United States Court of Appeals,
Eleventh Circuit.
No. 95-9575.
Charles E. NICHOLSON, John W. Smith, Plaintiffs-Appellants,
v.
WORLD BUSINESS NETWORK, INC.; World Charities, Inc.; World
Lottery Services; Edward M. Peabody; N.D. McCullar, Defendants-
Appellees.
Feb. 18, 1997.
Appeal from the United States District Court for the Northern
District of Georgia. (No. 1:93-CV-2328), WBH), Willis B. Hunt, Jr.,
Judge.
Before ANDERSON and CARNES, Circuit Judges, and CUDAHY*, Senior
Circuit Judge.
CUDAHY, Senior Circuit Judge.
If an employer fails to pay managerial employees the salary
owed them, can the employees not only assert breach of contract but
also invoke federal labor law? Charles Nicholson and John Smith,
the plaintiff-appellants, argue that they can.
Employees with the kind of jobs that Nicholson and Smith had
cannot generally look to the Fair Labor Standards Act (FLSA) for
protection, for the FLSA does not apply to "administrative
employees"—a category that includes lower-than-top tier managerial
staff. The district court concluded on summary judgment that Smith
was an administrative employee, and a jury by special verdict found
the same for Nicholson.
Nicholson and Smith claim that the district court erred, and
that as a matter of law, they cannot be administrative employees.
*
Honorable Richard D. Cudahy, Senior U.S. Circuit Judge for
the Seventh Circuit, sitting by designation.
One criterion for an employee's falling into the class of
"administrative employees" is a weekly salary of $250 or more.
Nicholson and Smith claim that because they never received a dime,
they cannot be administrative employees, and, therefore, the bar to
their relying on the FLSA drops away. This is an unusual
interpretation of the FLSA, one that would convert an entire
category of state contract law actions into federal labor suits.
Because Congress did not intend such a result for well-compensated,
highly responsible positions, we reject the proffered
interpretation.
Plaintiffs raise two other issues. The first is whether there
is no evidence to support the jury's special verdict against
Nicholson. The second is whether defendant N.D. McCullar was an
employer under the FLSA. The first issue we dispose of quickly,
and the second evaporates with our rejection of the "administrative
employee" claims. We affirm.
I. A Russian imbroglio
Defendants McCullar and Edward Peabody served in a variety of
executive roles for a web of companies including World Business
Network, Inc., World Charities, Inc. and World Lottery Services,
Inc. The precise details of the web's structure are
inconsequential, because the companies suffered a default judgment
and only McCullar and Peabody remain as defendants on appeal. What
is consequential is that this web of companies collaborated with
Gil Bachman (not a party to this suit) to create private lotteries
in the former Soviet Union. With claimed expertise in lottery
operations, Bachman served as point man for defendants McCullar and
Peabody in their dealings with plaintiffs Nicholson and Smith.
Plaintiff Smith had worked on lotteries with Bachman before.
Then, in November 1992, Bachman convinced Smith to help on the
lottery enterprise in the former Soviet Union. Smith was to travel
to Russia for five to six weeks at a salary of $2000 per week.
Smith took care of some initial business in America for a week and
a half, and then departed on February 26, 1993. He stayed in
Russia until March 20. While there, Smith performed spadework for
the lottery business: he established a security system, organized
tickets and prizes and inspected operations. Sometime near the end
of Smith's stay, Bachman flew to Russia and fired him. Smith was
never paid. He filed suit on October 13, 1993 against the web of
companies and McCullar and Peabody, alleging breach of contract and
violation of the FLSA. On the FLSA claim, he sought unpaid minimum
wages, overtime compensation, an equal amount in liquidated damages
and attorneys' fees, as 29 U.S.C. § 216(b) provides. Because the
FLSA does not apply to work performed in a foreign country, 29
U.S.C. § 213(f), Smith's damages would be confined to the salary he
earned before departing for Russia.
Plaintiff Nicholson did his work entirely in the United
States. Like Smith, Nicholson's relationship with Bachman
antedated these dealings. In February 1993, Nicholson began his
employ as a recruiter for Bachman's and defendants' Russian
enterprise, for which he was paid $5,000 per month. A few months
later, Nicholson moved beyond recruiting to some participation in
sales and trading. Nicholson says he was never paid for this sales
and trading work. Nicholson filed suit in tandem with Smith on
October 13, 1993, making the same allegations: that the companies
had breached their contract with Nicholson, and that all the
defendants had violated the FLSA.
Defendants filed a motion for summary judgment against both
plaintiffs. On the FLSA claims, the district court refused to rule
on whether Smith and Nicholson were employees or independent
contractors (contractor status would have exempted them from the
FLSA). The district court then assumed arguendo that Nicholson and
Smith were employees, and turned to defendants' next affirmative
defense: that Smith and Nicholson fell outside the FLSA's ambit as
"administrative employees," a term we examine in the next section
(II). The district court decided that the defendants had proven
that Smith fell into that class, but the facts of Nicholson's
employment were inconclusive. The suit proceeded to trial,
whereupon a jury returned a special verdict holding that Nicholson
was an employee—but an administrative employee.
Meanwhile the companies had stopped representing themselves in
the lawsuit, presumably because they had been emptied of cash and
other assets. The district court entered a default judgment
against them for breach of contract. But, because the district
court had earlier held that defendants McCullar and Peabody were
not personally liable for the contract claim, the default judgment,
against moneyless companies, amounted to a hollow victory for
Nicholson and Smith.
After the special verdict on the FLSA claim, Nicholson filed
a motion for judgment as a matter of law or, in the alternative,
for a new trial. His argument was the same claim that he and Smith
present on appeal: that they could not have been administrative
employees as a matter of law. The district court denied the
motion. Reviewing a question of law like this one de novo, Reich
v. Davis, 50 F.3d 962, 964 (11th Cir.1995), we now turn to whether
the district court denied the motion properly.
II. Were Nicholson and Smith administrative employees?
When Congress passed the FLSA almost sixty years ago, it
sought to end the presence in American commerce of "labor
conditions detrimental to the maintenance of the minimum standard
of living necessary for health, efficiency, and general well-being
of workers." 29 U.S.C. § 202(a). The levers Congress chose were
a minimum wage, mandatory overtime pay and curbs on child labor.
29 U.S.C. §§ 206, 207, 212. As the Supreme Court observed in 1945,
the "Act seeks to eliminate substandard labor conditions, including
child labor, on a wide scale throughout the nation." Roland
Electrical Co. v. Walling, 326 U.S. 657, 669-70, 66 S.Ct. 413, 419,
90 L.Ed. 383 (1946).
The goal of ameliorating the uglier side of a modern economy
did not imply that all workers were equally needful of protection.
The chief financial officer of a company, for instance, would be
less likely to be exploited than a janitor or assembly linesman.
So Congress removed "any employee employed in a bona fide
executive, administrative, or professional capacity ... or in the
capacity of outside salesman" from the FLSA's strictures. 29
U.S.C. § 213(a)(1). Congress delegated authority to the Secretary
of Labor to define these terms.
The implementing regulations create two tests, the long and
the short, for whether a person is an "administrative employee."
29 C.F.R. § 541.2. The long test includes five parts, all of which
the employee's job must satisfy. The first four parts hone in on
what kind of work the employee does:
(1) Is the employee's primary duty "office or nonmanual work
directly related to management policies or general business
operations"?
(2) Does the employee "customarily and regularly exercise[ ]
discretion and independent judgment"?
(3) Does she "regularly and directly assist[ ] a proprietor,
or an employee employed in a bona fide executive or administrative
capacity," or does she "perform [specialized or technical work]
under only general supervision," or "execute under only general
supervision special assignments and tasks"?
(4) Do these tasks take up the bulk (80% for non-service
employees, 60% for service and retail employees) of the employees'
time? 29 C.F.R. § 541.2(a)-(d). If the answer to all four
questions is yes, then the long test proceeds to the final
question.
Assuming that an employee has met the previous four tests, the
fifth requires that the employee "is compensated for his services
on a salary or fee basis at a rate of not less than $155 per week
... exclusive of board, lodging or other facilities." 29 C.F.R. §
541.2(e). The regulations also offer a short test, a safe harbor
for employers, which an employee may satisfy even if she fails the
long test. The short test exempts any employee who "is compensated
on a salary or fee basis at a rate not less than $250 per week"
(again exclusive of board, lodging, or other facilities), and who,
roughly speaking, meets criteria (1) and (2) above. 29 C.F.R. §
541.2(e)(2). Smith and Nicholson argue that the phrase " is
compensated" means just that—the employee must be actually paid.
(Emphasis added.) If she is not paid at all, then she is not an
administrative employee.
We are mindful of the Supreme Court's admonition that courts
closely circumscribe the FLSA's exemptions. "Any exemption from
such humanitarian and remedial legislation must therefore be
narrowly construed, giving due regard to the plain meaning of
statutory language and the interest of Congress." A.H. Phillips,
Inc. v. Walling, 324 U.S. 490, 493, 65 S.Ct. 807, 808, 89 L.Ed.
1095 (1945). But we are also heedful of the rationale for
interpreting the FLSA in this way: "To extend an exemption to
other than those plainly and unmistakably within its terms and
spirit is to abuse the interpretative process and to frustrate the
announced will of the people." Id. (emphasis added). To read the
FLSA blindly, without appreciation for the social goals Congress
sought, would also do violence to the FLSA's spirit.
Before turning to the specifics of Nicholson's and Smith's
argument, we put the salary test in context.1 The test dates from
an era during which whether an employees was on salary or was paid
by the hour revealed much about his job.2 Because being on salary
1
See generally Mark J. Ricciardi and Lisa G. Sherman, Exempt
or Not Exempt Under the Administrative Exemption of the FLSA ...
That Is the Question, 11 LABOR LAWYER 209 (1995).
2
Garrett R. Krueger, Straight-time Overtime and Salary
Basis: Reform of the Fair Labor Standards Act, 70 WASH.L.REV.
1097, 1102-03 (1995).
indicated a certain status within a company, the regulations
adopted the salary test as a rule-of-thumb for sorting out the
kinds of employees that Congress intended the FLSA to protect from
those it did not. We should not be surprised then to learn that
the salary floor applies not just to administrative employees, but
to executive and professional employees as well. 29 C.F.R. §
541.1, 541.3.
Plaintiffs are not the first exempted employees to try to
convert a contract action for unpaid salary into an FLSA suit. And
understandably so considerable advantages over a breach of contract
claim would accrue if they succeeded. Piercing through insolvent
corporations to reach the principals' presumably deep pockets is
only the beginning. While the FLSA applies generally to modestly
compensated workers, its punitive provisions can escalate the
potential recovery to bigger money. Nicholson, for instance, seeks
$45,000 on the FLSA claim, plus unpaid overtime; Smith, the
smaller sum of $9,372.10, plus unpaid overtime.
We must agree with the reasoning of other courts that have
defeated earlier efforts to transform contract actions into FLSA
suits. Each of these courts has properly directed its analysis to
what an employee was owed, not what he actually received. Donovan
v. Agnew, 712 F.2d 1509, 1517 (1st Cir.1983); Reich v. Midwest
Body Corp., 843 F.Supp. 1249, 1250 (N.D.Ill.1994); Kawatra v.
Gardiner, 765 S.W.2d 771, 773-76 (Tenn.Ct.App.1988). Support for
this position comes first from the regulations themselves. The
exemption for administrative employees refers to employees
compensated "on a salary or fee basis." 29 C.F.R. § 541.2(e)(1)-
(2). The definition of "a salary basis" underscores that it is the
employment agreement that is determinative. For an employee to be
on a salary basis, it must be that "under his employment agreement
he regularly receives each pay period ... a predetermined amount
constituting all or part of his compensation, which amount is not
subject to reduction because of variations in the quality or
quantity of the work performed." 29 C.F.R. § 541.118 (emphasis
added); § 541.212 (applying definition to administrative
employees). But the regulations are not enough in themselves, for
they are somewhat contradictory and opaque. As Nicholson and Smith
point out, an administrative employee is one who "is compensated"—a
passive verb in the past tense that suggests an action completed,
i.e., that the employee has actually been paid.
More decisive is Congressional intent. By focusing on the
employment agreement, we respect the protective stance toward
poorer and powerless workers that Congress took in the FLSA.
President Franklin D. Roosevelt told Congress that the FLSA would
" "[ ] extend the frontiers of social progress' by "insuring to all
our able-bodied working men and women a fair day's pay for a fair
day's work.' " Phillips, 324 U.S. at 493, 65 S.Ct. at 808. In
light of this goal, one way of illustrating the oddness of
Nicholson's and Smith's interpretation is to show how far their
logic would run. Administrative employees are not alone in having
a salary floor as part of their classification; professional and
executive employees do, too. If the plaintiffs' argument
prevailed, it would apply to all three classes. Suppose that a
company goes bankrupt and fails to pay its non-owner CEO her
salary. Under plaintiffs' logic, that CEO could sidestep a
contract action and instead invoke the FLSA. By creating the
employee exemptions, Congress declined to ground this kind of
action in federal labor law. Donovan, 712 F.2d at 1517.
Nicholson and Smith cite a series of cases in which reductions
in pay led courts to strip the administrative/executive employee
defense from employers. Avery v. City of Talladega, 24 F.3d 1337
(11th Cir.1994); Atlanta Professional Firefighters Union, Local
134 v. Atlanta, 920 F.2d 800 (11th Cir.1991); Harris v. District
of Columbia, 709 F.Supp. 238 (D.D.C.1989). These cases pertain to
a particular situation not present here. As noted above, the
regulations state that if an employee is being paid on a salary
basis, the employer must not "subject [the salary] to reduction
because of variations in the quality or quantity of the work
performed." 29 C.F.R. § 541.118. The three cases that plaintiffs
cite involve employees alleging precisely this—that their employers
have reduced their salaries because of how much or how well they
worked. Avery, 24 F.3d at 1340-41; Atlanta Professional
Firefighters, 920 F.2d at 805; Harris, 709 F.Supp. at 240, 242.
Nicholson and Smith allege nothing of the sort.
Understandably frustrated by their inability to recover in
contract, Nicholson and Smith would have us approve an end-run
around Congressional intent. We cannot accede to their request.
III. Sundry issues: jury's special verdict and McCullar as an
employer
Two issues remain for our consideration. First, we
understand Nicholson to be challenging on appeal the jury verdict
that he was an administrative employee. To overturn the jury, we
would have to find that insufficient evidence exists to support the
jury's determination—drawing all reasonable inferences in favor of
the defendants. Grant v. Preferred Research, Inc., 885 F.2d 795,
798 (11th Cir.1989). We cannot so conclude. The jury was told,
among other things, that Nicholson located suppliers for
import/export trade involving the former Soviet Union, including
Ukranian steel producers; that he searched for markets and
middlemen in poor countries to sell recycled clothing and jeans
there; and that Nicholson enjoyed a fair degree of autonomy and
responsibility for complex tasks. Some evidence supports the
jury's verdict. We end our inquiry there.
Second, because the jury concluded that Nicholson was an
administrative employee, the district court never assessed the
validity of another of McCullar's affirmative defenses: that
McCullar was not an employer within the meaning of the FLSA.
Plaintiffs have again failed on the threshold issue of whether they
are administrative employees. This loss renders McCullar's
affirmative defense moot.
The judgment of the district court is accordingly
AFFIRMED.