Recently I reported that the Eleventh Circuit’s decision in Polycarpe v. E&S Landscaping Services, Inc. will lead to an increase in the number of FLSA cases filed against small businesses in Florida. This week I will summarize Polycarpe and attempt to explain its significance.

First, some background. Employees may be covered by the FLSA’s provisions as individuals, which is known as individual coverage, or as employees of a covered business, which is known as “enterprise coverage.” Enterprise coverage is triggered if a business (1)“has employees engaged in commerce or in the production of goods for commerce, or that has employees handling, selling, or otherwise working on goods or materials that have been moved in or produced for commerce by any person”; and (2) has at least $500,000 of “annual gross volume of sales made or business done.” 29 U.S.C. § 203(s)(1)(A) (emphasis supplied).

The highlighted language is known as the handling clause. Congress added it to FLSA in 1961, thereby expanding the FLSA’s reach to include retail and service businesses that were local in nature, so long as the employees of a business handled goods that had moved in interstate commerce. Congress added the words “or materials” after the word “goods” in 1974. But the precise reach of enterprise coverage under the FLSA was not often addressed by the courts, and never attempted before by the Eleventh Circuit.

The Polycarpe decision addressed this issue by tackling two questions. First, do interstate goods or materials lose their interstate quality if the items have already come to rest within a state before they are purchased within the state by the business? As an example, if a lawn service business purchases a lawnmower that is built out-of-state, does the lawnmower lose its interstate quality if the lawn service purchases it at the local Home Depot? The Eleventh Circuit ruled no, rejecting the “coming to rest” doctrine as inconsistent with the text of the FLSA, a 1973 Fifth Circuit decision, Brennan v. Greene’s Propane Gas Serv., Inc., 479 F.2d 1027, 1030 (5th Cir. 1973) (which is binding in the Eleventh Circuit), and a Department of Labor regulation, 29 C.F.R. § 779.242 (stating that it is “immaterial . . . that the goods may have ‘come to rest’”)..

The second question the court addressed involved the interplay of “goods” and “materials” under the handling clause, and the application of the “ultimate consumer” defense. The court began by reciting the definition of “goods” under the FLSA:

“Goods” means goods (including ships and marine equipment), wares, products, commodities, merchandise, or articles or subjects of commerce of any character, or any part or ingredient thereof, but does not include goods after their delivery into the actual physical possession of the ultimate consumer thereof other than a producer, manufacturer, or processor thereof.

29 U.S.C. § 203(i) (emphasis supplied).

The highlighted language is known as the “ultimate consumer” exception. Employees’ handling of goods that fall under this exception will not trigger enterprise coverage. But the handling of materials will not fall under this exception, and will trigger enterprise coverage. Thus, it becomes critical to distinguish between “goods,” which is defined in the statute, and “materials,” which is not.

To make this distinction, the court reasoned that the meanings of “goods” and “materials” must be different, and not overlap. Applying these criteria to several different dictionary definitions, the court concluded that

the most accurate view of Congress’s intent for the interplay between “goods” and “materials” in the FLSA--one that does not impliedly repeal some of the statutory definition of “goods”--is to read “materials” in the FLSA this way: “materials” in the FLSA means tools or other articles necessary for doing or making something. See Webster’s Third New Int’l Dictionary: Unabridged 1392 (1993). We believe that this interpretation is true to the ordinary meaning of “materials” and avoids conflict with the statutory “goods” definition.

The court explained that this definition accorded with the legislative history of the 1974 amendments and the Department of Labor’s own view on the meaning of materials, as expressed in its amicus brief in the Polycarpe case.

The court then addressed the question of how to determine whether the items in a given case are either goods or materials (or neither):

Whether an item counts as “materials” will depend on two things: 1) whether, in the context of its use, the item fits within the ordinary definition of “materials” under the FLSA and 2) whether the item is being used commercially in the employer’s business.

The court used china plates as an example to illustrate both prongs of the test. As to prong 1: When a catering business uses china plates, they are materials. But when a department store sells the plates, they are goods. As to prong 2: When an accounting firm uses the china plates as decorative items in its lobby, they are not materials because they do not have a significant connection to the firm’s accounting work.

Unfortunately, the court did not provide an analysis of whether the six businesses whose cases were consolidated in Polycarpe were covered by the FLSA. Instead, the court remanded the cases to the district courts to determine whether enterprise coverage had been triggered in view of Eleventh Circuit’s holdings. In particular, the district courts will now have to decide whether the items evidenced by plaintiffs as having moved in interstate commerce support enterprise coverage under the handling clause as either “goods” (not subject to the ultimate-consumer exception) or as “materials.”

Not having worked on any of the cases at issue in Polycarpe, I will not venture to predict the outcomes of the cases in the lower courts. Nevertheless, it seems clear that Polycarpe significantly expands the likelihood that any business in the Eleventh Circuit will be found to be covered by the FLSA. No longer can a business rely on the fact that the interstate goods or materials its employees handled had “come to rest” within the state before the business purchased them. Assuming a business meets the $500,000 gross sales threshold, the only way a business can avoid enterprise coverage is by proof that its employees do not regularly handle, sell or work on materials in interstate commerce, and that the business is the ultimate consumer of any interstate goods that its employees handle. For service businesses that do not sell goods to consumers, it may be relatively easy to establish that it is the ultimate consumer of the goods in question. But establishing that its employees do not regularly handle interstate materials would seem be more challenging, because the majority of materials that businesses handle are manufactured outside the state. The saving grace for employers may be the requirement that the materials have a “significant connection” to the employer’s business purposes. The Eleventh Circuit suggests that there will be cases in which this requirement will defeat a plaintiff’s claim of enterprise coverage:

[W]e believe that the ordinary meaning of “handling, selling, or otherwise working on” is not so expansive as to be limitless; not every employer that meets the $500,000 sales threshold must be subject to the FLSA. It seems to us that an employee who uses an item at work will only sometimes be “handling, selling, or otherwise working on” the item for the purposes of FLSA coverage: an item’s use must have a significant connection to the employer’s business purposes.

It remains to be seen, however, how courts will define “significant connection.” China plates used to decorate an accounting firm’s lobby may not have a significant connection to the firm’s accounting work, but what about the computers, calculators, paper and pencils the firm uses? These would seem to be “materials” that have a significant connection to accounting work. On the other hand, do the same materials used by a dry cleaner have a significant connection to the business of dry cleaning? These are the types of questions that I believe courts in the Eleventh Circuit will grapple with in the post-Polycarpe world of FLSA litigation.