Arnold v. Ben Kanowsky, Inc./Opinion of the Court

This case concerns the provisions of the Fair Labor Standards Act of 1938 exempting from wages-and-hours coverage certain retail sales and service establishments. The suit was brought by petitioner individually under § 16(b) of the Act, 29 U.S.C.A. § 216(b) for payment of overtime wages claimed under § 7, 29 U.S.C.A. § 207. The Court of Appeals for the Fifth Circuit reversed a District Court judgment for petitioner and we granted certiorari, 359 U.S. 983, 79 S.Ct. 943, 3 L.Ed.2d 932. The proceedings in this Court are in forma pauperis. Both sides submitted on their briefs, and oral argument was heard only from the representative of the Secretary of Labor appearing as amicus curiae.

Respondent conducts an interior decorating and custom furniture business in Dallas, Texas. On the same premises he fabricates aircraft parts from phenolic, a cloth-impregnated phenol resin. This plastic is widely used in aircraft and automotive parts and can be machined on the woodworking equipment respondent has available in his furniture shop. Petitioner was employed by respondent from October 17, 1954, through September 2, 1955, primarily in the fabrication of phenolic parts.

At the trial, a representative of Chance Vought Aircraft, Inc., testified that his company purchased over $34,000 worth of phenolic parts from respondent in 1955, and that these parts were used in aircraft and missiles sold to the United States Navy. A representative of Temco Aircraft Company testified that it purchased about $2,000 worth of phenolic parts annually from Kanowsky for use in manufacturing aircraft subassemblies for the Air Force or for prime contractors, many of whom were located outside the State. Respondent also shipped a small amount of sheet phenolic directly outside the State.

During the year beginning October 1, 1954, respondent's sales totaled $99,117.52, and its sales of phenolic and phenolic parts were $39,751.71, or almost exactly 40% of its total sales. Its secretary-treasurer admitted that phenolic aircraft parts alone accounted for at least 25% of the company's total sales. Respondent introduced no evidence concerning the amount or nature of sales of phenolic in forms other than aircraft parts. Notwithstanding the admitted percentage of its total sales attributable to phenolic parts, respondent claimed exemption from the provisions of the Fair Labor Standards Act because of the retail character of its business.

The District Court found that petitioner was engaged in the production of goods for commerce within the meaning of the Act, and upon respondent's admission that petitioner had been paid for overtime hours only at straight time rates, entered judgment for petitioner for unpaid overtime compensation plus an attorney's fee. The Court of Appeals reversed on the ground that respondent was exempt from the Act's overtime requirements under § 13(a)(2) as a 'retail or service establishment.'

We believe that the Court of Appeals was in error and must be reversed. The wording of the statute, the clear legislative history, and the decisions of this Court require this conclusion.

Petitioner admittedly is engaged in the manufacture of phenolic parts for commerce. That this activity may be considered a 'sideline' from respondent's viewpoint does not remove petitioner from coverage under the Fair Labor Standards Act unless the respondent's activities fall within the specific exemptions enumerated in § 13 of the Act. As originally passed in 1938, the Fair Labor Standards Act exempted from coverage 'any employee engaged in any retail or service establishment the greater part of whose selling or servicing is in intrastate commerce.' In 1949 Congress substituted a three-part definition for this provision. Any employee employed by a retail or service establishment is to be exempt if more than 50% of the establishment's annual dollar volume of sales is made within the State, if 75% of its annual sales volume is not for resale, and if 75% of its annual sales volume is recognized within the industry as retail sales.

This Court had occasion at the last Term to point out that the 1949 revision does not represent a general broadening of the exemptions contained in § 13. Rather, Congress 'was acting in implementation of a specific and particularized purpose' to replace the unsatisfactory 'business use' test, which had developed around the 1938 provision, with a formula that would be at once flexible and at the same time provide clear statutory guidance to the Administrator.

We have held that these exemptions are to be narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit. The three conditions of § 13(a)(2) are explicit prerequisites to exemption, not merely suggested guidelines for judicial determination of the employer's status.

While § 13(a)(2) contains the requirements every retail establishment must satisfy to qualify for exemption, a retailer-manufacturer must satisfy the additional requirements of § 13(a)(4) since it 'makes or processes' the goods it sells.

Turning to the facts of this case, it is clear that respondent, through its fabrication of phenolic parts, is 'making or processing the goods that it sells.' To gain exemption it therefore must comply with the criteria of § 13(a)(2) as they are incorporated by reference in § 13(a)(4), as well as the additional requirements of § 13(a)(4) itself. It is clear that respondent does not meet at least two of the three standards of § 13(a)(2) as included in § 13(a)(4).

First, sales of phenolic parts account for more than 25% of the respondent's annual sales volume. The court below assumed that respondent's sales were recognized in the community as retail sales without any evidence to support the fact. This conclusion was not justified, since it is clear that Congress intended that 'any employer who asserts that his establishment is exempt must assume the burden of proving that at least 75 percent of his sales are recognized in his industry as retail.'

Second, the Court of Appeals assumed that the sales of phenolic and phenolic parts were not for resale, but in doing so, it was in error. The sales of parts to one company alone for incorporation in airplanes and missiles that were to be sold to the United States Navy exceeded 25% of the total. These sales indisputably were made with the expectation that the parts would be incorporated in aircraft and that the aircraft would be sold. Such transactions are clearly within the concept of resale.

Since respondent has not sustained its burden of proving that 75% of its annual sales volume is not for resale and is recognized as being retail in the particular industry, we need not reach the question whether the additional standards of § 13(a)(4) itself are met.

We hold that respondent has not satisfied the requirements of § 13 and is not entitled to exemption thereunder. The judgment of the Court of Appeals is reversed; the judgment of the District Court is reinstated; and the cause is remanded to that court for consideration of the prayer of petitioner for further counsel fees in accordance with the provision of the Act.

It is so ordered.

Judgment of Court of Appeals reversed; judgment of District Court reinstated and cause remanded with directions.

Mr. Justice WHITTAKER (dissenting).