In an amusing series of advertisements for insurer Geico, the characters announce that only 15 minutes can save you 15% or more on car insurance. But it takes a lot longer to investigate insurance claims.
In a recent ruling, the Court of Appeals for the Fourth Circuit in Richmond, Virginia said that Geico’s security investigators should have been paid overtime when they worked more than 40 hours in a week. But the insurer is off the hook for liquidated damages. (Calderon v. Geico Gen. Ins. Co., CA-4, Dkt. No. 14-2111, 12/23/15)
The controlling federal law in this area, the Fair Labor Standards Act (FLSA), has established guidelines for overtime pay. Generally, the law requires employers to pay one-and-a-half times the regular rate when employees work more than 40 hours a week.
However, there are cases where employees don’t have to be paid overtime, including when they fall under the executive, administrative or professional exemptions of the law. In the Geico case, it was the administrative exemption that was in question. To qualify for that exemption, employees generally must:
• Earn at least $455 a week on a salary or fee basis,
• Perform office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and
• Have a primary duty that includes the exercise of discretion and independent judgment with respect to matters of significance.
In 2010, a collective action under the FLSA was brought against Geico in federal district court alleging that the company improperly classified its security investigator position as exempt from overtime under the administrative exemption. The complaint asked for damages in the amount of the unpaid overtime, liquidated damages, interest and an award of attorneys’ fees and costs.
The district court ruled that the investigators should have been paid overtime, but Geico wasn’t liable for liquidated damages. Geico promptly appealed.
Appeals Court Upholds Ruling
The Fourth Circuit Court upheld the district court decision. It said that the duties of the security investigators are too far removed from Geico’s management or general business operations to satisfy the directly related test for the administrative exemption.
The appellate court ruled that the primary duty of the investigators was to resolve narrow factual questions, for example whether particular claims submitted to Geico were fraudulent. The court noted that the investigators have no supervisory responsibilities nor do they develop, review, evaluate or recommend business polices for Geico or any strategies relating to the claims they investigate. The court also noted that other federal regulations and Department of Labor opinion letters support this conclusion.
As to the liquidated damages, the circuit court upheld the district court’s ruling. Liquidated damages are amounts designated in a contract that an injured party can collect for a specified breach.
Typically, the FLSA allows an award of liquidated damages equal to the amount of unpaid back wages awarded. However, a district court may refuse to award liquidated damages if the employer shows to the court’s satisfaction that the omission was in good faith and that the employer had reasonable grounds for believing that it wasn’t violating the FLSA.
Geico has long classified the security investigators as exempt employees. In 2004, two events prompted Geico to revisit the issue. First, a federal district court ruled that Geico had misclassified its auto damage adjusters as exempt from overtime. Second, the Department of Labor issued new regulations on the administrative exemption. In both 2004 and 2007, Geico reviewed its policies and concluded that the security investigators were exempt from overtime.
The district court ruled that Geico had acted in good faith by reviewing the classification issue multiple times and that its decision to treat the investigators as exempt was reasonable.
For similar reasons, the appeals court concluded that Geico didn’t commit a willful violation.
Review Your Exemptions
With the amount of dollars at stake in cases like this, it’s wise to take the time to ensure your company is on firm ground if it claims the FLSA exemptions. Consult with your professional advisers if you have any doubts.