Archive for August, 2019
The Administrative Exemption to the Fair Labor Standards Actby Andrew Whiteman
The Administrative Exemption to the Fair Labor Standards Act
The Fair Labor Standards Act provides that “no employer shall employ any employee any of his employees . . . for a workweek longer than forty hours unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.” 29 U.S.C. § 207(a)(1). One exception in the law is for employees “employed in a bona fide executive, administrative, or professional capacity.” 29 U.S.C. § 213(a)(1).
The federal Department of Labor has issued regulations that define “administrative” employees who are exempt from the overtime requirements of section 207. An administrative employee is one who is:
(1) Compensated on a salary or fee basis at a rate of not less than $455 per week (or $380 per week, if employed in American Samoa by employers other than the Federal Government), exclusive of board, lodging or other facilities;
(2) Whose primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and
(3) Whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
Each of those three components will be discussed below.
- Salary or Fee Basis
An employee is paid on a salary basis if the employee has a “guaranteed minimum” amount of money the employee can count on receiving for a workweek in which the employee performs any work. The salary basis test does not apply to outside sales employees, teachers, and employees performing law or medicine. The predetermined amount cannot be reduced because of variations in the quantity or quality of the employee’s work. Thus, the employee must receive the full salary for any week in which s/he performs any work, regardless of the number of hours or days worked. With limited exceptions, if an employee makes deductions from the employee’s pay due to the operating requirements of the business, for example, if there is not enough work available, the employee is not paid on a salary basis. Conversely, hourly-paid employees are, by definition, not paid on a salary basis. Similar rules apply to administrative or other employees paid on a “fee basis.” If an employee is paid an agreed sum for a single job regardless of the time required to complete the work the employee is paid on a “fee basis.” See Department of Labor, Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA).
- Office or Non-Manual Work Directly Related to Management or General Business Operations for the Employer or its Customers
The Department of Labor’s guidance on the “duties” portion of the administrative exemption test is contained in Fact Sheet #17C: Exemption for Administrative Employees Under the Fair Labor Standards Act (FLSA). The meaning of the second prong of the administrative exemption is often difficult to ascertain. The regulations provide that exempt administrative job duties test is met if the employee’s (1) primary duty must be (2) the performance of office or non-manual work, which is directly related to management or general business operations of the employer or the employer’s customers.
(a). Primary Duty
“The term ‘primary duty’ means the principal, main, major or most important duty that the employee performs.” 29 C.F.R. § 541.700(a). In deciding whether something is the employee’s primary duty, one looks at “the character of the employee’s job as a whole” and considers factors including, but not limited to:
the relative importance of the exempt duties as compared with other types of duties; the amount of time spent performing exempt work; the employee’s relative freedom from direct supervision; and the relationship between the employee’s salary and the wages paid to other employees for the kind of nonexempt work performed by the employee.
(b). Office or Non-Manual Work
To be considered exempt under the administrative exemption, the primary duty must be “office or non-manual work” as opposed to the production of goods or services. 29 C.F.R. § 541.200(a)(2).
The administrative exemption requires that the employee’s work be “directly related to the management or general business operations of the employer or the employer’s customers.” Id. The DOL has provided further clarification on what it means to be “directly related to the management or general business operations” in order to meet the administrative exemption:
(a) To qualify for the administrative exemption, an employee’s primary duty must be the performance of work directly related to the management or general business operations of the employer or the employer’s customers. The phrase “directly related to the management or general business operations” refers to the type of work performed by the employee. To meet this requirement, an employee must perform work directly related to assisting with the running or servicing of the business, as distinguished, for example, from working on a manufacturing production line or selling a product in a retail or service establishment.
(b) Work directly related to management or general business operations includes, but is not limited to, work in functional areas such as tax; finance; accounting; budgeting; auditing; insurance; quality control; purchasing; procurement; advertising; marketing; research; safety and health; personnel management; human resources; employee benefits; labor relations; public relations, government relations; computer network, internet and database administration; legal and regulatory compliance; and similar activities. Some of these activities may be performed by employees who also would qualify for another exemption.
(c) An employee may qualify for the administrative exemption if the employee’s primary duty is the performance of work directly related to the management or general business operations of the employer’s customers. Thus, for example, employees acting as advisers or consultants to their employer’s clients or customers (as tax experts or financial consultants, for example) may be exempt.
- Primary Duty Includes the Exercise of Discretion and Independent Judgment with respect to Matters of Significance
29 C.F.R. § 541.202 provides guidance on the meaning of the requirement for the administrative exemption that the employee’s primary duty must include the exercise of discretion and independent judgment with respect to matters of significance. In general, the exercise of discretion and independent judgment involves the comparison and evaluation of possible courses of conduct and acting or making a decision after the various possibilities have been considered. “Matters of significance” refers to the level of importance or consequence of the work performed. 29 C.F.R. § 541.202(a). The regulation provides a list of non-exclusive factors to be considered in determining whether the employee’s primary duties involve the use of “discretion and independent judgment.” 29 C.F.R. § 541.202(b).
The Fourth Circuit Court of Appeals has held that “the critical focus regarding this element remains whether an employee’s duties involve “‘the running of a business’” . . . as opposed to the mere “‘day-to-day carrying out of [the business’s affairs.’” Calderon v. GEICO Gen. Ins. Co., 809 F.3d 111, 123 (4th Cir. 2015) (internal citation omitted).
An exempt employee has no right to receive anything other than the full amount of his or her base salary in any work period for which the employee performs work, less any allowed deductions. Overtime pay is not required under the Fair Labor Standards Act. Non-exempt employees, on the other hand, are entitled to time and one-half times their regular pay for each hour they work over the FLSA overtime threshold.
© Andrew Whiteman 2019
Whiteman Law Firm handles all types of cases involving employee benefits claims under ERISA. Click here for more information about our employee benefits practice. Please contact us for more information.
Fourth Circuit Clarifies that an Employer/Plan Administrator/Named Fiduciary is Indeed an ERISA Fiduciaryby Andrew Whiteman
Fourth Circuit Clarifies that an Employer/Plan Administrator/Named Fiduciary is Indeed an ERISA Fiduciary
In the case of Dawson-Murdock v. National Consulting Group, Inc., an employer argued that it was not an ERISA fiduciary of its own group life insurance plan, even though the employer was designated as the “plan administrator” and “named fiduciary” in the plan documents. The United States District Court for the Eastern District of Virginia accepted the employer’s argument and ordered that the case be dismissed. Dawson-Murdock v. National Counseling Group, Inc., Case No. 3:18-cv-58, 2018 WL 3744020 (E.D. Va. August 7, 2018). The Fourth Circuit Court of Appeals reversed. Dawson-Murdock v. National Counseling Group, Inc., ___ F.3d ___, Case No. 18-1989, 2019 WL 338535 (4th Cir. July 24, 2019), clarified the meaning of the term fiduciary and held that a person named as the plan administrator and named fiduciary qualified as an ERISA fiduciary and could be sued for breach of statutory duties owed plan participants and beneficiaries.
The facts of the case are relatively straightforward. The plaintiff, Rema Dawson-Murdock, sought benefits under a group life insurance policy issued by Unum Life Insurance Company of America to her late husband’s employer, National Consulting Group, Inc. (“NCG”). After Ms. Dawson-Murdock made a claim for death benefits, a vice-president of NCG advised her that Unum had denied the claim but that NCG would pay the amount of the insurance benefit out of its own funds and would work with Unum to try to recoup the amount paid. Ultimately, after NCG’s discussions with Unum were unsuccessful, NCG reneged on its promise to pay Ms. Dawson-Murdock’s claim for death benefits.
The plaintiff’s husband, Wayne Murdock, worked full-time for NCG and elected employer-provided group life insurance coverage of $150,000. Mr. Murdock switched to part-time work on March 21, 2016. He did not return to full-time work and died on August 30, 2016. After Mr. Murdock’s death, Ms. Murdock submitted a death benefits claim to Unum. On October 24, 2016, NCG’s vice-president of human resources notified Ms. Dawson-Murdock that Unum had denied her claim. He further advised Ms. Dawson-Murdock that NCG would pay the claim amount while it Unum worked through the denial with Unum. The vice-president advised Ms. Dawson-Murdock that she would not have to deal further with Unum. A few days later, Ms. Dawson-Murdock received a denial letter from Unum. The letter stated that Mr. Murdock was not eligible for group life coverage when he died because he had switched to part-time work and had not exercised his option to convert or port his coverage. Ms. Dawson-Murdock did not submit an appeal of the denial decision to Unum because of the vice-president’s representations. Over the next several months, the vice-president repeatedly advised Ms. Dawson-Murdock that NCG was working on the payment, but in February 2017 he told her that NCG would not make the payment.
Ms. Dawson-Murdock sued NCG and the NCG life insurance plan in the United States District Court for the Eastern District of Virginia. She alleged claims under ERISA and state law. The ERISA claims were based on 29 U.S.C. § 1132(a)(3), which provides that a participant or beneficiary of an ERISA plan may sue to obtain “appropriate equitable relief” for violations of certain ERISA provisions or the terms of a plan. Ms. Dawson-Murdock claimed that NCG failed to notify her husband that his eligibility for the group life insurance plan changed after he switched to part-time work, even though he continued to pay premiums to NCG.
The decision in the case turned on whether NCG was a “fiduciary” of the NCG plan at the time the vice-president communicated with Ms. Dawson-Murdock. The district court ruled in that NCG was not a plan fiduciary because it did not meet the ERISA definition of “fiduciary” found in 29 U.S.C. § 1002(21)(A). That statute states that a person is a fiduciary with respect to a plan if (1) he exercises any discretionary authority or discretionary control regarding the management plan or the disposition of its assets, (2) renders investment advice for a fee with respect to plan assets, or (3) has any discretionary authority or discretionary responsibility in the administration of the plan. The district court ruled that collecting Mr. Murdock’s premiums and failing to notify him of his right to continue coverage under the policy’s portability or conversion provisions was not fiduciary activity. In support of this holding, the court relied on a regulation adopted by the Department of Labor, 29 C.F.R. § 2509.75-8 (D-2), which states that “a person who performs merely ministerial functions” for an employee benefit plan does not qualify as an ERISA fiduciary. The district court dismissed the ERISA because NCG was found not to be a fiduciary. The state law claims for negligence and breach of contract were found to be preempted by ERISA and were also dismissed.
The Fourth Circuit reversed. In Dawson-Murdock v. National Counseling Group, Inc., ___ F.3d ___, Case No. 18-1989, 2019 WL 338535 (4th Cir. July 24, 2019), the court held that NCG, as plan administrator and named fiduciary under the life insurance plan, could be sued as a fiduciary even if it did not meet the functional fiduciary test of 29 U.S.C. § 1002(21)(A). The court also held that Ms. Dawson-Murdock had adequately alleged that NCG was acting as a functional fiduciary in failing to inform her late husband regarding his eligibility and in advising Ms. Dawson-Murdock not to appeal the insurer’s denial.
In holding that NCG was a fiduciary, the Fourth Circuit relied in part on the plan’s summary plan description (“SPD”), which states that NCG is the “plan administrator” and “named fiduciary” of the plan and that ERISA imposes duties on those who operate the plan and that the people who operate the plan are called fiduciaries and have a duty to do so prudently and in the interest of plan participants and beneficiaries. The Fourth Circuit pointed out that ERISA contemplates two types of fiduciaries. The first type is a “named fiduciary” of a plan – a person named as a fiduciary in the plan documents is a fiduciary under 29 U.S.C. § 1102(a). The second type of fiduciary contemplated by ERISA is a “functional fiduciary” as defined in ERISA section 1002(21)(a). Thus, according to the court, “the concept of fiduciary under ERISA . . . includes not only those named as fiduciaries in the plan instrument, . . . but [also] any individual who de facto performs specified discretionary functions with respect to the management, assets, or administration of a plan.” 2019 WL 3308535 at *5, quoting Custer v. Sweeny, 89 F.3d 1156, 1161 (4th Cir. 1996). The court noted that it had previously relied on a 1975 interpretive bulletin published by the Department of Labor in assessing whether a person or entity qualified as a fiduciary under ERISA. See 29 C.F.R. § 2509.75-8. The interpretive bulletin states that “a plan administrator . . . must [by] the very nature of his position, have discretionary authority or discretionary responsibility in the administration of the plan.” 2019 WL 3308535 at *5, citing 29 C.F.R. § 2509.75-8 (D-3). Consequently, “[p]ersons who hold such positions will . . . be fiduciaries.” Id. Thus, according to the court, the interpretive bulletin explained that “a plan administrator is a functional fiduciary with respect to plan administration, but a person or entity that is not a plan administrator and performs only ministerial functions in relation to a plan is not a functional fiduciary.” 2019 WL 3308535 at *5.
The court ruled for the first time in the Fourth Circuit that “a participant or beneficiary is generally not required to allege that the administrator and named fiduciary also satisfies the functional fiduciary test in order to state a plausible fiduciary breach claim against it under ERISA.” Id. at * 6. The court also ruled that Ms. Dawson-Murdock had adequately alleged her claims that NCG by failing to advise her husband that he had the option to convert or port his group life insurance coverage and acted in a fiduciary capacity when its vice-president advised her that she need not appeal Unum’s denial decision.
The Fourth Circuit decision in Dawson-Murdock is important for three reasons. It clarifies that plan administrators and named fiduciaries are ERISA fiduciaries. It validates claims based on the administrator’s failure to advise plan participants concerning their rights and options under ERISA plans. And it allows administrators to be sued for misrepresentations regarding the actions a beneficiary must take to preserve her rights under a plan.
© Andrew Whiteman 2019
Whiteman Law Firm handles all types of cases involving employee benefits claims under ERISA. Click here for more information about our employee benefits practice. Please contact us for more information.
FINRA Reminds Broker-Dealers and Investment Advisers to Comply with the SEC’s “Best Interest” Requirementsby Andrew Whiteman
FINRA Reminds Broker-Dealers and Investment Advisers to Comply with the SEC’s “Best Interest” Requirements
On June 5, 2019, the United States Securities and Exchange Commission issued Release No. 34-86031, titled Regulation Best Interest: The Broker-Dealer Standard of Conduct (“Regulation BI”), which provides for a best interest standard applicable to broker-dealers. The same day, the SEC issued Release No. IA-5248, titled Commission Interpretation Regarding Standard of Conduct for Investment Advisers (herein, “SEC Interpretation”). Both documents take effect on June 30, 2020, to allow sufficient time for financial professionals to implement the new requirements.
Differences between Broker-Dealers and Investment Advisers
There are important distinctions between brokerage firms and investment advisers. They are subject to different laws, regulated separately by different entities, and the duties they owe to their customers are distinct. Unfortunately, most investors are confused about the differences between broker-dealers and registered investment advisers.
Brokerage firms, known formally as broker-dealers, must register with the SEC but their primary regulator is the Financial Industry Regulatory Authority, known as “FINRA,” which acts under authority delegated by the SEC. All broker-dealers are regulated by FINRA regardless of the size of the firm, although the states have concurrent jurisdiction in certain areas.
Registered Investment Advisers (“RIAs”)are subject to the Investment Advisers Act of 1940. The SEC regulates investment advisers who manage $110 million or more in client assets. Advisers with less than $100 million in assets under management must register with the state in which they have their principal place of business. Those advisory firms that have greater than $100 million but less than $110 million in assets under management may elect to register with SEC. Those that do not will continue to be regulated by the states.
Historically, broker-dealers and investment advisers performed different functions in the marketplace. A broker-dealer is a company that is in the business of buying and selling securities on behalf of its customers or for its own account. The sales personnel who work for broker-dealers are known as brokers or, more formally, “registered representatives.” Traditionally, broker-dealers and registered representatives were compensated by commissions charged on each transaction and had no duty to the customer (for example, to monitor the performance of a security) after the sale was completed.
RIAs, on the other hand, are paid for providing securities advice to their customers. The services offered often include advice concerning a customer’s investment holdings, recommendations concerning securities purchases and sales, and follow-up monitoring of customer holdings. Financial professionals who are employed by investment advisers are often called investment advisers, but the formal designation is “investment adviser representatives” or “IARs.” RIAs and IARs are typically compensated based on a fixed fee that is equal to a percentage of the customers’ holdings.
The legal standards applicable to broker-dealers and RIAs are distinctly different. In keeping with the broker-dealer’s traditional sales function, the primary duty owed to the customers of a broker-dealer is transaction-based – a recommended transaction must be “suitable” for the customer. On the other hand, the RIA is held to a fiduciary standard in keeping with its duties to provide ongoing advice and monitoring.
Market forces have blurred the distinction between broker-dealers and RIAs. Most broker-dealers are dual-registered and offer a fixed fee arrangement as an option to commissions. Most brokerage firms offer financial planning services that are indistinguishable from the core service offered by RIAs. Although broker-dealers are not legally obligated to monitor customers’ holdings, most tell their customers that will do so. It is no wonder then that investors are confused about the differences between the two.
Following the financial crisis that began in September 2008, Congress sought to reform the standards applicable to broker-dealers to reflect the expanded nature of their business model. In July 2010, President Obama signed the Dodd-Frank financial reform law, which gave the SEC the authority to develop a uniform fiduciary standard for retail investment advice that was no less stringent than the standard applicable to investment advisers under the Investment Advisors Act of 1940. In January 2011, the SEC staff issued a report that recommended the SEC propose a uniform fiduciary rule. and on April 14, 2016, the Department of Labor issued its final version of the fiduciary rule. Full compliance with the new fiduciary standard was to occur by January 1, 2018. However, in August 2017, the Labor Department proposed that compliance with the fiduciary rule be delayed for 18 months, until July 1, 2019. By that time, President Trump had been elected. The new administration stated its opposition to imposing a fiduciary standard on broker-dealers, and Department of Labor’s rule was shelved.
Instead of adopting extending the fiduciary standard to broker-dealers, the SEC adopted Regulation Best Interest on June 5, 2018.
Regulation Best Interest is Applicable to Broker-Dealers
The stated purpose of Regulation BI is to establish a standard of conduct for broker-dealers and their associated persons when they make recommendations to retail customers for any securities transaction or investment strategy involving securities. According to the SEC’s 771-page release, the Regulation BI enhances the broker-dealer standard of conduct by requiring broker-dealers “to act in the best interest of the retail customer at the time the recommendation is made,” to refrain from “placing the financial interest of the broker-dealer ahead of the interests of the retail customer,” to “address conflicts of interest by establishing, maintaining, and enforcing policies and procedures reasonably designed to identify and fully and fairly disclose material facts about conflicts of interest,” and, in certain instances, to mitigate or eliminate conflicts.
The SEC’s Interpretation of Investment Advisers’ Fiduciary Duties to Customers
The SEC Interpretation is not a rule, like Regulation Best Interest. Rather, the SEC Interpretation provides the SEC’s views on the nature and extent of fiduciary duty owed by Investment Advisers under the Investment Advisers Act of 1940 (“Advisers Act” or “Act”). The Advisers Act itself does state that investment advisers are fiduciaries to their customers. Rather, courts have found that section 206 of the Act (29 U.S.C. § 80b-6) establishes federal fiduciary standards to govern the conduct of investment advisers. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (“Courts have imposed on a fiduciary an affirmative duty of ‘utmost good faith, and full and fair disclosure of all material facts,’ as well as an affirmative obligation ‘to employ reasonable care to avoid misleading’ his clients.”).
FINRA’s Regulatory Notice 19-26
Regulatory Notice 19-26 sets forth the requirements for broker-dealers and investment advisers to comply with the new laws by June 30, 2020.
© Andrew Whiteman 2019
The lawyers at Whiteman Law Firm have been handling securities matters for over 30 years. Click here for more information about our securities litigation and arbitration practice. Please contact us for more information.