Reich v. John Alden Life Insurance

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT

No. 97-1053

ROBERT B. REICH, ETC.,

Plaintiff - Appellant,

v.

JOHN ALDEN LIFE INSURANCE COMPANY,

Defendant - Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

Selya, Circuit Judge,

Campbell, Senior Circuit Judge,

and Lagueux,* District Judge.

Anne Payne Fugett, Attorney, with whom J. Davitt McAteer,

Acting Solicitor of Labor, Steven J. Mandel, Associate Solicitor,

and William J. Stone, Counsel for Appellate Litigation, U.S.

Department of Labor, were on brief for appellant.
William J. Kilberg, with whom Eugene Scalia and Gibson, Dunn

& Crutcher LLP were on brief for appellee.

September 18, 1997

* Of the District of Rhode Island, sitting by designation.

LAGUEUX, District Judge. In this appeal, the Court is
LAGUEUX, District Judge.

asked to decide whether certain employees of the John Alden Life

Insurance Company ("John Alden") are exempt from the overtime pay

provisions of the Fair Labor Standards Act, 29 U.S.C. 201-219

("FLSA" or the "Act"). The particular question before the Court

concerns whether the employees at issue, known as marketing

representatives or marketing specialists (collectively, the

"marketing representatives"), fall within the "administrative

employee" exemption, 29 U.S.C. 213(a)(1), which provides that

"any employee employed in a bona fide executive, administrative,

or professional capacity" is excluded from the Act's overtime pay

and recordkeeping provisions.

The United States Secretary of Labor ("the Secretary")

filed this action against John Alden on May 4, 1995, seeking to

enjoin the company from violating the FLSA's overtime and

recordkeeping requirements with respect to the marketing

representatives. The parties submitted the case to the district

court on stipulated facts and cross-motions for summary judgment,

under Rule 56 of the Federal Rules of Civil Procedure. In a

Memorandum and Order dated October 8, 1996, Judge Gorton found

that the marketing representatives qualified as "administrative

employees" under 29 U.S.C. 213(a)(1), and therefore denied the

Secretary's motion and granted summary judgment in favor of John

Alden. See Reich v. John Alden Life Ins. Co., 940 F. Supp. 418,

421-24 (D. Mass. 1996). For the reasons that follow, we affirm.

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I. FACTUAL BACKGROUND
I. FACTUAL BACKGROUND

As noted above, the parties submitted this case to the

district court on stipulated facts, and Judge Gorton provides a

detailed account of the parties' stipulation in his memorandum.

See id. at 419-20. Thus, for the purposes of this appeal the

Court needs only to highlight those facts that are most relevant

to the issue presented for review.

John Alden is a Florida-based company that operates in

several states, including Massachusetts, where it maintains an

office in Westborough. The company designs, creates, and sells

various types of insurance products; its customers are typically

businesses, who purchase group coverage on behalf of their

employees.

As is the common practice in the industry, John Alden

does not sell its products through direct contacts with

customers, but instead relies on licensed independent insurance

agents ("agents") to provide its customer base. In general, an

agent will recommend a variety of insurance products, including

John Alden products and those of its competitors, to a

prospective end-purchaser. When a customer decides to purchase a

John Alden product, the agent acts as an intermediary between the

company and the end-purchaser to achieve completion of the

transaction.

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The primary duty of the marketing representatives --

the employees at issue here1 -- is to cultivate this independent

agent sales force, and, thereby, ultimately to increase sales of

John Alden products. To this end, the marketing representatives

maintain constant contact with agents. Marketing representatives

do not "share" agents with one another; instead, each keeps a

list or "deck" of agents with whom he or she is in contact. The

typical deck consists of 500-600 agents, and marketing

representatives continually cull their decks to maintain an

active agent base.

As an agent's primary contact with John Alden, a

marketing representative is responsible for keeping his or her

agents up to date on all aspects of John Alden's product line.

For instance, the marketing representatives keep their agents

apprised of any new products or product combinations available

from John Alden, and make their agents aware of any changes in

the pricing of the company's products. The marketing

representatives also discuss how John Alden's products might meet

the particular needs of an agent's current or prospective

customers, and advise agents as to which John Alden products to

market against competing products. Often, they help their agents

develop proposals for bidding on new business by recommending the

appropriate combination of John Alden products to fit a

prospective customer's needs. To further educate their agents,

1 All of the marketing representatives at issue in this case
work in John Alden's Westborough, Massachusetts office.

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marketing representatives sometimes pass along articles about the

company and/or its competitors, or give small-group presentations

about John Alden's products.

In dealing with agents, the marketing representatives

do not use prepared scripts. Further, although they receive

guidance about suggested points of emphasis during an initial

training period and at weekly sales meetings, these employees

must decide for themselves which products to emphasize to a

particular agent, and which of their agents to contact on a given

day. Thus, to make these decisions the marketing representatives

must rely on their own knowledge of their agent decks and the

specific needs of their agents' customers. Consequently, they

spend most of their time (approximately seven hours a day) on the

phone with agents. While most of these calls are made to agents

with whom they are already familiar -- to advise agents of new

product developments, discuss current customer needs, or follow

up on outstanding sales proposals -- they also make some "cold

calls" to agents in the deck with whom they are unfamiliar, both

to acquaint the agents with John Alden and to learn about each

agent's customer base.

When a customer ultimately decides to purchase a John

Alden product, a marketing representative acts as a conduit

between the agent and prospective purchaser, on the one hand, and

John Alden's underwriting department, on the other. Generally,

the marketing representative sends an application to the agent,

who meets with the customer to complete the necessary paperwork;

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the agent then returns the completed application to the marketing

representative, who in turn forwards it to the underwriting

department. While the application is pending, the marketing

representative will sometimes gather the additional information

needed in the approval process, such as medical records, or

arrange medical tests for the purchasers' employees where such

information is lacking. Beyond this, however, the marketing

representatives play no further role in the purchase transaction.

Thus, they do not set or negotiate prices or terms of insurance,

nor do they have any authority to approve or deny an application,

as this is done solely by the underwriting department.

Typically, marketing representatives are college

graduates with two to six years of marketing experience. An

initial period of training at John Alden is supplemented with

both formal and informal instruction from supervisors and more

senior marketing representatives throughout their tenure at the

company. They also attend weekly sales meetings with a District

Manager, where they learn about new products and exchange

information about sales techniques they have found to be

effective. At these sales meetings, the marketing

representatives also pass along any information they might have

received from agents -- for instance, information concerning a

competitor's new products or prices, or about which new products

are selling well -- that might be helpful to the company in

designing new products.

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The marketing representatives work five days a week,

typically working ten-hour days with a one-hour lunch break.2 As

noted earlier, they spend most of their time on the phone with

agents, with the remaining time spent completing and reviewing

paperwork related to these agent contacts. On average, a first-

year marketing representative will generate approximately $1.5

million in sales annually for the company, while a more

experienced representative will be credited with approximately $3

million in sales each year. The average annual compensation for

a marketing representative is $50,000, and more senior

representatives can earn as much as $75,000. In addition to a

base salary of $34,000 to $37,000, these employees earn quarterly

incentive and bonus pay based on the number, value, and profit

performance of the policies issued by the agents in their agent

decks. To further encourage sales, the company sets a quarterly

sales goal for each marketing representative; anyone who fails to

meet this benchmark receives further training and counseling, and

ultimately risks termination if this failure persists for two or

more consecutive quarters.

II. PROCEDURAL BACKGROUND
II. PROCEDURAL BACKGROUND

On May 4, 1995, the Secretary commenced this action

against John Alden pursuant to section 17 of the FLSA, 29 U.S.C.

217, seeking to enjoin the company from violating the overtime

and recordkeeping provisions of the Act, 29 U.S.C. 207 and

2 Although John Alden does not maintain records of the hours
worked by its marketing representatives, the parties have
stipulated that they average more than 40 hours per week.

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211, respectively, and from withholding unpaid overtime wages due

to the marketing representatives.3 In its answer, John Alden

asserted as an affirmative defense, inter alia, that the

marketing representatives were exempt from the applicable

regulations of the FLSA as "administrative employees" under

section 13 of the Act, 29 U.S.C. 213(a)(1).

The parties submitted the case to the district court

for decision on cross-motions for summary judgment, based on

their stipulation of facts as described above. It was undisputed

that the marketing representatives routinely worked more than 40-

hour workweeks without overtime pay and that the company did not

keep records of the hours worked by each during a workweek.

Therefore, the only issue before the district court was whether

the marketing representatives could be considered "administrative

employees" under the FLSA. In a Memorandum and Order dated

October 8, 1996, the court concluded that the marketing

representatives satisfied the Department of Labor's ("DOL")

regulatory requirements for the administrative exemption, and

therefore entered judgment in favor of John Alden. See Reich v.

John Alden Life Ins. Co., 940 F. Supp. 418 (D. Mass. 1996).

In finding these employees to be exempt, the court

applied the regulatory "short test" for the administrative

exemption, as set forth in 29 C.F.R. 541.2(e)(2). First, the

court addressed whether a marketing representative's primary duty

3 Specifically, the Secretary seeks to recover unpaid overtime
wages owed to 29 marketing representatives, 16 of whom were still
employed at John Alden at the time of the suit.

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consists of "[t]he performance of office or nonmanual work

directly related to management policies or general business

operations," as required by 541.2(a)(1). In concluding that

this "primary duty" requirement had been met, the court first

found that marketing representatives perform the administrative

tasks of "promoting sales" and "representing the company" within

the meaning of the DOL's interpretative regulations, see 29

C.F.R. 541.205(b). The court thus rejected the Secretary's

contention that, because they are concerned with securing sales

for the company, marketing representatives perform non-

administrative "production" work, the distinction drawn in

541.205(a). See John Alden, 940 F. Supp. at 421-22. Completing

its analysis of the "primary duty" requirement, the court went on

to find that the work performed by the employees is of

"substantial importance to the management or operation of the

business" within the meaning of 541.205(a) and (c), noting

that "[t]he success of the company in New England depends in

large part on the success of the marketing representatives who

promote sales of John Alden products." Id. at 422-23.

The court then turned to the second part of the short

test, which provides that an exempt administrative employee must

engage in work that requires the exercise of "discretion and

independent judgment." 29 C.F.R. 541.2(e)(2). The court found

that this requirement had been met on the facts before it as

well, noting that marketing representatives exercise discretion

and use their own judgment in deciding which agents to contact

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and which products to emphasize on a given day. See id. at 423-

24. Thus, having found that both prongs of the short test had

been satisfied, the court concluded that the marketing

representatives qualified as administrative employees and were

thus exempt from the FLSA's overtime requirements.

Following the entry of judgment in favor of John Alden,

the Secretary filed a timely notice of appeal to this Court. The

case is now in order for decision.

III. STANDARDS OF REVIEW
III. STANDARDS OF REVIEW

Rule 56(c) of the Federal Rules of Civil Procedure sets

forth the standard for ruling on a motion for summary judgment:

The judgment sought shall be rendered
forthwith if the pleadings, depositions,
answers to interrogatories, and admissions on
file, together with the affidavits, if any,
show that there is no genuine issue as to any
material fact and that the moving party is
entitled to a judgment as a matter of law.

The trial court must view all facts and draw all inferences in

the light most favorable to the nonmoving party. See Continental

Cas. Co. v. Canadian Universal Ins. Co., 924 F.2d 370, 373 (1st

Cir. 1991). When deciding cross-motions for summary judgment,

the court must consider each motion separately, drawing

inferences against each movant in turn. See Blackie v. Maine, 75

F.3d 716, 721 (1st Cir. 1996). Summary judgment is appropriate

when there is no dispute as to any material fact and only

questions of law remain. Id.

Because the summary judgment standard requires the

trial court to make a legal determination rather than to engage

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in factfinding, appellate review is generally governed by the de

novo standard. See National Amusements, Inc. v. Town of Dedham,

43 F.3d 731, 735 (1st Cir.), cert. denied, 515 U.S. 1103 (1995).

However, the particular procedural vehicle by which this case was

decided by the district court requires some deviation from the

norm. As noted earlier, the parties cross-moved for summary

judgment on stipulated facts, with their legal arguments focused

on the significance to be accorded to the agreed-upon facts.

Thus, in effect, the parties submitted this case to the district

court as a case stated. Cf. Equal Opportunity Employment Comm'n

v. Steamship Clerks Union, Local 1066, 48 F.3d 594, 603 (1st

Cir.), cert. denied, 116 S. Ct. 65 (1995). As this Court has

stated in a similar case:

[W]here, in a nonjury case, "the basic
dispute between the parties concerns the
factual inferences . . . that one might draw
from the more basic facts to which the
parties have drawn the court's attention," .
. . the district court is freed from the
usual constraints that attend the
adjudication of summary judgment motions.
Federaci n de Empleados Tribunal Gen. de

Justicia v. Torres, 747 F.2d 35, 36 (1st

Cir. 1984) (Breyer, J.). The court may then
engage in a certain amount of differential
factfinding, including the sifting of
inferences. By the same token, the court of
appeals may assume that "the parties
considered the matter to have been submitted
below as a case ready for decision on the
merits." Id. Consequently, the standard for

appellate oversight shifts from de novo

review to clear-error review.

Id. at 603.

Here, as in Steamship Clerks, in reaching its decision

the lower court was required first to engage in some differential

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factfinding -- i.e., the drawing of factual inferences from the

stipulated facts -- and then to make a legal determination based

upon these facts. Thus, this appeal involves both factual and

legal determinations. This Court will apply the more deferential

clear-error standard when reviewing the factual inferences drawn

by the court below, id., while the lower court's ultimate

application of the law to the facts, both those stated and

inferred, remains subject to de novo review. Id.

In parsing out the questions of fact from the ultimate

legal conclusion, we are guided by our decision in Reich v.

Newspapers of New England, Inc., 44 F.3d 1060 (1st Cir. 1995),

where the Court considered whether certain newspaper employees

fell within the professional exemption to the FLSA's overtime pay

provisions, 29 U.S.C. 213(a)(1). Adopting the approach used by

the Fifth Circuit in Dalheim v. KDFW-TV, 918 F.2d 1220, 1226 (5th

Cir. 1990), this Court recognized that "there are three distinct

types of findings involved in determining whether an employee is

exempt." Newspapers of New England, 44 F.3d at 1073. First, the

court must make findings concerning the so-called "historical

facts" of the case, such as determining an employee's day-to-day

duties. Id. Second, the court must draw factual inferences from

these historical facts, for instance, to conclude whether these

day-to-day duties require "invention, imagination, or talent" as

required by applicable regulations. Id. Finally, the trial

court must reach the ultimate conclusion of whether an employee

is exempt, based on both historical facts and factual inferences.

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Id. Having separated out the lower court's determinations in

this manner, we concluded that the first two types of findings,

as essentially factual determinations, were subject to the

clearly erroneous standard of review. Id. As for the district

court's ultimate finding, we noted that "[a]lthough this is based

on both historical facts and factual inferences, it is a

conclusion of law, over which we exercise plenary review." Id.

The Court will apply this framework in its review of

the decision at issue here. Of course, there are no "first tier"

findings to review, as the historical facts were agreed upon in

the parties' stipulation. Accordingly, the factual inferences

drawn by the district court from the stipulated facts will be

reviewed for clear error, while the lower court's ultimate legal

determination engenders plenary review.

Finally, while recognizing that the determination of

whether an employee is exempt is clearly tied to the district

court's inferential factfinding,4 we remain acutely aware of our

duty to engage in a thorough review of the record. See id. at

1073. Moreover, we must review the decision below to ensure that

the court's factfinding was guided by the proper legal standards,

as "to the extent that findings of fact can be shown to have been

predicated upon, or induced by, errors of law, they will be

4 As the Fifth Circuit has noted, "[i]n the great majority of
cases, the district court's findings of fact and the inferences
it draws, if carefully set forth and supported by the record,
will all but compel the legal conclusion that a given employee is
or is not exempt. Absent some fundamental legal error, those
conclusions will usually stand undisturbed on appeal." Dalheim,

918 F.2d at 1226-27.

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accorded diminished respect on appeal." Dedham Water Co. v.

Cumberland Farms Dairy, Inc., 972 F.2d 453, 457 (1st Cir. 1992).

IV. DISCUSSION
IV. DISCUSSION

The FLSA establishes, as a general rule, that employees

must be compensated at a rate not less than one and one-half

times their regular rate for all overtime hours. 29 U.S.C.

207(a)(1). The Act further defines overtime as employment in

excess of 40 hours in a single workweek. Id. However, this

overtime provision does not apply to "any employee employed in a

bona fide executive, administrative, or professional capacity . .

. (as such terms are defined and delimited from time to time by

regulations of the Secretary)." 29 U.S.C. 213(a)(1). Of

course, the remedial nature of the statute requires that FLSA

exemptions be "narrowly construed against the employers seeking

to assert them and their application limited to those

establishments plainly and unmistakably within their terms and

spirit." Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960).

Further, it is the employer in an FLSA case that bears the

ultimate burden of establishing that its employees fall within

the exemption. See Newspapers of New England, 44 F.3d at 1070.

The specific parameters of the FLSA's administrative

exemption are not set forth in the statute, but are instead

articulated in the DOL's regulations and interpretations. The

regulations, promulgated pursuant to an express delegation of

legislative authority, are to be given controlling weight unless

found to be arbitrary, capricious, or contrary to the statute.

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See Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467

U.S. 837, 843-44 (1984). On the other hand, the interpretive

regulations are not conclusive, as they merely set forth the

Secretary's official position on how the regulations should be

applied in specific contexts. See Newspapers of New England, 44

F.3d at 1070. Even so, these interpretations have the "power to

persuade, if lacking power to control," as they "constitute a

body of experience and informed judgment to which courts and

litigants may properly resort for guidance." Skidmore v. Swift &

Co., 323 U.S. 134, 140 (1944).

The requirements of the administrative exemption are

set forth in the regulations at 29 C.F.R. 541.2. That

regulation outlines both a short and a long test for determining

whether an employee qualifies for the administrative exemption;

the short test is used for employees whose salaries are more than

$250 per week. 29 C.F.R. 541.2(e)(2). Since the parties have

stipulated that the marketing representatives earn more than $250

per week, there is no dispute that the short test governs the

instant case.

Under the short test, John Alden must demonstrate: (1)

that the primary duty of the marketing representative consists of

"[t]he performance of office or nonmanual work directly related

to management policies or general business operations of his

employer or his employer's customers," 29 C.F.R. 541.2(a)(1),5

5 To be more precise, the first prong of the short test set
forth at 541.2(e)(2) requires that the "primary duty consists
of the performance of work described in paragraph (a) of this

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and (2) that such primary duty "includes work requiring the

exercise of discretion and independent judgment," 29 C.F.R.

541.2(e)(2). The district court found, and we agree, that the

marketing representatives meet both parts of this test.

A. Work Directly Related to Management or Operations
A. Work Directly Related to Management or Operations

As stated above, under this first prong of the test

John Alden must show that its marketing representatives have as a

primary duty "office or nonmanual work directly related to

management policies or general business operations" of John Alden

or its customers. 29 C.F.R. 541.2(a)(1). In the parties'

stipulation, the "primary duty" of the marketing representatives

is described as follows:

to contact and deal with licensed independent
insurance agents ("agents"), and related
activities, to increase purchases of John
Alden insurance products by end-purchasers
who are in contact with the agents.

As there is no dispute that this statement describes "office or

nonmanual work," the only question that remains is whether this

primary duty is "directly related" to John Alden's management

policies or general business operations.

The interpretative regulations concerning the

administrative exemption are set forth at 29 C.F.R. 541.201

through 541.215. Of particular relevance is section 541.205,

which specifically addresses the "directly related to management

section." For the sake of simplicity, the Court has quoted
directly from paragraph (a) in setting out the short test.

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policies or general business operations" language under

consideration. Subsection 541.205(a) provides as follows:

The phrase "directly related to management
policies or general business operations of
his employer or his employer's customers"
describes those types of activities relating
to the administrative operations of a
business as distinguished from "production"
or, in a retail or service establishment,
"sales" work. In addition to describing the
types of activities, the phrase limits the
exemption to persons who perform work of
substantial importance to the management or
operation of the business of his employer or
his employer's customers.

Thus, 541.205(a) of the interpretations further subdivides the

first prong of the short test into two subparts: (1) the

employee must be engaged in "administrative" rather than

"production" activity; and (2) this administrative activity must

be of "substantial importance" to management or operations.

The district court found that both parts of this test

had been satisfied, and thus concluded that the work of the

marketing representatives was "directly related" to John Alden's

business operations. See John Alden, 940 F. Supp. at 421-23. As

the Fifth Circuit has noted, "[w]hether an employee's work is or

should be deemed 'directly related' to business operations is an

inference drawn from the historical facts." Dalheim, 918 F.2d at

1230. Thus, we review this finding for clear error. Id.; see

also Newspapers of New England, 44 F.3d at 1073.

1. The Administrative-Production Dichotomy
1. The Administrative-Production Dichotomy

Subsection 541.205(b) of the interpretations offers the

following definition of "administrative" work:

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The administrative operations of the business
include the work performed by so-called white
collar employees engaged in "servicing" a
business as, for example, advising the
management, planning, negotiating,
representing the company, purchasing,
promoting sales, and business research and
control.

However, applying the administrative-production dichotomy is not

as simple as drawing the line between white-collar and blue-

collar workers. On the contrary, non-manufacturing employees can

be considered "production" employees in those instances where

their job is to generate (i.e., "produce") the very product or

service that the employer's business offers to the public. See,

e.g., Reich v. New York, 3 F.3d 581, 587-89 (2d Cir. 1993), cert.

denied, 510 U.S. 1163 (1994) (police investigators conduct or

"produce" criminal investigations); Dalheim, 918 F.2d at 1230-31

(television station's producers, directors, and assignment

editors "produced" newscasts, and were thus non-exempt).

Applying this distinction, the district court held that

the marketing representatives were engaged in administrative

rather than production activities, a finding in which this Court

joins. As stated in the stipulation of facts, John Alden is in

the business of designing, creating, and selling insurance

policies to the public. It follows, as the district court

properly recognized, that the "products" generated by John Alden

are these insurance policies themselves. As the marketing

representatives are in no way involved in the design or

generation of insurance policies, the very product "that the

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enterprise exists to produce and market," Dalheim, 918 F.2d at

1230, they cannot be considered production employees.

In its arguments both to the lower court and on appeal,

the Secretary has urged that the Third Circuit's decision in

Martin v. Cooper Electric Supply Co., 940 F.2d 896 (3d Cir.

1991), cert. denied, 503 U.S. 936 (1992), compels the conclusion

that the employees at issue here are production employees.

However, both the district court and John Alden have properly

distinguished Cooper Electric from the instant case. The company

at issue in Cooper Electric was a wholesaler that did not

manufacture any products of its own, but instead sold products

made by other firms. Id. at 903. Thus, the parties stipulated

that the wholesaler's primary business purpose was to produce

sales of electrical products. Id. Since the employees at issue

in Cooper Electric, the company's salespeople, worked to generate

the very product that the company existed to market -- sales of

electrical products -- the Third Circuit concluded that they were

non-exempt production employees. Id. at 903-04. Of course, the

facts of Cooper Electric are clearly distinguishable from this

case, as John Alden does indeed generate a product, insurance

policies, not merely sales of a product.

In an attempt to answer this argument, the Secretary

points out that the stipulation of facts describes John Alden's

business purpose as the design, creation, and sale of insurance

policies. Thus, the Secretary contends that, in addition to the

production of insurance policies, John Alden also produces sales,

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and that any employee engaged in the generation of sales should

be deemed non-exempt under the logic of Cooper Electric.6

However, Cooper Electric itself provides an effective counter.

In discussing the "servicing" component of the Secretary's

interpretations, see 29 C.F.R. 541.205(b), the Third Circuit

explained that "servicing a business" entailed "employment

activity ancillary to an employer's principal production

activity." Cooper Electric, 940 F.2d at 904 (emphasis in

original). In the instant case, the activities of the marketing

representatives are clearly ancillary to John Alden's principal

production activity -- the creation of insurance policies -- and

therefore could be considered administrative "servicing" within

the meaning of section 541.205(b).

As the district court noted, the day-to-day activities

of marketing representatives are more in the nature of

"representing the company" and "promoting sales" of John Alden

products, two examples of exempt administrative work provided by

541.205(b) of the interpretations. As John Alden's primary

contact with the insurance market (via agent contacts), marketing

representatives represent the company by keeping the market

informed of changes in John Alden's product offerings and pricing

structure. Further, by advising agents as to which of John

6 In the context of a retail or service establishment, section
541.205(a) expressly provides that "sales" work is not
administrative. However, as the Secretary recognizes, insurance
companies are not retail or service establishments within the
meaning of the FLSA, see 29 C.F.R. 779.316, and thus this

provision is inapplicable to the present case.

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Alden's products to market against competing products, and by

helping them put together proposals for bidding on new business,

marketing representatives are, again to quote Cooper Electric,

engaged in "something more than routine selling efforts focused

simply on particular sales transactions." Id. at 905. Rather,

their agent contacts are "aimed at promoting (i.e., increasing,

developing, facilitating, and/or maintaining) customer sales

generally," id. (emphasis in original), activity which is deemed

administrative sales promotion work under section 541.205(b).

Therefore, there was no error in the district court's finding

that John Alden's marketing representatives are engaged primarily

in administrative rather than production work.

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2. Substantial Importance to Management or Operations
2. Substantial Importance to Management or Operations

In addition to drawing the administrative-production

work dichotomy, 29 C.F.R. 541.205(a) limits the "directly

related" language to "persons who perform work of substantial

importance to the management or operation of the business of his

employer or his employer's customers." Of course, employees who

formulate management policies or oversee general business

operations easily satisfy this "substantial importance"

requirement. See 29 C.F.R. 541.205(c). However, the

interpretations make it clear that the exemption is not to be

limited solely to so-called "management" personnel:

As used to describe work of substantial
importance to the management or operation of
the business, the phrase "directly related to
management policies or general business
operations" is not limited to persons who
participate in the formulation of management
policies or in the operation of the business
as a whole. Employees whose work is
"directly related" to management policies or
to general business operations include those
[whose] work affects policy or whose
responsibility it is to execute or carry it
out. The phrase also includes a wide variety
of persons who either carry out major
assignments in conducting the operations of
the business, or whose work affects business
operations to a substantial degree, even
though their assignments are tasks related to
the operation of a particular segment of the
business.

29 C.F.R. 541.205(c). Examples of employees or positions that

generally meet the "substantial importance" requirement include

credit managers, claim agents and adjusters, wage-rate analysts,

securities brokers, and promotion men. See 29 C.F.R.

541.205(c)(5). However, the particular title given to an

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employee is not determinative, as an employee's exempt status

must instead be predicated on whether his or her duties and

responsibilities meet all of the applicable regulatory

requirements. See 29 C.F.R. 541.201(b).

In applying these interpretations, the district court

first recognized that "the work of the marketing representatives

is critically important to John Alden's business," in that "[t]he

success of the company in New England depends in large part on

the success of the marketing representatives who promote sales of

John Alden products." John Alden, 940 F. Supp. at 422-23.

Having thus found that the marketing representatives were engaged

in work that "affects business operations to a substantial

degree" -- one of the categories of work deemed to be of

"substantial importance" under 29 C.F.R. 541.205(c) -- the

district court concluded that their work met this prong of the

test. Id.

On appeal, the Secretary contends that, in applying the

interpretations, the district court misconstrued the concept of

"substantial importance" so as to require plenary review of this

issue. In short, the Secretary submits that the lower court

improperly equated economic impact with substantial importance,

so that if an employee's work contributes to an employer's

financial well-being, that fact alone is sufficient to satisfy

the substantial importance requirement. If the court did indeed

misconstrue the concept of "substantial importance," then its

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factual inferences were drawn with the wrong legal standard in

mind, and it would have erred as a matter of law.

We recognize that more than one circuit has held that

"[t]he financial effect of employee activity cannot alone show

work of 'substantial importance to the management or operation'

of an employer's business." Cooper Electric, 940 F.2d at 906;

see also Dalheim, 918 F.2d at 1231.7 As stated by the Fourth

Circuit in Clark v. J.M. Benson Co., 789 F.2d 282 (4th Cir.

1986), in assessing substantial importance it is necessary to

look at "the nature of the work, not its ultimate consequence."

Id. at 287 (emphasis in original). Further, the interpretive

regulations clearly dismiss the view that this requirement can be

met simply by showing a link between poor performance and lost

profits:

A messenger boy who is entrusted with
carrying large sums of money or securities
cannot be said to be doing work of importance
to the business even though serious
consequences may flow from his neglect. An
employee operating very expensive equipment
may cause serious loss to his employer by the
improper performance of his duties. . . . But
such employees, obviously, are not performing
work of such substantial importance to the
management or operation of the business that
it can be said to be "directly related to
management policies or general business
operations" as that phrase is used in
541.2.

7 In Dalheim, the employer argued for substantial importance by

stressing that "if a producer performs poorly, KDFW's bottom line
might suffer." Dalheim, 918 F.2d at 1231. The Court held that

"[a]s a matter of law, that is insufficient to establish the
direct relationship required by 541.2 by virtue of the
'substantial importance' contemplated by 541.205(c)." Id.

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See 29 C.F.R. 541.205(c)(2).

Although the district court did not expressly set forth

the test in the above manner, our review of the district court's

reasoning convinces us that these principles were taken into

account in assessing substantial importance. Contrary to the

Secretary's assertion, the court did not simply equate

"substantial importance" with financial impact. Rather, after

noting the economic significance of their sales promotion work,

the court then proceeded to consider the nature of the work

undertaken by the marketing representatives, which the court

recognized required them to:

a) understand the nature of the evolving
insurance market, b) grasp the subtleties of
that market, c) familiarize themselves with
their agents, their competitors and the needs
of existing and prospective end-purchasers,
and d) respond quickly in identifying and
promoting a John Alden product when an agent
contemplates a particular competitive
product.

John Alden, 940 F. Supp. at 423. In light of this, we are

satisfied that the district court did not misconstrue the nature

of the "substantial importance" inquiry, as it considered the

nature of the employee's work as well as the consequences of that

work.8 Accordingly, because the district court was operating

8 While recognizing the Fourth Circuit's statement that "[t]he
regulations emphasize the nature of the work, not its ultimate

consequence," J.M. Benson, 789 F.2d at 287 (emphasis in

original), we would find it difficult to conclude that a certain
kind of work was "substantially important" to business operations
without also considering the consequences of that work.

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within the proper legal framework, we will review its inferential

factfinding on this issue for clear error.

Our review of the record finds ample support for the

lower court's conclusion. First and foremost, as John Alden's

primary contact with the independent agents, marketing

representatives are the insurance market's principle source for

information about John Alden and its products. Moreover, in the

course of their daily activities, these employees gather

information about their agents, the agents' customers, and the

insurance market as a whole -- such as information about changes

in consumer needs, or regarding the success of certain

competitors' offerings. The marketing representatives must then

use all of this information both to pique their agents' interest

in John Alden, and to suggest products or product combinations

that an agent's customers might find attractive. In addition,

the marketing representatives can pass along the information they

have compiled to their supervisors, who later relay the same to

John Alden's management, who can then factor it into decisions on

new product designs and offerings.

It is certainly reasonable to draw the inference that

this type of work, both by its nature and in its consequence,

would affect John Alden's business operations to a substantial

degree. Indeed, it would appear that work of this nature --

disseminating information to the marketplace, understanding

customers and competitors, and gathering available information to

be used in putting together proposals and packages that are

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appropriate for those customers -- is directly related to

operations, and at the heart of John Alden's business success.

As such, we find no error in the district court's conclusion on

this issue.

Lastly, the Secretary attaches some significance to the

fact that John Alden employs a number of marketing

representatives in this region, stressing that the collective

economic impact of a group of employees is insufficient to

satisfy the substantial importance requirement. See Cooper

Electric, 940 F.2d at 906. However, the Secretary's own

interpretative regulations provide a sufficient rejoinder:

The fact that there are a number of other
employees of the same employer carrying out
assignments of the same relative importance
or performing identical work does not affect
the determination of whether they meet this
test so long as the work of each such
employee is of substantial importance to the
management or operation of the business.

29 C.F.R. 541.205(c)(6). In the instant case, we find that the

work of each marketing representative, standing alone, has a

substantial effect on John Alden's business.9 As set out in the

parties' stipulation, the sixteen marketing representatives

currently employed in the regional office are responsible for the

promotion of the company's products throughout all of New England

(minus Connecticut). Moreover, each marketing representative is

individually responsible for a deck of 500-600 agents, with each

9 It is unclear from the district court's discussion whether it
considered the consequences of the marketing representatives'
work individually or as a whole. Thus, we consider this issue
based upon our own review of the record.

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deck generating, on average, from $1.5 million to $3 million in

sales annually. In light of all this, we have little difficulty

in finding that each individual marketing representative carries

out a "major assignment[] in conducting the operations of the

business," and "affects business operations to a substantial

degree" through his or her own sales promotion activities. See

29 C.F.R. 541.205(c).

The district court was not clearly wrong in finding

that the marketing representatives are engaged in administrative

work of substantial importance to John Alden's business

operations. Accordingly, we agree that these employees are

engaged in administrative work "directly related to management

policies or general business operations," as required under the

first prong of the short test, 29 C.F.R. 541.2(a)(1). We now

turn to the court's analysis of the "discretion and independent

judgment" part of the test.

B. Work Requiring Discretion and Independent Judgment
B. Work Requiring Discretion and Independent Judgment

To satisfy the second prong of the short test, John

Alden must demonstrate that its marketing representatives are

engaged in work that requires the exercise of discretion and

independent judgment. 29 C.F.R. 541.2(e)(2). The Secretary's

interpretations elaborate on this requirement as follows:

In general, the exercise of discretion and
independent judgment involves the comparison
and the evaluation of possible courses of
conduct and acting or making a decision after
the various possibilities have been
considered. The term . . . , moreover,
implies that the person has the authority or
power to make an independent choice, free

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from immediate direction or supervision and
with respect to matters of significance.

29 C.F.R. 541.207(a). The interpretations further advise that

"the discretion and independent judgment exercised must be real

and substantial, that is, they must be exercised with respect to

matters of consequence." 29 C.F.R. 541.207(d)(1). However,

the exempt employee need not have final decisionmaking authority

over such matters; "[e]ven though an employee's work is subject

to approval, even to the extent that a decision may be reversed

by higher level management, it does not follow that the work did

not require the exercise of discretion and independent judgment."

Dymond v. United States Postal Serv., 670 F.2d 93, 96 (8th Cir.

1982); see also 29 C.F.R. 541.207(e).

The district court found, and we agree, that the

marketing representatives exercise discretion and independent

judgment in carrying out their duties. It is undisputed that

these employees have discretion in choosing which agents to

contact on any given day, and concerning which products to

discuss with each agent. In addition, the marketing

representatives rely on their own knowledge of an agent's

business to help tailor proposals for the agent's end-customers.

Further, they must be able to anticipate the competing products

that the agent's customers might be considering, and distinguish

John Alden's offerings from those of competitors. Thus, there is

clear support in the record for the district court's conclusion

that John Alden's marketing representatives exercise discretion

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and independent judgment in the course of their day-to-day agent

contacts.

While recognizing that the marketing representatives do

exercise some discretion in their dealings with agents, the

Secretary argues that this discretion is not exercised with

respect to "matters of consequence" within the meaning of the

interpretive regulations. However, the matters on which these

employees exercise their discretion and judgment -- which agent

would be in the best position to sell a given product, and which

products would be most attractive to a given customer -- would

certainly appear to be "of consequence" to John Alden's business.

Indeed, this work would seem to be of equal or greater importance

than some of the work the Secretary's interpretations identify as

exempt, such as the duties of an administrative assistant to an

executive,10 or those of a customer's man in a brokerage house.11

See 29 C.F.R. 541.207(d)(2). Thus, we will not upset the

district court's decision on this ground.12

10 "The regulations . . . contemplate the kind of discretion and
independent judgment exercised by an administrative assistant to
an executive, who without specific instruction or prescribed
procedures, arranges interviews and meetings, and handles callers
and meetings himself where the executive's personal attention is
not required." 29 C.F.R. 541.207(d)(2).

11 The test includes "the kind of discretion and independent
judgment exercised by a customer's man in a brokerage house in
deciding what recommendations to make to a customer for the
purchase of securities." Id.

12 As the district court noted, the work of the marketing
representatives does not at all resemble the given examples of
nonexempt work where discretion is exercised on matters of
relatively little consequence: i.e., a truck driver's decision on
which route to follow; a shipping clerk's decision on the method

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The Secretary also contends that the lower court

committed error by mistaking the mere "use of skill in applying

techniques, procedures, or specific standards," 29 C.F.R.

541.207(b), for the required discretion and independent

judgment. The Secretary submits that the marketing

representatives, in informing agents and persuading them to

recommend John Alden products, are simply applying the sales

techniques they learned in training sessions and weekly sales

meetings. The Secretary also points out that the marketing

representatives receive both formal and informal guidance about

which products and product features to emphasize, and about the

general points to make with agents. Thus, the Secretary avers

that rather than exercising discretion and independent judgment,

these employees are simply making decisions within a given set of

parameters, the type of work that would not qualify for the

exemption. See 29 C.F.R. 541.207(c).13

However, as the district court found, the record simply

does not support the Secretary's assertion. These employees do

not use prepared scripts or read from a required verbatim

of packing and mode of shipment; and a bookkeeper's decision on
whether to post to one ledger or another first. See 29 C.F.R.

541.207(d)(1).

13 The interpretive regulations offer the following examples of
work in which skill in applying standards or techniques can be
mistaken for discretion: inspectors who develop facts to assess
whether prescribed standards have been met; lumber "graders" who
inspect each "stick" and then place each into a well-defined
grading category; personnel clerks who screen applications and
reject those that do not meet prescribed minimum requirements.
See 29 C.F.R. 541.207(c)(1)-(6).

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statement, nor do they operate within the contours of a

prescribed technique or "sales pitch". On the contrary, the

content of a given conversation with an agent is dictated by the

needs or customer base of that agent, or by the particular

information sought by the marketing representative during that

phone call. Further, to the extent that the marketing

representatives receive guidance about products to emphasize and

suggested points to make with agents, they nonetheless exercise

discretion in applying this instruction -- for instance, in

determining which agent may have an interest in that product, or

in fashioning bid proposals that meet the needs of the agent's

customers.14 See Atlanta Prof'l Firefighters Union, Local 134 v.

City of Atlanta, 920 F.2d 800, 805 (11th Cir. 1991) (employees

who retained "discretion in implementing [the] directions" of

another meet discretion and independent judgment test). In light

of all this, we concur that the marketing representatives "are

not merely 'skilled' workers who operate within a strict set of

rules. Rather, they exercise significant discretion in their

daily contacts with various insurance agents." John Alden, 940

F. Supp. at 423.

The district court did not commit error in finding that

the primary duty of the marketing representatives "includes work

14 By way of comparison, the Court notes that a "customer's man
in a brokerage house" likely receives similar training about
product features and points of emphasis. Under the interpretive
regulations, 29 C.F.R. 541.207(d)(2), this employee exercises
the requisite discretion when he or she applies this guidance to
make a recommendation to a customer for a securities purchase.

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requiring the exercise of discretion and independent judgment"

within the meaning of 29 C.F.R. 541.2(e)(2). Therefore, we

conclude that the second prong of the administrative exemption

has been met in this case.

V. CONCLUSION
V. CONCLUSION

For all of these reasons, we agree with the district

court's determination that John Alden's marketing representatives

are exempt administrative employees. Accordingly, the judgment

below is affirmed.
affirmed

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