Summer is here, which presents the perfect opportunity to discuss one the Fair Labor Standards Act’s lesser-known exemptions, the seasonal amusement or recreational establishment exemption.

Conceptually, the exemption is straightforward: an amusement or recreational establishment does not have to comply with minimum wage and overtime regulations if it satisfies one of two tests: 1) it does not operate for more than seven months in a calendar year; or 2) during the preceding calendar year, its average receipts for any six months of that year were not more than 33 1/3 per cent of its average receipts for the other six months of the year.

Recent cases have shed light on this exemption. Last August, the Second Circuit decided Chen v. Major League Baseball Props., 798 F.3d 72 (2d Cir. 2015), which we discussed at http://www.wageandhourlawupdate.com/2015/08/articles/wage-and-hour/exemptions/second-circuit-mlb-fanfest-properly-treated-as-exempt-recreational-establishment/. Although MLB itself fails both tests for this exemption, the Court concluded that an employer’s “distinct physical place of business” may satisfy the exemption tests even if the parent entity does not. Thus, MLB’s FanFest—a five-day festival held during All-Star weekend—was not required to pay its volunteers minimum wage or overtime pay.

The Chen decision made sense in part because of the nature of the volunteers’ duties (greeting customers, answering questions, distributing gifts, etc.) and the number of hours worked (Chen worked only 14 total hours). A recent case, however, better tested the scope of the exemption. Morales v. 22nd District Agricultural Assn., 2016 Cal. App. LEXIS 573 (Cal. App. 4th Dist. July 13, 2016).

In Morales, the defendant operated the Del Mar Fairgrounds and Del Mar Horsepark, two distinct facilities. The plaintiffs were seasonal employees who were permitted to work unlimited hours for up to 119 days per year. Despite this scope of work, the California Appellate Court nonetheless concluded—consistent with federal precedent—that it was not the nature of the employees’ work that determined whether the exemption was satisfied, but rather the nature of the employer’s revenue-producing activities.

The Morales case highlights how misunderstood the exemption often is. The court applied a three-part, conjunctive test to determine whether the Fairgrounds and Horsepark constituted a single establishment—the same test rejected by the Second Circuit in Chen. The appellants had not challenged the lower court’s application of that test, which yielded a decision that seemingly contradicts Chen: the Morales court deemed the Del Mar Fairgrounds and Del Mar Horsepark, which are located on separate parcels of land, were a single establishment.

The Chen decision provides employers with a powerful tool to protect seasonal amusement or recreational establishments. This decision remains the best guidance available to employers, although the Morales case reminds us that in addition to physical separation, substantive separation—different executive leadership, boards of directors, accounting staffs, human resources departments, and so forth—will help preserve employers’ ability to create separate amusement or recreational establishments that are exempt from the FLSA’s minimum wage and overtime rules.