Banking and Business – February 2025

BACKGROUND

The Fair Labor Standards Act (FLSA) establishes federal minimum wage and overtime pay requirements, with exemptions for employees in bona fide executive, administrative, professional, computer or outside sales roles. 29 U.S.C. § 213. Employees classified as "outside sales" must primarily engage in making sales or obtaining contracts for services or the use of facilities, and they must conduct their work primarily away from their employer’s place of business. 29 C.F.R. § 541.500.

Until recently, a key question for employers has been: What standard of proof is required to demonstrate that an employee qualifies for an FLSA exemption? This issue led to a circuit split, with the Fourth Circuit applying a heightened clear and convincing evidence standard, while other circuits, such as the Fifth Circuit, adhered to the more common preponderance of the evidence standard. See Carrera v. E.M.D. Sales Inc., 75 F.4th 345 (4th Cir. 2023); Adams v. All Coast, L.L.C., 15 F.4th 365 (5th Cir. 2021).

In 2025, the Supreme Court of the United States resolved this dispute in E.M.D. Sales Inc. v. Carrera, 220 L.Ed. 2d 309 (2025), holding that the preponderance of the evidence standard applies when proving FLSA exemptions.

CASE HISTORY

E.M.D. Sales Inc. (EMD), a food product distributor in the Washington, D.C. area, employed sales representatives responsible for managing inventory and taking orders at grocery stores. Carrera v. E.M.D. Sales, Inc., 402 F.Supp. 3d 128, 129 (D. Md. 2019). Several of these sales representatives sued EMD, alleging that they were misclassified as outside sales employees and were therefore entitled to overtime pay under the FLSA. Id.

EMD argued that the employees fell under the FLSA’s outside sales exemption. Id. at 146. However, the U.S. District Court for the District of Maryland ruled that EMD failed to prove the exemption by clear and convincing evidence, concluding that the employees primarily executed pre-existing sales agreements rather than making independent sales. Id.

On appeal, EMD contended that the preponderance of the evidence standard should apply, as it is the standard used in most civil litigation. Carrera v. E.M.D. Sales Inc., 75 F. 4th,  345, 351 (4th Cir. 2023). The Fourth Circuit disagreed, affirming its precedent that FLSA exemptions must be proven by clear and convincing evidence. Id. at 355.

SCOTUS DECISION

The Supreme Court granted certiorari to resolve the circuit split on the appropriate burden of proof for FLSA exemptions. E.M.D. Sales, 220 L.Ed. 2d 309, 314 (2025). The plaintiffs argued for a heightened standard, citing the public interest in protecting employees and the non-waivable nature of FLSA rights. However, the Court rejected this argument, noting that other employment laws with significant public policy implications—such as Title VII of the Civil Rights Act—use the preponderance of the evidence standard. Id. at 316.

The Supreme Court held that preponderance of the evidence is the correct standard for proving FLSA exemptions. Id. at 317. The Court emphasized that preponderance of the evidence is the default standard in civil litigation unless a statute or constitutional provision mandates a higher standard, or the case involves coercive government action—neither of which applied in E.M.D. Sales. Id. at 312.

TAKEAWAYS

The Supreme Court’s ruling provides clarity and consistency for employers, but it also underscores the importance of correctly classifying employees. In our M&A practice, we are seeing employee misclassification as a hot diligence issue. Employers should consider the following:

1. Ensure Proper Classification – Employers must carefully assess whether employees classified as exempt truly meet the job duties and salary threshold tests under the FLSA. Misclassification can lead to costly class action lawsuits and substantial back pay liability. In the M&A context, misclassification can lead to buyers requesting additional indemnification and holdbacks from the purchase price.
2. Conduct Internal Audits – Employers should work with counsel to conduct regular internal audits to ensure that job duties and salaries align with both federal and state exemption requirements. Importantly, state laws may impose stricter exemption standards, and compliance with federal law alone may not be sufficient. If an employee qualifies as exempt under federal law but not under state law, state law governs, and the employee must receive overtime pay.
3. Monitor Federal and State Regulations – Employers should stay informed on wage and hour law developments, including the Department of Labor’s April 23 Final Rule increasing the federal overtime salary threshold. The Trump administration’s approach to enforcement will be key in shaping future compliance requirements.

While the Supreme Court’s decision in E.M.D. Sales Inc. v. Carrera is a favorable development for employers, making it easier to prove FLSA exemptions, employers must remain vigilant in properly classifying employees, conducting compliance audits, and staying current with federal and state labor laws.

For further inquiries or questions, please contact me at smigala@lavellelaw.com or (847) 705-7555.