Nicholson v. World Business Network, Inc.

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.