A New Jersey federal court recently granted an employer's motion for summary judgment (dismissal without a trial) on a group of financial advisers' overtime claims, finding they were properly classified as exempt under the Fair Labor Standards Act (FLSA) and its New Jersey counterpart.

Facts

A group of former financial advisers for Morgan Stanley Smith Barney LLC (MSSB) filed a lawsuit in federal court for overtime wages under the FLSA and Connecticut, New York, New Jersey, and Rhode Island law. MSSB is a financial services firm that provides financial advisory services and sells investment products.

The financial advisers' duties included (1) making investment recommendations to new and current clients by examining different factors such as clients' financial status, financial goals, and risk tolerance, (2) monitoring existing clients' accounts, and (3) researching economic developments and market news and trends. In addition, advisers engaged in marketing activities to gain new clients, such as calling prospective clients and hosting seminars.

The advisers were supervised by branch managers, and their interactions with branch managers varied from daily interaction to sparse supervision. The advisers did not generally require preapproval from supervisors to make purchases and sales on behalf of clients. They were paid at least $1,972 in monthly compensation and had the opportunity to receive incentive-based compensation if their gross revenue exceeded the minimum monthly compensation.

The advisers argued that MSSB improperly classified them as exempt employees under the FLSA's administrative exemption and that they were owed overtime pay. The district court had previously dismissed the advisers' other claims, including their attempt to file the case as a class action.

The only remaining issue for the district court was whether the individual advisers were entitled to overtime pay under the FLSA and state law. MSSB asked the court to dismiss the advisers' overtime claims, arguing it properly classified them as exempt employees and that they were owed no overtime pay.

District Court's Decision

The FLSA's administrative exemption applies to employees who meet a three-part test:

1. Their primary duty is performing work that is directly related to the management or general business operations of the employer or its customers.
2. They perform work that requires exercising discretion and independent judgment.
3. They are paid at least $455 per week ($23,660 annually).

The compensation rate was set to increase to $47,476 annually in late 2016. However, shortly before the rule's effective date, it was put on hold by a federal court in an unrelated decision. Therefore, the $455-per-week rate remains the monetary threshold.

The district court reviewed the decisions of courts in other states that denied overtime claims filed by financial advisers who performed similar job functions as the employees in this case as well as U.S. Department of Labor (DOL) guidance stating that financial advisers are exempt employees under the FLSA's administrative exemption.

The district court ultimately agreed that the advisers were properly classified as exempt employees. The court rejected the advisers' reliance on other courts' decisions and DOL guidance because those resources did not address the exempt status of financial advisers specifically. Instead, they addressed the status of employees in the financial services industry generally.

The advisers argued that their primary duty consisted of selling financial products, a nonexempt duty, and therefore, MSSB improperly classified them as exempt employees. However, the district court found that whether the advisers' sales activities were part and parcel of their exempt duties was irrelevant.

The advisers' deposition testimony established that they performed tasks that were directly related to MSSB's management or general business operations. Their tasks included analyzing clients' financial information, advising clients on investment opportunities, and recommending financial products. The tasks indicated that the advisers' primary duty required performing analyses, making judgments, and providing advice.

They were required to research particular financial instruments, learn about clients' assets and investment aims, and recommend appropriate investments based on those assessments. The sales that were generated were merely incidental, and the employees spent the vast majority of their time performing exempt tasks.

The district court found persuasive the advisers' admission that they did not need preapproval from supervisors to execute transactions on behalf of clients, except in limited circumstances. Further, supervisors did not directly oversee the advisers' client communications or recommendations, and MSSB permitted advisers to choose from an array of financial products when making investment recommendations to clients. Those facts indicated the advisers exercised discretion and independent judgment in performing their job duties.

Further, the advisers were paid at least $1,972 per month, which easily satisfied the administrative exemption's compensation requirement. Although the advisers argued that their commission payments were illegally cut if they did not meet their targets every month, they still were paid enough to satisfy the exemption threshold. Finally, the district court agreed with MSSB that the exemptions from overtime pay under New Jersey law are not materially different from the exemptions under the FLSA and rejected the advisers' claims under New Jersey law.

Bottom Line

Although the employer won this case, it is a good reminder that employees' specific job duties are crucial in classifying them under the FLSA and state law. Carefully draft job descriptions, and ensure that an employee's actual duties properly satisfy the tests for the administrative, executive, and professional exemptions. Also, routinely audit your workforce since job duties often change, which requires positions to be reevaluated to determine whether they should be classified as exempt or nonexempt.

Anna Matsuo is a contributor to New Jersey Employment Law Letter.