FLSA2006-30 — Loss prevention managers and section 13(a)(1)

U.S. Department of Labor
Employment Standards Administration
Wage and Hour Division
Washington, D.C. 20210

FLSA2006-30
September 8, 2006

Dear Name*:

This is in response to your request for an opinion concerning whether Loss Prevention
Managers (LPMs) employed by your client, a large retail business operating over 200
department stores, qualify for the administrative exemption under Fair Labor Standards Act
(FLSA) section 13(a)(1) (copy enclosed). Based on a review of the information provided, it is
our opinion that LPMs qualify for the administrative exemption.

You state that the primary function of an LPM is the effective implementation of a loss
prevention and shortage control program for the store where the LPM is employed. The
effective implementation of a loss prevention and shortage control program is an essential
ingredient for the profitability of your client’s retail stores. This is a significant matter that
frequently determines the success or failure of a store. In this capacity, the LPM is the primary
communicator between the store and the Regional Loss Prevention Manager on specific issues
and concerns, and serves as the co-chair of the store’s Loss Prevention and Safety Committee.
As co-chair of this committee, the LPM ensures training standards for associates regarding
emergency procedures, robbery, fire, etc. The LPM reports directly to the Store Manager and
the Regional Loss Prevention Manager, and provides both with current reports and information.

The LPM utilizes company programs and also develops complementary store-specific
programs to meet or exceed the store’s shortage goals. In developing the Store Shortage
Reduction Action Plan, the LPM analyzes inventory shortage results, allocates store Loss
Prevention resources to successfully reduce inventory shortage, focuses prevention activities on
high shortage departments, identifies paperwork control weaknesses and implements
procedures to correct them, conducts audits for compliance and ensures store follow up on
price accuracy initiatives, and sells/partners with store management to implement the plan. The
LPM investigates the causes of inventory shortage (e.g., complex “paperwork” problem or
theft) and then selects appropriate steps to solve the problem. Once the appropriate course of
action is selected, the LPM pursues that course of action to a successful completion. In
developing cash shortage controls and programs to manage and reduce loss, the LPM develops
an appropriate training and awareness program to reduce error, reviews cash discrepancies to
keep store within allowable guidelines, and identifies cash registers with unacceptable
shortages. Also, the LPM regularly reviews loss prevention exception reports for signs of
dishonesty.

Depending on the size of the store, its history, and other factors, an LPM may supervise one or
more Loss Prevention Associates (LPAs).
1
The LPM guides the store management and LPAs
in conducting investigations, training, and addressing shortage related issues. In providing
direction for LPAs, the LPM interviews all LPA candidates and conducts and supervises

1
Notwithstanding the LPM’s supervisory authority, you asked, for purposes of this opinion
request, that we address only the applicability of the administrative exemption.

training for LPAs on a continual basis. In developing store associate awareness and support
programs, the LPM promotes customer approach programs and ensures that all associates
receive loss prevention awareness training, including the distribution of associate awareness
material. One aspect of these programs deals with how to approach customers in a way that is
legal and appropriate. In ensuring that programs to prevent and detect internal theft are
followed, the LPM, in consultation with management, determines what internal investigations
to pursue and when to conduct interviews, and ascertains prosecutable cases. Also, the LPM
must be proficient in covert camera installation and the operation of photographic and video
equipment. The LPM is responsible for taking appropriate legal steps with respect to
shoplifters, including apprehensions of suspects and the filing of police reports, but this duty
arises on average once or twice per week. In this regard, LPMs are directed to focus their
efforts on deterrence, training, and associate awareness. The LPM also has responsibilities, in
conjunction with the human resources department, for the prompt and thorough investigation of
harassment allegations. With respect to all of the above job functions, the LPM consults with
and provides expert advice to store management. The LPM works in an independent manner
and his or her typical work day consists of performing office or non-manual work. The LPM is
paid in excess of $455 per week on a salary basis.

FLSA section 13(a)(1) provides a complete minimum wage and overtime pay exemption for
“any employee employed in a bona fide executive, administrative, or professional capacity,” as
those terms are defined in 29 C.F.R. Part 541. An employee may qualify for exemption if all of
the pertinent tests relating to duties and salary are met. Please note that revisions to 29 C.F.R.
Part 541 were published as a final rule in the Federal Register on April 23, 2004 (69 Fed. Reg.
22,122) and became effective on August 23, 2004 (copy enclosed).

As stated in 29 C.F.R. § 541.200(a), the term “employee employed in a bona fide
administrative capacity” means “any employee”:

(1) Compensated on a salary or fee basis at a rate of not less than $455 per week . . . ;
(2) Whose primary duty is the performance of office or non-manual work directly
related to the management or general business operations of the employer or the
employer’s customers; and
(3) Whose primary duty includes the exercise of discretion and independent judgment
with respect to matters of significance.

In the context of the administrative exemption,

[t]he phrase “directly related to the management or general business operations” refers
to the type of work performed by the employee. To meet this requirement, an
employee must perform work directly related to assisting with the running or servicing
of the business, as distinguished, for example, from working on a manufacturing
production line or selling a product in a retail or service establishment.

29 C.F.R. § 541.201(a).

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Work directly related to management or general business operations includes, but is
not limited to, work in functional areas such as tax; finance; accounting; budgeting;
auditing; insurance; quality control; purchasing; procurement; advertising; marketing;
research; safety and health; personnel management; human resources; employee
benefits; labor relations; public relations; government relations; computer network,
internet and database administration; legal and regulatory compliance; and similar
activities.

29 C.F.R. § 541.201(b).

To qualify for the administrative exemption, an employee’s primary duty must include
the exercise of discretion and independent judgment with respect to matters of
significance. In general, the exercise of discretion and independent judgment involves
the comparison and the evaluation of possible courses of conduct, and acting or
making a decision after the various possibilities have been considered. The term
“matters of significance” refers to the level of importance or consequence of the work
performed.

29 C.F.R. § 541.202(a).

The phrase “discretion and independent judgment” must be applied in the light of all
the facts involved in the particular employment situation in which the question arises.
Factors to consider when determining whether an employee exercises discretion and
independent judgment with respect to matters of significance include, but are not
limited to: whether the employee has authority to formulate, affect, interpret, or
implement management policies or operating practices; whether the employee carries
out major assignments in conducting the operations of the business; whether the
employee performs work that affects business operations to a substantial degree, even
if the employee’s assignments are related to operation of a particular segment of the
business; whether the employee has authority to commit the employer in matters that
have significant financial impact; whether the employee has authority to waive or
deviate from established policies and procedures without prior approval; whether the
employee has authority to negotiate and bind the company on significant matters;
whether the employee provides consultation or expert advice to management; whether
the employee is involved in planning long- or short-term business objectives; whether
the employee investigates and resolves matters of significance on behalf of
management; and whether the employee represents the company in handling
complaints, arbitrating disputes or resolving grievances.

29 C.F.R. § 541.202(b). Section 541.202(c) further notes that “[t]he exercise of discretion and
independent judgment implies that the employee has the authority to make an independent
choice, free from immediate direction or supervision.” As the preamble to the final rule
explained, 69 Fed. Reg. 22,143 (Apr. 23, 2004) (copy enclosed), federal courts generally find
that employees who meet at least two or three of the indicators mentioned in 29 C.F.R.
§ 541.202(b) are exercising discretion and independent judgment, although a case-by-case
analysis is required.
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The administrative exemption thus has requirements pertaining both to the “type of work
performed” and to “the level of importance or consequence of the work performed.” 69 Fed.
Reg. 22,139 (copy enclosed). With regard to the type of work performed, the preamble
explains that “the administrative exemption covers only employees performing a particular type
of workwork related to assisting with the running or servicing of the business.” See 69 Fed.
Reg. 22,141. Furthermore:

[T]his exemption is intended to be limited to those employees whose duties relate “to
the administrative as distinguished from the ‘production’ operations of a business.”
Thus, it relates to employees whose work involves servicing the business
itselfemployees who “can be described as staff rather than line employees, or as
functional rather than departmental heads.”

Id. Although the production versus staff dichotomy is illustrative, rather than dispositive, “it is
still a relevant and useful tool in appropriate cases to identify employees who should be
excluded from the exemption.” Id.

Based on a review of the information provided, we believe that the LPM’s primary duty of
effectively implementing a loss prevention and shortage control program by, among other
duties, analyzing inventory results, allocating store Loss Prevention resources to successfully
reduce inventory shortage, focusing prevention activities on high shortage departments,
identifying paperwork control weaknesses and implementing procedures to correct them,
conducting audits for compliance and ensuring store follow-up on price accuracy initiatives,
reviewing cash discrepancies to keep the store within allowable guidelines, identifying cash
registers with unacceptable shortages, and regularly reviewing loss prevention exception
reports for signs of dishonesty directly relates to the functional areas of accounting, auditing,
and quality control discussed in 29 C.F.R. § 541.201(b). See 69 Fed. Reg. 22,140-22,142. The
duties performed by the LPM such as interviewing all loss prevention candidates, conducting
and supervising training for LPAs on a continual basis, and providing direction for LPAs also
directly relate to the functional areas of personnel management and human resources. By
ensuring training standards for associates regarding emergency procedures, robbery, fire, etc.,
as co-chair of the store’s Loss Prevention and Safety Committee, the LPM performs work that
is directly related to the functional area of safety and health. Furthermore, as described above,
the LPM’s typical work day consists of performing office or non-manual work. Therefore, the
LPM’s primary duty involves the “performance of office or non-manual work directly related
to the management or general business operations of the employer.” 29 C.F.R. § 541.200(a)(2).
See Wage and Hour Opinion Letter September 20, 1982 (copy enclosed).

Moreover, we believe that the LPM’s primary duty “includes the exercise of discretion and
independent judgment with respect to matters of significance.” 29 C.F.R. § 541.200(a)(3).
Working independently shows that the LPM has certain decision-making authority that is “free
from immediate direction or supervision.” 29 C.F.R. § 541.202(c). In selecting appropriate
steps to address the problem of inventory shortage and pursuing the selected course of action,
the LPM compares and evaluates possible courses of conduct, and acts or makes a decision
after the various possibilities have been considered as discussed in 29 C.F.R. § 541.202(a). The
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LPM’s primary duty of implementing the loss prevention and shortage control program for the
store and, in certain situations, the LPM’s supervisory responsibilities over one or more LPAs
demonstrate that the employee “implement[s] management policies or operating practices.”
29 C.F.R. § 541.202(b); see also 69 Fed. Reg. 22,142-22,144 (copies enclosed). In implementing
the loss prevention and shortage control program for the store, the LPM “performs work that
affects business operations to a substantial degree” because the effective performance of such
duty is essential for the profitability of the store and, in fact, frequently determines the store’s
success or failure. 29 C.F.R. § 541.202(b). In developing complementary store-specific
programs to meet or exceed the store’s shortage goals, the LPM “carries out major assignments
in conducting the operations of the business.” Id. In determining what internal investigations
to pursue and when to conduct interviews, in ascertaining prosecutable cases, and in
investigating harassment allegations, the LPM “investigates and resolves matters of
significance on behalf of management.” Id. In addition, in consulting with and providing
expert advice to store management with respect to the loss prevention and shortage control
program, the LPM “provides consultation or expert advice to management.” Id. Therefore, the
LPM’s duties meet several of the factors in 29 C.F.R. § 541.202(b) indicating the sufficient
“exercise of discretion and independent judgment with respect to matters of significance.”
29 C.F.R. § 541.200(a)(3). Based on this review, it is our opinion that LPMs qualify for the
administrative exemption under FLSA section 13(a)(1).

This opinion is based exclusively on the facts and circumstances described in your request and
is given based on your representation, express or implied, that you have provided a full and fair
description of all the facts and circumstances that would be pertinent to our consideration of the
question presented. Existence of any other factual or historical background not contained in
your letter might require a conclusion different from the one expressed herein. You have
represented that this opinion is not sought by a party to pending private litigation concerning
the issues addressed herein. You have also represented that this opinion is not sought in
connection with an investigation or litigation between a client or firm and the Wage and Hour
Division or the Department of Labor.

We trust that this letter is responsive to your inquiry.

Sincerely,

Paul DeCamp
Administrator

* Note: The actual name(s) was removed to preserve privacy in accordance with 5 U.S.C.
§ 552(b)(7).
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