman, 179 F.3d at 1264 (quotation and

alteration omitted); see also Chevron U.S.A., Inc. v. Natural Res. Def. Council,

467 U.S. 837, 843-44 (1984).

Serco argues the district court erred by concluding the Employees were not

outside salesmen because they did not have the authority to “close the sale.” The

inability of the Employees, Serco contends, to accompany recruits into the MEPS

and obtain their commitment, by way of signing the Oath of Enlistment, is not

dispositive. No one other than the Employees “sold” the Army to the recruits.

We disagree. Although the Employees engaged in sales training and “sold” the

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idea of joining the Army to potential recruits, it did not engage in sales work as

defined by the Department of Labor regulations.

The touchstone for making a sale, under the Federal Regulations, is

obtaining a commitment. This can be done by making a sale or obtaining an order

or contract for services. 29 C.F.R. § 541.500. This requirement is spelled out in

numerous Department of Labor regulations. For example, 29 C.F.R. § 541.504

explains that promotional work is not exempt, unless it is actually performed

incidental to and in conjunction with an outside employee’s own sales. By way of

illustration, the regulation describes a distribution scenario in which a

manufacturer’s representative visits a retailer:

This manufacturer’s representative may perform various types of
promotional activities such as putting up displays and posters,
removing damaged or spoiled stock from the merchant’s shelves or
rearranging the merchandise. Such persons can be considered
salesmen only if they are actually employed for the purpose of and
are engaged in making sales or contracts. To the extent that they are
engaged in promotional activities designed to stimulate sales which
will be made by someone else the work must be considered
nonexempt.

Id. § 541.504(b)(2). The regulation further explains, “the test is whether the

person is actually engaged in activities directed toward the consummation of his

own sales, at least to the extent of obtaining a commitment to buy from the person

to whom he is selling. If his efforts are directed toward stimulating the sales of

his company generally rather than the consummation of his own specific sales his

activities are not exempt.” Id. (emphasis added); see also id. C.F.R. § 541.503

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(explaining sales work includes “any other work performed by the employee in

furthering his own sales efforts”).

This concept is illustrated in Wirtz v. Keystone Readers Serv., Inc., 418

F.2d 249 (5th Cir. 1969). Students were engaged in door-to-door sales of

magazine subscriptions and sued their employer for overtime compensation. Id.

at 252. The employer claimed the student salesmen were “outside salesmen”

under the FLSA. Id. at 253. The court disagreed. Although the students solicited

orders from potential customers, their role in making the sale was limited. The

door-to-door student salesmen were instructed to ascertain whether the prospect

met certain qualifications but were prohibited from collecting money. Id. at 252.

All order forms collected by the salesmen were turned over to student managers

who subsequently contacted the prospect, confirmed the prospect met the

qualifications, and explained the payment plan. Id. Only then was a contract

executed. The Fifth Circuit held the student salesmen were only engaged in

promotional work; they gathered a list of potential customers who were “receptive

to the idea of purchasing magazine subscriptions.” Id. at 260-61. The salesmen’s

work paved the way for a sale made by someone else: the student manager. Id.

Narrowly construing the exemption, the court explained the student salesmen

were nothing more than “pseudo-salesmen” and thus not within the coverage of

the outside salesmen exemption. Id. at 261.

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 Although a civilian military recruiter is in many ways unlike a student

selling magazines door to door, the parallels between these two cases lead us to

conclude the Employees likewise engaged in promotional work, paving the way

for someone else—the United States Army—to make the sale. Serco contests this

characterization, arguing no one at the MEPS could have “sold” the recruit on

joining the Army. Even when viewing the evidence in the light most favorable to

Serco, the record does not support this contention. It was only at the MEPS that a

recruit could pass the needed physical to enlist, choose a suitable job, and sign an

oath to enlist. Before a recruit arrived at the MEPS, no “order or contract” had

been obtained; the Employees merely cultivated “a list of persons who seem[ed]

receptive to the idea” of joining the Army. Wirtz, 418 at 260; see also Ackerman,

179 F.3d at 1266.

This conclusion is further supported by two Department of Labor opinion

letters and a case from the Western District of Michigan examining whether

college recruiters qualify for the outside salesman exemption. Agency opinion

letters “do not warrant Chevron-style deference.” Christensen v. Harris County,

529 U.S. 576, 587 (2000). They are, however, “entitled to respect under []

Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944), but only to the extent that

those interpretations have the power to persuade.” Id. (quotations omitted). The

Department of Labor’s opinion letters on college recruiters each state:

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 Ordinarily, an individual who regularly performs recruitment for a
college is not engaged in making sales of the college’s services, or
obtaining contracts for its services. Rather, college recruitment
activity appears analogous to sales promotion work, since, like a
promotion person who solicits customers for a business, the college
recruiter is engaged in identifying qualified customers, i.e., students,
and inducing their application to the college, which in turn decides
whether to make a contractual offer of its educational services to the
applicant.

Opinion Letter from Dept. of Labor, Wage and Hour Div. (Feb. 19, 1998), 1998

WL 852683; Opinion Letter from Dept. of Labor, Wage and Hour Div. (Apr. 20,

1999), 1999 WL 1002391. Thus, the college recruiters were not outside salesmen

because they did not obtain commitments to purchase educational services;

instead, they promoted the college’s services and paved the way for the college to

make a contractual offer.

Serco argues its employees, however, are more akin to the “field

representatives” in Nelson v. DeVry, Inc., 302 F. Supp. 2d 747, 750 (W.D. Mich.

2003). Much like the civilian recruiters, field representatives are assigned a

specific territory and through phone calls, high school visits, and student

appointments, seek to recruit students to enroll at DeVry, a for-profit, technology-

based higher education institution. Id. After identifying eligible candidates, the

field representatives assist potential candidates in completing their application.

Id. Unlike the college recruiters discussed in the Department of Labor’s opinion

letters, however, DeVry’s field representatives have the authority to obtain a

commitment from a prospective student. Id. at 756. DeVry uses strictly objective

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criteria for admission. Thus, the district court in DeVry concluded “[i]f anyone

made a decision pertaining to admissions, it was the field representatives, who

were responsible for sorting out from the general population of prospective

students which ones were DeVry material.” Id.

Although the Employees’ job duties appear quite similar to those of the

field representatives in DeVry, they differ in an important aspect. Unlike the field

representatives, who could offer a prospective student admission to DeVry,

Serco’s civilian military recruiters could only lay the groundwork. It was the

Army—and only the Army—who could enlist a recruit. Thus, the Employees

operated more like the college recruiters described in the Department of Labor’s

opinion letters than DeVry’s field representatives. Because the Employees were

not engaged in sales, as defined by the Department of Labor’s regulations, they

were not “outside salesmen.” We therefore affirm the district court. 4

4
We note it is possible that even if Serco’s employees had obtained
commitments from recruits, they would still not qualify as outside salesmen. A
good argument can be made that “sales” in this context is used in the
metaphorical sense only; instead, the Employees acted as “outside buyers.” It is
the recruit, not the Army, who is offering a service. An “outside buyer” is not
exempt from the FLSA:

The inclusion of the word “services” is not intended to exempt
persons who, in a very loose sense, are sometimes described as
selling “services.” For example, it does not include persons such as
servicemen even though they may sell the service which they
themselves perform. Nor does it include outside buyers, who in a
very loose sense are sometimes described as selling their employer’s
“service” to the person from whom they obtain their goods. It is
(continued...)

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III. Cross-Appeal

The FLSA requires eligible employees to be compensated at one and one-

half their hourly wages for overtime hours worked. 29 U.S.C. § 207(a)(1).

Where, however, certain conditions are met, the rate is reduced to “half time.” 29

C.F.R. § 778.114 (2003). This is referred to as the “fluctuating workweek”

method. Pursuant to the Department of Labor’s regulations, the fluctuating

workweek method is to be used when “there is a clear mutual understanding of

the parties that the fixed salary is compensation (apart from overtime premiums)

for the hours worked each workweek, whatever their number, rather than for

working 40 hours or some other fixed weekly work period.” Id. § 778.114(a).

Under this kind of compensation structure, the salary “is intended to compensate

the employee at straight time rates for whatever hours are worked in the

workweek.” Id. Thus, regardless of the fluctuating nature of the hours an

employee may work, be it forty or sixty, the salary is intended to pay for all hours

worked. In contrast, an employee who is compensated on an hourly basis is

entitled to overtime calculated by the time-and-a-half method.

4
(...continued)
obvious that the relationship here is the reverse of that of
salesman-customer.

29 C.F.R. § 541.501(e) (2003). In a loose sense, the Employees were selling the
Army’s services; they were promoting the idea of a military career. The Army,
however, appears to be the customer, paying for the services of the recruits who
enlist. The parties do not raise this argument and we decline to sua sponte decide
the case on this ground.

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 By its own terms, § 778.114 applies only if there is “a clear mutual

understanding of the parties” that the fixed salary is compensation for however

many hours the employee may work in a particular week, rather than for a fixed

number of hours per week. The district court found the parties had such an

understanding, and therefore calculated back pay pursuant to the fluctuating

workweek method. The Employees cross-appeal this ruling and ask this court to

hold the Employees are entitled to back pay calculated pursuant to the time-and-a-

half formula.

The Employees contend § 778.114 requires that the “clear mutual

understanding” must extend to how overtime premiums would be calculated. The

parties initially agreed that no overtime would be paid; thus, no agreement as to

the payment of overtime ever existed. The regulation, however, “calls for no such

enlarged understanding.” Valerio v. Putnam Assoc. Inc., 173 F.3d 35, 40 (1st Cir.

1999). “The parties must only have reached a ‘clear mutual understanding’ that

while the employee’s hours may vary, his or her base salary will not.” Id.; see

also Bailey v. County of Georgetown, 94 F.3d 152, 156-57 (4th Cir. 1996)

(rejecting the proposition that “an employee must also understand the manner in

which his or her overtime pay is calculated” as contrary to the regulation). Thus,

our inquiry is whether the Employees and Serco had a clear and mutual

understanding that they would be paid on a salary basis for all hours worked.

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 We agree with the district court that the parties had this clear and mutual

understanding. The plaintiffs stated in deposition testimony that they were hired

on a salaried basis and that they routinely worked more than forty hours a week.

They were neither docked for working less than forty hours a week nor paid more

when they worked more than forty hours a week. See Mayhew v. Wells, 125 F.3d

216, 218-19 (4th Cir. 1997) (explaining employee was salaried where he was

neither docked for running personal errands nor paid more when he worked ten

extra hours a week). In letters sent to the Department of Labor, the plaintiffs

described salary, not hourly, wage agreements. This fully supports the conclusion

that the employees were paid on a salaried basis for all hours worked and that

they had a clear and mutual understanding of this arrangement.

The Employees point to two pieces of evidence to suggest such an

understanding did not exist. First, Clements testified that Serco’s manager, Steve

Hixon, stated the Employees “would be paid a salary of $600.00 per week and

that this would work out to $15.00 per hour.” A close examination of this

statement, however, reveals that Clements testified that his understanding was

that the Employees’ effective rate of pay was $15.00 an hour, not that the

Employees would be paid by the hour. The Employees, in subsequent affidavits,

expressed that they understood Hixon’s statements to mean they would be

compensated for forty hours of work a week. This testimony does not create a

disputed material fact. The existence of a clear and mutual understanding “may

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be based on the implied terms of one’s employment agreement if it is clear from

the employee’s actions that he or she understood the payment plan in spite of

after-the-fact verbal contentions otherwise.” Mayhew, 125 F.3d at 219 (quotation

omitted). Evidence was presented that the Employees understood they would not

be docked when they worked fewer than forty hours and would not be paid more

when they worked over forty hours. This is sufficient to establish the Employees

understood they would receive a fixed salary. Second, the Employees cite their

numerous inquiries to Serco management and to the Department of Labor about

whether they should receive overtime. Although this evidence supports the

conclusion that the Employees and Serco did not have a clear and mutual

understanding as to overtime pay, it is irrelevant as to whether the Employees

understood they were being paid on a salaried or hourly basis.

Based on the fluctuating workweek method, the district court awarded

Clements $3,006.82 in back pay and Gerber $3,651.02. We affirm this award.

IV. Conclusion

For the foregoing reasons, we affirm the district court.

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Clements v. Serco, Inc., Nos. 06-4316 & 07-4005

McCONNELL, J., concurring.

I agree with the majority that the plaintiffs here were not “outside

salesmen” because they did not have the authority to complete the transaction of

signing recruits up for the Army. The more fundamental reason the plaintiffs

must prevail, however, is that the activity of recruiting employees is not “sales”

within the meaning of the Fair Labor Standards Act. The governing regulations

define the term “outside salesman” as an employee “engaged away from his

employer’s place, or places, of business” in “making sales” or “obtaining orders

or contracts for services.” 29 C.F.R. § 541.500. A recruiter does not sell goods

or services or obtain orders or contracts for goods or services. Rather, the

recruiter purchases (or in this case, engages in promotional activities leading to

the purchase of) services from the recruit. A recruiter is more like a buyer than a

seller. 1

A Department of Labor Opinion Letter, cited by the plaintiffs (Appellees’

Br. at 17), is closely on point. See Opinion Letter from Dept. of Labor, Wage and

Hour Div. (Oct. 4, 1982), 1982 DOL WH LEXIS 28. The letter holds that

recruiters cannot be “outside salespersons” because “[w]ork such as recruiting an

1
A college recruiter is different. A college recruiter persuades prospective
students to purchase the college’s services; he is not attempting to persuade
students to sell their services to the college. Thus, Nielson v. DeVry, Inc., 302 F.
Supp.2d 747, 750 (W.D. Mich. 2003), is inapposite.
employee for the client would not be considered part of the sales activity of the

recruiter.” Id. at *4. The Department of Labor regulations make clear that those

who buy goods and services on behalf of their employers are not engaged in

“sales,” even though they “in a very loose sense are sometimes described as

selling their employer’s ‘service’ to the person from whom they obtain their

goods. It is obvious that the relationship here is the reverse of that of

salesman-customer.” 29 C.F.R. § 541.501(e) (2003).

Presumably, the majority does not place primary reliance on this rationale,

see Maj. Op. 12 n.4, because in their briefs in this Court the appellees focused on

other legal arguments. I have no quarrel with that, but the opinion should not be

misconstrued as implying that recruiters would be “salesmen” if they had the

authority to finalize the enlistments. Even if the plaintiffs in this case had

accompanied the recruits into the recruiting station and signed the final

paperwork on behalf of the Army, this would not make them “salesmen.” To be a

salesmen, the employee’s job must be to sell. Hiring, or recruiting for hire, is not

sales.

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