District court ruling favors San Francisco in FLSA overtime pay case.

A district court decision, which might be the first of its kind in the United States, represented a significant victory for the City and County of San Francisco against employees who sued to receive overtime compensation under the Fair Labor Standards Act (FLSA).

In the October 5 ruling of Stewart, et al. v. City and County of San Francisco, et al. and Chan, et al. v. City and County of San Francisco, the United States District Court for the Northern District of California concluded that the 1954 salary test regulations developed by the Department of Labor (DOL) for determining whether an employee is exempt from overtime requirements under the FLSA are invalid and illegal in their application to municipalities. In Stewart, a court was once again called upon to interpret the application of the FLSA, and its implementing regulations to municipalities. In general, the FLSA requires that employers pay overtime wages to any employee who works in excess of 40 hours per week. The Act exempts from these overtime requirements all bona fide executive and administrative employees. Employees are executives or administrators if their duties are managerial or supervisory in nature, and if they are salaried employees whose salary does not vary regardless of the quality or quantity of the work they perform. Specifically, the court in Stewart considered whether employees of the City and County of San Francisco are entitled to overtime compensation under the "salary test" for the "managerial exemption" of the FLSA, and its implementing regulations.

The employees involved in the law suit earn between $40,000 and $100,000 annually and claim they are entitled to time-and-a half overtime pay for hours worked in excess of 40 hours per week. They also claim they are entitled to back pay for overtime from April 1986. The salary test basically finds managerial employees who are paid a predetermined salary regardless of the quantity or quality of the work they perform ineligible to receive overtime compensation. The employees maintain that DOL's 1954 regulations setting forth the salary test are valid and applicable to city governments, and that San Francisco is not in compliance. San Francisco, on the other hand, argues that the 1954 regulations are invalid because they are contrary to the intent of Congress.

Reviewing the 1954 regulations, the court determined that Congress intended that the salary test for the managerial exemption be available to all employers and employees covered by FLSA. However, DOL's 1954 regulations did not address the application of the managerial exemption to the public sector.

Thus, in 1985, when the Supreme Court's decision in Garcia v. San Antonio Metro. Transit Authority made FLSA applicable to municipalities, the regulations became inconsistent with the intent of FLSA because municipalities could not utilize the exemption intended by Congress.

Accordingly, the court concluded that DOL's 1954 salary test regulations did not apply to San Francisco because "application of the 1954 regulations to municipalities is contrary to the intent of Congress." In reaching this decision, the court also relied on DOL's conclusion that the applicability of the 1954 salary test regulations to municipalities is contrary to Congressional intent.

The Stewart opinion is significant for public entities because it invalidates the salary test regulations upon which cases such as Abshire are based. In its 1990 decision in Abshire v. County of Kern, the Ninth Circuit held that the possibility that an employee's pay may be reduced for absences of less than a day was sufficient for the employee to be ineligible for the exemption against overtime pay, even if no actual reduction was ever made.

With financial support from state municipal leagues across the country, NLC and the city of Omaha successfully challenged the Ninth Circuit's unfavorable holding in Abshire. In McDonnell v. City of Omaha, the Eighth Circuit found that an employee will only be ineligible for the exemption under FLSA when money from the employees salary is actually deducted to compensation for time missed by that employee. By invalidating the applicability of DOL's 1954 salary test regulations to municipalities, the court in Stewart further alleviates some of the tremendous difficulties municipalities face in their efforts to utilize FLSA's managerial exemption to defend against claims for overtime.

Moreover, because liability exposure from unfavorable rulings in these cases is extremely costly, NLC hopes that in light of McDonnell and Stewart, the Ninth Circuit and other courts will no longer rely on Abshire, but will begin to reach decisions which consistently shield municipalities from having to pay their executives and administrators vast amounts of overtime compensation.

Such rulings by the courts would likely bring an end to the flood of law suits that have been brought against cities and towns since the Abshire decision.

Oral arguments in other cases in California addressing the applicability of the salary test to municipalities will be heard in the Ninth Circuit in November.