Not Every Employee is Covered by the FLSA, But You're Not Off the Hook Just Yet
December 19, 2014
If you read this blog, attend presentations on wage and hour issues, or just shudder every time you read about another overtime or minimum wage lawsuit, you might assume that all employees are covered by the federal Fair Labor Standards Act (FLSA) and its regulations. However, in some rare circumstances, the FLSA may not cover very small and, importantly, local businesses, meaning that those businesses’ employees may not be entitled to the minimum wage or overtime pay under the FLSA. A quick warning before we start: as we have highlighted in the past, though, most states and an increasing number of local governments do not provide exemptions from state and local minimum wage laws, even for small businesses. With a very few exceptions, the fact that the FLSA does not apply only resolves one half of the question; you almost certainly still have to contend (and comply) with state and local laws, that may have different standards and penalties.
Setting aside state and local issues for a moment, the FLSA provides two different ways for coverage to apply: and “enterprise coverage” and “individual coverage.” Setting aside more complex corporate structures that can implicate “joint employer” or similar tests, both coverage tests are straightforward. For most businesses, the FLSA’s enterprise coverage provisions will apply if the business meets two tests. First, the business must be involved in interstate commerce. Second, the business’s gross annual revenue must be at least $500,000. If a business meets both tests, then all employees working for the business are covered, regardless of whether they ever engage in interstate commerce. Notwithstanding these limits, the FLSA also automatically covers some businesses, such as schools, hospitals, nursing homes, or other residential care facilities as well as all governmental entities (regardless of the level of government), no matter how big or small.
Even if the business fails to meet the enterprise coverage test, individual coverage applies to any employee whose work affects interstate commerce. Congress and the DOL have defined “interstate commerce” more broadly than the title might suggest. Obviously, a route driver who moves products across state lines is involved in interstate commerce. However, the definition also would include employees who load, unload, or use those products arriving from out of state. Employees who take payments from customers who are out-of-state, or who process payments that come from out of state banks or credit card issuers would be engaged in interstate commerce, too. There are some limits to this. A local construction company whose employees buy all necessary building supplies from the local contractor supply store and who otherwise never leave the state are not engaged in interstate commerce. Their retail purchases of construction materials though the local supply store will not trigger coverage, even though the store might have had the supplies shipped in from out of state. The connection to interstate commerce must be at least a bit more tangible than local retail purchases.
If the business does not earn at least $500,000 in gross annual revenue and the individual employee does not engage in interstate commerce (i.e., neither enterprise coverage nor individual coverage apply), then the FLSA does not cover employees. These cases do pop up from time to time. In May, the Eleventh Circuit affirmed a Florida district court ruling that an employee at a yacht refinishing and painting business was not engaged in interstate commerce and could not state a claim under the FLSA.
The employee, Alfredo Pino, worked as a prep person and later as a painter and supervisor. As an hourly, non-exempt employee, he had received no overtime compensation. Pino filed a complaint alleging that his employer was an “enterprise” that grossed more than $500,000 per year and that both his work and the business itself affected interstate commerce. The company moved for summary judgment, documenting that the business never grossed more than $500,000 in any of the relevant years and therefore was not an “enterprise” under the FLSA. Furthermore, the evidence showed that while the business did sometimes work on boats from Italy, Pino had always worked on non-commercial boats for local customers. The district court granted summary judgment to the employer, rejecting Pino’s arguments that he was engaged in interstate commerce because some of the boats he worked on had foreign registries or may have traveled out of state. Pino appealed.
The Eleventh Circuit affirmed the decision, finding “no dispute” that Pino had never traveled outside of Florida, and that nothing about painting boats involved interstate activity. Just like the example of an employee buying supplies at a local store after they had been shipped in from out of state, the court found that “the fact that the boats at some point moved in interstate commerce is also insufficient.” As other cases have explained, when goods traveling in interstate commerce reach the customer for whom they were intended (a boat’s delivery to an owner, or a shipment of drywall delivered to Home Depot), “the interstate journey ends and employees engaged in any further intrastate movement of the goods are not covered” by the FLSA. Because nothing about Pino’s work contributed materially to interstate commerce, as required by the regulations, the appeals court affirmed the dismissal of Pino’s case.
Insights for Employers
Too many employers assume that because their businesses are small, they are not covered by the FLSA. As we describe above, some small businesses can breathe a small sigh of relief, but cases like Pino’s are really the exceptions that prove the rule. FLSA enterprise coverage is broad. Employers with $500,000 in gross revenues should carefully analyze any potential FLSA liabilities, as they will potentially affect every employee. Even in a business with revenues under $500,000, employees could still have individual coverage under the FLSA depending on their duties.
More importantly, as I mentioned at the outset, even small employers are not completely off the hook. While the FLSA may not apply, you still need to look at the applicable state laws. While a few states, such as Ohio, provide complete exemptions from the minimum wage for small businesses, most states and, increasingly, local governments do not. For example, Indiana law applies the FLSA’s minimum wage to every employer with two or more employees, with no exemptions based on annual revenues or interstate job duties.
Practically anything that has a material connection to the vast, increasingly interconnected economy will be sufficient to trigger involvement in interstate commerce. In the rare instances that it is not, state and local laws will often still apply. While every situation is different, the best insight we can offer might be to save yourself time and legal expenses by presuming that the FLSA (and related state laws) will cover your business and all of its employees.