The Sixth Circuit Court of Appeals recently affirmed judgment for the employer in a collective action brought under the Fair Labor Standards Act (FLSA) by 91 current and former special investigators (SIs) employed by Nationwide Mutual Insurance Company. In Foster v. Nationwide Mutual Insurance Company, a published opinion decided on March 21, 2013, the court held that the SIs were administrative employees exempt from the FLSA’s overtime requirement because their primary duty was directly related to the general business operations of Nationwide and included the exercise of discretion and independent judgment.

The FLSA requires an employer to pay its employees overtime for each hour worked in excess of 40 hours per week unless an exemption applies. Exemptions are to be narrowly construed against the employer and the employer has the burden of proving each element to establish the exemption. Nationwide claimed its SIs were exempt under the administrative exemption. In order for the administrative exemption to apply, three elements must be met:

  • The employee must be paid on a salary or fee basis of not less than $455 per week.
  • The employee’s primary duty must be to perform office or non-manual work that is directly related to the management or general business operations of the employer or its customers.
  • The employee’s primary duty must include the exercise of discretion or independent judgment with respect to matters of significance.

Nationwide’s SIs were employed in the company’s Special Investigations Unit (SIU). When a claim was filed that the claims department believed possessed indicators of fraud, it was referred to the SIU. If the SIU accepted the referral, it was assigned to an SI. The SI was then expected to review the file, develop an “action plan” with a claims representative, identify potential witnesses, determine which questions to ask, conduct interviews, determine if an examination under oath was necessary, occasionally conduct examinations under oath, recommend the hiring of experts or outside vendors, supervise outside vendors, prepare a summary of their findings, and make recommendations to the claims department. If the SI concluded the claim was suspicious, he or she could refer the claim to the National Insurance Crime Bureau or an appropriate state agency for further action. The SI did not have the authority to determine if fraud was present or to deny the claim. Many of the SIs had backgrounds in law enforcement.

Neither side disputed that the SIs were paid more than $455 per week. The workers claimed, however, that the FLSA’s administrative exemption did not apply because SIs were essentially fact gatherers who submitted information to claims adjusters who made the decisions about claims. The SIs argued that the U.S. Department of Labor (DOL) had broadly provided that “investigators” did not qualify for the administrative exemption. They further contended that the SIs did not exercise independent judgment or discretion and, further, that their primary duty (the investigation of claims) was not directly related to the management or general business operations of the employer (the selling of insurance policies).

Nationwide claimed that the primary duty of the SIs was to protect Nationwide’s assets against insurance fraud—which it argued was directly related to its general business operations. Nationwide also argued that SIs did exercise independent judgment and discretion in that they used their backgrounds and knowledge to determine which facts were relevant and to make determinations about which witnesses should be interviewed and which course of action should be followed. Nationwide claimed that many of the duties performed by the SIs were similar to those performed by claims adjusters, which were recognized as meeting elements two and three of the administrative exemption. The court noted that nearly all the SIs who testified characterized their investigations as searches for the truth or attempts to determine which claims were legitimate.

The Sixth Circuit agreed with the district court’s finding that, whatever the precise scope of the SIs’ primary duty, it was directly related to the general business operations of Nationwide because it involved conducting investigations into suspicious claims with the purpose or goal of resolving indicators of fraud present in those claims. The court agreed with the lower court that “just as claims adjusting is ancillary to Nationwide’s general business operations, the SIs’ investigative work that drives the claims adjusting decisions with respect to suspicious claims is also directly related to assisting with the servicing of Nationwide’s business.”

The Sixth Circuit further agreed with the district court’s finding that the workers’ reliance on the DOL’s 2005 Opinion Letter was misplaced. Although that letter found that “investigators” were generally not exempt, the district court found that the letter was in response to a situation where the investigators were employed by a company that contracted with the U.S. Department of Defense to conduct background investigations of individuals to determine whether security clearances would be granted. Those “investigators” were provided with standard questions and conducted what the court characterized as “formulaic background investigations.” The court found that the duties exercised by the SIs in conducting investigations with the goal of resolving indicators of fraud and determining the legitimacy of suspicious claims involved the exercise of discretion and independent judgment.

The practical takeaway for employers is that in determining whether an employee is exempt under the administrative exemption, employers must look beyond the employee’s title and consider not only the employee’s duties but the purpose of those duties. Is the primary duty performed by the employee directly related to the management or general business operations of the employer (or the employer’s customers) and does that primary duty require the employee to exercise independent judgment and discretion with respect to matters of significance? How much latitude does the employee have to determine what needs to be done and how to go about doing it?  Is the employee merely gathering facts to relate to a decision maker, or is the employee deciding how to go about gathering facts, determining the relevance of information, making credibility determinations, etc? Even if the employee is not a decision maker, is he or she making recommendations to the decision maker? Also remember that the exercise of discretion and independent judgment must be with regard to matters of significance. Determining which witnesses to interview may be a matter of significance. Determining the order in which to interview witnesses is probably not.


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