By Susan G. Fentin

In another of what promises to be a long line of cases in which courts consider whether working managers have been properly classified as exempt from overtime under the Fair Labor Standards Act (FLSA), the U.S. Court of Appeals for the 1st Circuit—which covers Maine, Massachusetts, New Hampshire, and Rhode Island—has ruled that two former Dunkin' Donuts (DD) managers in Massachusetts can pursue claims that they were improperly classified.

In its opinion, the 1st Circuit raised some interesting issues that intersect with the Department of Labor's (DOL) final overtime rules, which raised the threshold salary level for exempt status.

America runs on Dunkin'

Gassan Marzuq worked as a manager at a DD store in Massachusetts from 2007 to 2012, and Lisa Chantre was a manager in another DD store from 2009 until 2010. Both stores are among multiple DD franchises that are owned and operated by three related corporate entities, and John Cadete was president of all three.

When Marzuq and Chantre were hired, they signed manager agreements in which they acknowledged that they were expected to work "no less than a six[-]day, 48[-]hour workweek." That provision was so important to Cadete that the words "no less than" were set in boldface type in the agreements.

However, because they are required to substitute for crew members who miss their scheduled shifts, managers frequently work more than 48 hours a week. In addition to working the line when crew members call out, the managers have several other responsibilities, including calibrating equipment, handling cash, training and supervising employees, and completing a substantial amount of paperwork. Since the managers spend a large portion of their days serving customers and cleaning, it's questionable how much of their day is actually spent in a management role.

Marzuq and Chantre filed suit against DD after they were terminated, claiming they had been improperly classified as exempt under the FLSA's executive exemption and they were entitled to overtime for all the hours they worked over 40 each workweek.

The trial court concluded that a previous decision by the 1st Circuit controlled Marzuq and Chantre's case. In that 1982 decision, Donovan v. Burger King, the appeals court held that certain assistant managers could be properly considered exempt. Marzuq and Chantre appealed the trial court's dismissal of their claims to the 1st Circuit.

Have it your way

Under the FLSA, employers are required to pay their workers 1½ times their regular rate of pay for any hours worked in excess of a 40-hour workweek. There are, of course, exceptions to this, among them the executive exemption that applies to employees who are—at least until December 1—paid a base salary of at least $455 per week.

We say "until December 1" because, as you undoubtedly know, the base salary level will likely increase significantly after the DOL has just raised the minimum base salary for the "white collar" exemptions to $47,476.

In addition to earning the required base salary, to be properly considered exempt, the employee must have a "primary duty" of management, must customarily and regularly direct the work of two or more employees, and must have the authority to hire or fire employees or whose recommendations carry particular weight.

Under the DOL regulations, a manager can be considered exempt even if he is serving customers at the same time he is supervising employees. The issue in the 1982 Burger King case was whether the manager's exempt duties were his primary duty. The court in that case looked at a number of factors, including the amount of time spent performing exempt work.

Time alone is not the determinative test, however; some assistant managers in retail stores can spend more than 50% of their time performing nonexempt work and still be classified as exempt executives. It is the "overall character" of the position that determines whether exempt or nonexempt work is the employee's "primary duty."

On appeal, the 1st Circuit considered the exempt duties test and whether the DD managers could be properly considered exempt under the four factors listed in the DOL regulations: (1) the relative importance of the exempt duties compared with other duties, (2) the amount of time spent performing exempt work, (3) the employee's relative freedom from direct supervision, and (4) the relationship between the employee's salary and the wages paid to other employees.

The court agreed with Marzuq and Chantre that the Burger King analysis was not directly on point: Marzuq had testified that he spent "most of the time," perhaps as much as 90% of his time, performing nonexempt work. By contrast, the employees in Burger King alleged that they spent 40% of their time on such duties.

The court concluded that a jury should decide whether the managers' work was truly exempt. It noted that the bulk of their workweek was spent performing nonexempt work, administrative tasks were a relatively small portion of their workweek, their authority to problem solve or terminate an employee was apparently limited, and, taking the number of hours worked by managers each week and the fact that nonexempt employees could receive tips into consideration, nonexempt staff might actually make more per hour than their managers!

Looking at the overall character of the managers' primary duty, the 1st Circuit determined that it should be up to a jury to determine the number of hours the managers regularly worked, the percentage of time they were engaged in nonexempt work, and the portion of that nonexempt time in which they were performing both exempt and nonexempt duties.

In addition, the court found there might be a jury question about whether the managers had a substantial role in decisions affecting their crew members. The 1st Circuit reversed the decision of the trial court and allowed the case to proceed to trial. Marzuq v. Cadete Enterprises, Inc. (1st Cir., 2015).

Impact of DOL regulations

It bears noting that, at $825 per week/$42,900 per year, Marzuq's weekly wage in 2012 was not far from the minimum salary level established by the DOL when it released its highly anticipated overtime regulations on May 18.

The DOL has set the minimum salary for exempt status at $913 per week/$47,476 annually for a full-year worker, which is the weekly earnings of the 40th percentile of full-time salaried workers in the lowest-wage census region.

As a result, although DD might seek to preserve the exempt status of its managers by raising their salary, that will not solve the problem if their job duties do not also qualify them for the exemption. So the court's analysis here is significant for all exempt workers, even for those whose salary level may not need to change after the DOL final regulations are issued.

We've noted before that the time is ripe for employers to reevaluate their exempt/nonexempt classifications. If you are concerned that some of your exempt workers may be misclassified, the new regulations will give you another reason to revise their classification without necessarily creating liability for past wages. Consult experienced labor and employment counsel if you need guidance on how to reclassify your exempt workers.