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STEWART v. CITY & CTY. OF SAN FRANCISCO

October 5, 1993

JAMES STEWART, et al., Plaintiffs,
v.
CITY AND COUNTY OF SAN FRANCISCO, et al., Defendants. DONALD K. CHAN, et al., Plaintiff, v. CITY AND COUNTY OF SAN FRANCISCO, Defendant.



The opinion of the court was delivered by: CHARLES A. LEGGE

 This is an action under the Fair Labor Standards Act, 29 U.S.C. §§ 200, et seq. (the "FLSA"). Plaintiffs are employees of defendant City and County of San Francisco (the "city"), earning between approximately $ 40,000 and $ 100,000 per year. *fn1" The FLSA originally excluded government employees. In 1974, Congress amended the FLSA to include public employees within its scope. Pub. L. 93-259, 88 Stat. 55. However, its application to state and local employees was struck down by the United States Supreme Court in National League of Cities v. Usery, 426 U.S. 833, 49 L. Ed. 2d 245, 96 S. Ct. 2465 (1976). In 1985, the Supreme Court reversed National in Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528 (1985), and Congress again amended the FLSA in response to Garcia, making it applicable to state and local employees. Pub. L. 99-150, 99 Stat. 787; 29 U.S.C. §§ 203(e), 207(o), 207(p).

 Plaintiffs claim that they are entitled to overtime compensation under the FLSA, sections 201 and following. The city claims that plaintiffs are exempt from the overtime provisions of the FLSA because they are "employed in a bona fide executive, administrative, or professional capacity," within the meaning of 29 U.S.C. § 213(a)(1) (the "managerial exemption").

 I.

 The issues of liability were bifurcated from the issues of damages. The parties have made cross-motions for summary judgment regarding the so-called "salary test" for the managerial exemption; the meaning and significance of that test is discussed below. Discovery on the liability issues presented in these cross-motions has been completed. The motions were briefed, argued and submitted for decision. The court has also received an amicus curiae brief from the Secretary of Labor, which does not so much support the position of either party as it does support the validity of the current regulations adopted by the Department of Labor. The court has read the moving and opposing papers, the amicus curiae brief, the legislative history of the applicable congressional enactments, the regulations adopted by the Department of Labor over the years, the record of the case, and other applicable authorities.

 The court finds that there are no genuine issues of material fact on the questions raised in the cross-motions. The court concludes that summary judgment on the salary test must be granted to the defendant city for the reasons discussed below. Proceedings on the second test for the managerial exemption, the so-called "duties test", will now be scheduled.

 II.

 In creating the exemption, Congress expressly gave to the Secretary of Labor the authority to define by regulations the terms and limitations of the exemption, subject to the provisions of the Administrative Procedure Act. Because of that express delegation to the Department of Labor, the issues in this case initially require more examination of the regulations than of the statute. That is, the language of section 213(a)(1) does not itself resolve the issues, but rather they must be resolved by reference to the regulations adopted over the years by the Department of Labor under its broad statutory mandate. Of course, the court must also address whether the regulations are consistent with that mandate and with the intent of Congress.

 Acting in response to the congressional delegation of authority, the Department of Labor has enacted various regulations over the years since 1938. The ones with which we are concerned are: (1) the regulations as amended in 1954, 19 FR 4406, which remained in effect until 1991; (2) the interim rule of September 6, 1991, 56 FR 45824 and 45828; and (3) the current form of the regulations passed on August 19, 1992, 57 FR 37666.

 In summary, the regulations have defined two tests for determining whether an employee is exempt as managerial. One is the salary test, 29 C.F.R. § 541.118, and the other is the duties test, 28 C.F.R. § 541.103 et seq. If both of those tests are applicable -- the city contends that they are not -- then an employee's salary and duties must meet both tests if the employee is to be exempt as managerial.

 The important issue in this case is whether the salary test applies to the city. That issue poses a conflict between:

 (1) 29 C.F.R. § 541.118(a), which contains specific requirements that a managerial employee be paid a salary, and that the salary be the same regardless of the quantity or quality of an employee's work.

 And (2) the charter and practices of the city, which require its employees to maintain hourly time records, and to be penalized for various absences. San Francisco Charter § 8.400(g). This provision of the city charter was passed to prevent corruption in city government. It is a "public accountability" requirement similar or identical to those of most municipalities in the United States. The requirement is designed to prevent politically appointed employees who do not actually work from drawing a salary. The city argues that it is central to the integrity of city government that it be able to verify through its payroll records that its employees, no matter how exalted, are not paid for work they have not done. This type of local legislation has been acknowledged as valid and necessary protective legislation for municipal governments. *fn2"

 The city contends that: because of these generally accepted municipal requirements, it must keep hourly records and must penalize absences; but those requirements conflict with the salary test regulations under the FLSA; and, the regulations therefore deny to cities the managerial exemption provided by the FLSA. The city therefore contends that it is not governed by the salary test of the regulations.

 III.

 Does the salary test apply to the city? Because the answer to this question lies initially in the various regulations passed by the Department of Labor over the years, it is not possible to answer that question in the abstract. Rather, the question is related to others: (1) If a salary test applies, which version of the regulations define it? And (2) under whatever regulations are applicable, if any, is the city in compliance with their requirements?

 This interdependence of issues results from the nature of the attacks which the city, and in some cases the plaintiffs, make upon the regulations. Plaintiffs contend that the 1954 regulations are applicable, that they are valid and apply to city governments, and that the city is not in compliance. The city attacks the validity of the salary test regulations, based upon the Administrative Procedure Act and the various amendments to the regulations. The city also argues that the regulations violate Bowen v. American Hospital Assn., 476 U.S. 610, 90 L. Ed. 2d 584, 106 S. Ct. 2101 (1986), in that they significantly alter the balance of powers between state and federal governments, when it is not necessary to do so to achieve the goals of Congress. Similarly, the city claims that the application of the salary test would violate the Tenth Amendment to the U.S. Constitution. The city grounds its Tenth Amendment claim on the Supreme Court's decision in Gregory v. Ashcroft, 115 L. Ed. 2d 410, 111 S. Ct. 2395 (1991), where the Court held that the usual constitutional balance between the state and federal government should not be altered without a plain statement of congressional intent.

 This court should not reach the constitutional issue if the dispute can be resolved on any ground short of that. The court believes that it is first required to review the history of the regulations. After determining which regulations are on their face applicable, reference to the facts is necessary in order to determine whether the issue of the city's compliance can be resolved without a genuine dispute of material fact. The court must also consider whether the applicable regulations are invalid for statutory reasons. Only after that should the court, if necessary, consider the Tenth Amendment argument.

 In reviewing the regulations, this court's powers are constrained. When Congress has delegated to an administrative agency the authority to define statutory terms, a court's review of the agency's regulations is narrow. Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416, 28 L. Ed. 2d 136, 91 S. Ct. 814 (1971). Judicial review of agency action requires deference. This court is not free to substitute its judgment for that of the agency. American Meat Institute v. United States Dept. of Agriculture, 646 F.2d 125, 127 (4th Cir. 1981). And the burden rests upon the party seeking to strike down a regulation to justify that result.

 The courts do have a role in this legislative-administrative equation, however. While Congress granted the Department of Labor explicit authority to define and limit the managerial exemption, the agency's power is nevertheless limited. The Administrative Procedure Act, 5 U.S.C. § 701 et seq, requires federal courts to:

 
hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, an abuse of discretion, or ...

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