SCOTUS decision settles a circuit split but still requires employers to prove it is more likely than not that an overtime exemption applies
On January 15, 2025, the Supreme Court unanimously ruled in E.M.D. Sales, Inc. v. Carrera, et al. that the "preponderance of the evidence" standard of proof governs Fair Labor Standards Act ("FLSA") exemption disputes rather than the more stringent "clear and convincing evidence" standard. The decision aligns with the more employer-friendly majority approach espoused by most federal appellate courts and rejects the 4th Circuit's heightened standard for proving that an employee is exempt from the overtime requirements under the FLSA. While many wage and hour cases, particularly class and collective actions, are resolved before trial, the decision means that in those instances where employers take cases all the way to a jury or judge on whether an employee is properly classified, their burden to prevail will be lower. While not unexpected, this decision has wide-ranging implications for valuing "close call" employee exemption disputes under the FLSA and is certainly a welcome development for employers.
Legal Background
The Fair Labor Standards Act ("FLSA") guarantees a federal minimum wage and requires employers to pay overtime compensation to workers working more than 40 hours per week. The FLSA includes various exemptions from these requirements for certain categories of workers based on a variety of factors, including salary and job duties. The law places the burden on employers to show that an exemption applies and imposes stiff penalties when misclassified workers are not paid time-and-a-half for hours worked over 40 hours each workweek.
In E.M.D. Sales, the case just decided by the Supreme Court, the parties had disputed whether the outside sales exemption applied to a certain group of company employees. Though the FLSA does not define outside salespersons, the U.S. Department of Labor has promulgated regulations providing that workers can qualify for this exemption where (i) their primary duty is making sales (as defined by the FLSA) or obtaining orders or contracts for services; and (ii) they are customarily and regularly engaged away from the employer's place of business. Unlike other exemptions, the outside sales exemption does not include a salary threshold requirement.
About the Supreme Court Case
In E.M.D. Sales, three sales representatives of a food distribution company ("EMD") that sold products to grocery stores in Washington, D.C., sued the company for unpaid overtime. EMD argued that the outside sales exemption applied so the workers were not entitled to any unpaid overtime.
After a nine-day bench trial, the U.S. District Court for the District of Maryland found that the plaintiffs were entitled to overtime pay because EMD failed to carry its burden to prove the plaintiffs came within the outside sales exemption by clear and convincing evidence. The district court noted it is the employer's burden to demonstrate each element of a claimed exemption under the FLSA, and held that EMD failed to meet its burden to show the plaintiffs made "sales" as that term is interpreted by case law. Specifically, the court found EMD demonstrated "there is a possibility—but not clear and convincing evidence" that plaintiffs could make their own sales to chain stores, rather than simply submitting orders to fill space or stock displays already negotiated by EMD management.
EMD appealed and the U.S. Court of Appeals for the 4th Circuit affirmed the lower court's ruling, rejecting EMD's argument that Supreme Court precedent required courts to apply the more permissive "preponderance of the evidence" standard in FLSA exemption cases. The 4th Circuit distinguished the precedent by finding the case at issue centered on statutory interpretation rather than evidentiary standards to be applied to an employer's burden of proof. The 4th Circuit then relied on long-standing precedent in the 4th Circuit dictating that employers must carry their burden of proof by clear and convincing evidence.
The Supreme Court's Holding
The Supreme Court rejected the 4th Circuit's approach holding that employers need only prove an FLSA exemption applies by a "preponderance of the evidence." The court reasoned that the default standard of proof in American civil litigation has been "preponderance of the evidence" since the FLSA was enacted in 1938. The court further explained that, in civil litigation, there are three main circumstances in which it is appropriate to apply a heightened standard of proof: (i) when it is established by statute; (ii) when it is required by the Constitution; or (iii) in certain "uncommon cases" that typically arise when the government attempts to take unusual coercive action against an individual more dramatic than money damages or other conventional relief. The court concluded that none of the three circumstances applied.
In reaching its conclusions, the court rejected numerous policy-focused arguments raised by the plaintiffs. Contrary to the plaintiffs' contentions, the court ruled that the FLSA is not uniquely focused on the public's interest in a well-functioning economy and therefore did not merit a heightened standard. In rejecting this argument, the court compared the FLSA to other laws enforcing workplace protections that utilize a preponderance of the evidence standard such as Title VII. The court also applied this same reasoning in rejecting the plaintiffs' arguments that a heightened standard should apply because, for instance, the employer typically controls the majority of the evidence and wage and hour plaintiffs may have low incomes.
Although the court held that a "preponderance of the evidence" standard applies in FLSA misclassification disputes, it remanded the matter for further proceedings to determine whether the EMD plaintiffs qualify for the outside sales exemption under the more permissive standard.
Main Takeaways
Though widely expected by Supreme Court observers and the employment bar, the 9-0 decision puts to rest any ambiguity about what an employer needs to show to prevail in an FLSA exemption case. While the decision is welcome news for employers, it remains important to be early, proactive, and thoughtful in mitigating potential wage and hour compliance issues. The potential consequences for misclassifying employees and failing to pay overtime can be steep, including both compensatory damages looking back three years from the date of the complaint and liquidated (i.e., double) damages. Just because an employer's burden of proof is more permissive, that does not mean it is necessarily an easy bar to clear. Under the preponderance standard, the employer still needs to show it is more likely than not (i.e., more than 50% of the evidence tends to prove) that a worker or group of workers satisfies an FLSA exemption. Wise corporate compliance professionals conduct regular, simple, and routine internal audits of company classification decisions to avoid the potentially material consequences of a wage/hour collective and class action.
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