When an insurer forms a special investigation unit (SIU), ithires highly qualified, trained and experienced investigators tohelp it avoid paying fraudulent claims. The job of a fraudinvestigator is drastically different from that of many otherroles. Each skilled professional provides a uniqueskill set and breadth of knowledge on which theinsurer relies. Traditionally, SIU investigators are well paidand not subject to mandatory overtime requirements.

In Frank Foster, On Behalf of Himself and All OthersSimilarly Situated v. Nationwide Mutual Insurance Company, 710F.3d 640 (6th Cir. 03/21/2013) 91 current and former specialinvestigators (SI) employed by Nationwide Mutual Insurance Company,appealed from the judgment entered against them with respect totheir collective claims that Nationwide improperly classified SIsas administrative employees exempt from the overtime requirementsof the Fair Labor Standards Act (FLSA) (29 U.S.C. §§ 207 and213(a)(1)) and analogous provisions of New York and Californialaw.

A Job Overview

The SIU operates alongside the claims-adjusting units, which arelikewise led by a director who oversees claims managers and claimsadjusters. As Nationwide's internal document described it, the SIU“'exists to service its corporate partners by providing the highestquality and expedient investigative, informational, and consultingservices to detect and deter fraud and to support other objectivesof Nationwide.'” The SIU's work is aimed at reducing the number ofnon-meritorious claims that are paid in order to keep Nationwide'sinsurance products competitively priced.

With an average annual salary of $75,000, a typical SIgenerally receives favorable compensation. He or she isusually an experienced investigator with a prior background in lawenforcement or in handling insurance claims. Perthe evidence established at trial, such professionals tend to“spend the majority, if not an overwhelming majority, of theirtime carrying out investigations of suspicious claims.”

FLSA Stipulations

The FLSA requires overtime pay for each hour worked in excess of 40 hours perweek but exempts any employee employed in a bona fideexecutive, administrative, or professional capacity. Theregulations provide:

1. Compensated…at a rate of no less than $455 per week.
2. Whose primary duty is the performance of office or non-manualwork directly related to the management or general businessoperations of the employer or the employer's customers.
3. Whose primary duty includes the exercise of discretion andindependent judgment with respect to matters of significance.

The exemption is to be narrowly construed against the employer,and the employer bears the burden of proving each element by apreponderance of the evidence.

Plaintiffs waived their right to jury trial and the districtcourt presided over a bench trial that included considerable focuson the work performed by Nationwide's SIs. Based on the evidenceheard, the district court made the factual determination that theprimary duty of Nationwide's SIs is to conduct investigations intosuspicious claims with the purpose or goal of resolving indicatorsof fraud present in those claims.

The SIs uniformly described the tasks of their investigations asincluding: “resolving the indicators of fraud, gatheringinformation, taking statements, interviewing witnesses, makingreferrals to law enforcement and the [National Insurance CrimeBureau (NICB)], recommending the retention of outside vendors [suchas accident reconstruction or fire origin experts], supervisingoutside vendors, and recommending and [sometimes] conducting[examinationsunder oath (EUOs)].”

At the outset, plaintiffs argue that the Department of Labor's(DOL) general regulations broadly provide that “investigators” donot qualify for the administrative employee exemption. In fact, thegeneral regulations caution that a job title alone is notdeterminative of an employee's exempt or non-exempt status.

General Business Operations

Plaintiffs contend that the district court erred as a matter oflaw in finding that the special investigators' primary dutyincludes the performance of work “directly related” to Nationwide's“general business operations.” To meet this requirement, anemployee must perform work directly related to assisting with therunning or servicing of the business, as distinguished, forexample, from working on a manufacturing production line or sellinga product in a retail or service establishment.

Plaintiffs argued that SIs are engaged in day-to-day productionwork because Nationwide's “business” is actually selling thepromise of asset protection. The record supports the districtcourt's rejection of that characterization and its determinationthat Nationwide is in the business of creating and marketinginsurance policies to the public.

Insurance claims adjusters generally meet the dutiesrequirements [elements two and three] for the administrativeexemption, whether they work for an insurance company or other typeof company, if their duties include activities such as interviewinginsureds, witnesses, and physicians; inspecting property damage;reviewing factual information to prepare damage estimates;evaluating and making recommendations regarding coverage of claims;determining liability and total value of a claim; negotiatingsettlements; and making recommendations regarding litigation.

This supports the conclusion that claims adjusting workperformed for an insurance company is ancillary to an insurer'sprimary production activity. Although Nationwide severed someof these activities from the investigative work of the SIs, theinvestigators' work remains integral to the claims adjustingfunction; is performed in partnership with claims adjusters; andinvolves making findings that bear directly on the adjusters'decisions to pay or deny a claim.

Just as claims adjusting is ancillary to Nationwide's generalbusiness operations, the SI work that drives adjustingdecisions with respect to suspicious claims is also directlyrelated to assisting with the servicing of Nationwide'sbusiness.

Discretion and Independent Judgment

The regulations explain that “discretion and independentjudgment involves the comparison and evaluation of possible coursesof conduct, and acting or making a decision after the variouspossibilities have been considered,” 29 C.F.R. § 541.202(a), andrequires “more than the use of skill in applying well-establishedtechniques, procedures or specific standards in manuals or othersources,” 29 C.F.R. § 541.202(e).

It is left to the investigator to decide whom to interview; whatdocuments to review; which leads to pursue; and similar tacticalmatters. Sure, some direction is provided by the SI's actionplan, which in turn defines the scope of the investigation andto which adherence is required. However, SIs are integrallyinvolved in developing such action plans for their respectiveinsurance investigations.

Turning to the resolution of fraud indicators in the claimsinvestigated by SIs, Plaintiffs argue that Nationwide is attemptingto not only comply with state laws that prevent unlicensedindividuals from adjusting insurance claims and avoiding bad faithlitigation, but also at the same time assert the job of theSI involves providing recommendations to management, anactivity conceivably encroaching upon that which may only be doneby licensed adjusters.

Matters of Significance

In the court's view, terms such as “factual findings,”“relevant,” “pertinent,” and “resolve” connote a degree ofdiscretion and judgment inherent in the investigatory processundertaken by the special investigators.

Nearly all of the testifying SIs characterized theirinvestigations as searches for truth or attempts todetermine whether or not the subject claimsare legitimate. A doctorate in philosophy is not required torealize that “truth” is not an entirely objective concept.Determining truth requires “factual findings,” a process thatnecessarily requires judgment and discretion.

Nationwide's SIs use their experience and knowledge of fraud todistinguish the relevant from the irrelevant, fact from fiction, inorder to resolve competing versions of events. Accordingly, theSixth Circuit Court concluded that through the resolution ofindicators of fraud, SIs exercise discretion andindependent judgment. It further concluded the discretionexercised by these SIs impacts matters of significance.The factsdeveloped by the SIs during their investigations have an undisputedinfluence on Nationwide's decisions to pay or deny insuranceclaims. Paying insurance claims is central to Nationwide'sbusiness, and payment of fraudulent claims would threaten to makethe company less competitive in its industry.

The DOL regulations only require that the primary duty of anadministrative employee “include” the exercise of discretion andindependent judgment. The discretion and independent judgmentexercised in determining and communicating (albeit informally) thelegitimacy (or illegitimacy) of suspicious claims referred forinvestigation is a matter of significance to Nationwide. That beingthe case, the Sixth Circuit concluded it did not need to addressthe novel question of whether the discretion and independentjudgment exercised in deciding whether to refer claims to lawenforcement or the NICB would also be related to “matters ofsignificance” since the SI's efforts dealt with matters ofsignificance.

The Lessons Here

It is amazing that an SI would defeat his or her ownprofessionalism by claiming that “SIs are engaged in day-to-dayproduction work” just like the person who puts a single transistoron a production line making digital alarm clocks. Suchinvestigators clearly are professionals. They have organizedinto the International Association of Special Investigative Units(IASIU), thereby conducting regular training sessions toprove their professionalism. Rather than bringing suitagainst an employer for overtime to which they are notentitled the SI should, rather, prove his or her professionalismand demand an increase in wage as a result of their good work.

An investigator's job is not typically confined to the 9-to-5schedule. It takes a great deal of skill and experience.No investigator should be willing to lower his orher reputation in the eyes of an employer by claiming theSIU does is nothing more than “production work.” If that is indeedtrue, then those professionals are simply not doingwhat is required of an SI.