Kaplan law school test prep case tests bounds of FLSA Outside Sales exemption

Lawyer readers of the blog will remember BarBRI, Kaplan, and other bar prep providers hawking prep classes, flash cards, practice tests, and more to help law students get through exams and the bar. You also probably remember who their salespeople were: your classmates. A recent decision denying Kaplan’s summary judgment motion tests the bounds of this arrangement and the “outside sales” exemption under the Fair Labor Standards Act (FLSA).

A former law student who served as a Kaplan representative (actually, a head sales representative) filed a class and collective action against the company, alleging it violated the FLSA by failing to pay law student representatives the statutory minimum wage. The plaintiff’s theory was that the reps did not have a primary duty of sales and, therefore, would not be exempt under the FLSA’s outside sales exemption.

Kaplan’s arrangement with its law student representatives was common among prep providers. The company did not pay student workers money, but instead gave them “credits” that could be used towards courses (or third-party gift cards also, in Kaplan’s case). The student earned enough credits to qualify for a free course, but in her case it was not by selling courses to other students.  As head representative, she primarily helped the company’s regional director with setting up sales tables, posting/providing promotional materials to students, and other sales support activities. During her year with Kaplan, she sold only one review course, and worked only approximately 55 hours.

The FLSA Outside Sales Exemption

The FLSA exempts from its minimum wage and overtime requirements any employee ‘‘employed . . . in the capacity of outside salesman.’’ Other than to define the term ‘‘sales,’’ the FLSA does not define what it means to be employed in the capacity of an ‘‘outside salesman.’’ Over the years, the DOL has promulgated several regulations to define the term ‘‘outside salesman.’’ The general DOL definition specifies that the term ‘‘employee employed in the capacity of outside salesman’’ means ‘‘any employee . . . [w]hose primary duty is . . . making sales within the meaning of [Section 203(k)]’’ and ‘‘[w]ho is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.’’ Kaplan moved for summary judgment, arguing that the law student fit squarely within this “outside salesman” exemption, since her primary duty was selling bar review courses and she worked at the law school, not at a Kaplan office.

The District Court’s Decision

However, the court disagreed with Kaplan’s reliance on the common meaning of “making sales” and “place of business,” finding that the legal definitions “diverge[d] in significant ways from their dictionary counterparts” that Kaplan sought to use.  The reason for the outside salesman exemption, the court noted, was explained in the Supreme Court’s 2012 Christopher v. SmithKline Beecham Corp. decision. The Supreme Court noted that the exemption was “premised on the belief that exempt employees typically earned salaries well above the minimum wage and enjoyed other benefits that set them apart from the nonexempt workers entitled to overtime pay.”

The court first considered whether the student’s sales support activities qualified her as having a primary duty of “making sales.” Kaplan argued that all of the student’s promotional duties involved making sales, which was true as far as it went. The court dig deeper, questioning whether the student’s work was for “her own account” or whether it was incidental to someone else’s sales.  While the former law student’s deposition testimony on whether she engaged in sales promotion was clear, her testimony was “fundamentally ambiguous” on “whose sales” she was supporting.

The court also disagreed that the law student was “customarily and regularly engaged away from [Kaplan’s] place or places of business in performing such primary duty.” Here, the court took a much broader view of the term “place of business” by examining opinion letters from the Department of Labor’s Wage and Hour Division and other district court decisions. Although there was no “bright-line definition,” the court concluded that the school was “surely” a place of business for Kaplan, since it regularly rented space from the school for its events, maintained sales employees on campus, and regularly used the law school’s property for meetings, promotions (including writing on the school’s chalkboards and posting on bulletin boards). Furthermore, law students were not required to travel to any other locations. Based on that record, the court concluded “there can be no doubt” that the law school was one of Kaplan’s places of business and that the law student never “customarily and regularly” made sales or solicitations away from that place of business.

Upshot for Employers

The outside sales exemption is one of the trickier exemptions to navigate, particularly for employees in a “sales support” role rather than those who directly engage in sales.  This decision shows that “making sales” and “place of business” may have broader legal definitions than the common, dictionary definitions, leaving employers potentially exposed if they have not carefully evaluated their outside sales staff’s activities.