Tag Archives: Salaried Employees

D.Ariz.: Where Construction Inspector Was Salaried Misclassified, Damages to Calculated Using Default Time and a Half Methodology, Not FWW

Blotzer v. L-3 Communications Corp.

This case was before the court on the parties’ cross motions for summary judgment. Both plaintiff and defendant contended that they were entitled to judgment as a matter of law regarding the exempt status of plaintiff, a construction inspector. The parties further disputed whether the fluctuating workweek methodology or the FLSA’s default time and a half methodology was applicable to calculate plaintiff’s damages, assuming he had been misclassified. After finding plaintiff to be non-exempt, the court held that plaintiff’s damages had to be calculated using the FLSA’s default methodology, because: (1) it is contrary to the rationale of the FLSA to apply the FWW method in misclassification cases; (2) application of the FWW in misclassification cases runs counter to the intent of the FLSA; and (3) even if the FWW method were applied, the defendant had failed to prove the elements of the FWW method were present in the case.

The court explained:

The FWW method set forth in 29 C.F.R. § 778.114 is not intended to apply retroactively in a misclassification case. See Urnikis–Negro, 616 F.3d at 666 (stating that 29 C.F.R. § 778.114 is not a remedial measure that specifies how damages are to be calculated when a court finds that an employer has breached its statutory obligations). It was drafted by the Department of Labor as “forward-looking” and only describes how employers and employees should structure an agreement for future compensation. Id. at 677. Moreover, because the regulation was adopted without formal rule-making, it is entitled to less deference. See Hasan v. GPM Investments, LLC, 2012 WL 3725693, *2 (D.Conn.2012) (citing Christensen v. Harris Co., 529 U.S. 576, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000)). The Court concludes that the FWW should not be applied in the present case because: (1) it is contrary to the rationale of the FLSA to apply the FWW method in misclassification cases; (2) application of the FWW in misclassification cases runs counter to the intent of the FLSA; and (3) even if the FWW method were applied, Defendant has failed to prove the elements of the FWW method are present in this case.

Application of the FWW method in a misclassification case is contrary to FLSA’s rationale. The FWW method requires proof of a “clear mutual understanding” that: (1) the fixed salary is compensation for the hours worked each work week, whatever their number; and (2) overtime pay will be provided contemporaneously such that it fluctuates depending on hours worked per week. See 29 C.F.R. §§ 778.114(a) & (c). In a misclassification case, at least one of the parties initiated employment with the belief that the employee was exempt from the FLSA, paid on a salary basis, and therefore not entitled to overtime. When an employee is erroneously classified as exempt and illegally being deprived of overtime pay, neither the fourth nor fifth legal prerequisites for use of the FWW method is satisfied. The parties do not have a “clear, mutual understanding” that a fixed salary will be paid for “fluctuating hours, apart from overtime premiums” because the parties have not contemplated overtime pay. In addition, because the employees were erroneously classified as exempt, overtime compensation was not provided contemporaneously. See Russell v. Wells Fargo and Co., 672 F.Supp.2d 1008 (N.D.Cal.2009); Hasan, 2012 WL 3725693 at * 4 (collecting cases which hold that, in a misclassification case, the parties never agreed to an essential term of a fluctuating work week arrangement, ie. that overtime would be paid at different rates depending on the number of hours worked per week). As the court stated in Ransom v. M. Patel Enters., Inc., 825 F.Supp.2d 799, 810 n. 11 (W.D.Tex.2011):

The significance of the employee’s lack of knowledge of nonexempt status cannot be overstated. The fundamental assumption underpinning the FWW is that it is fair to use it to calculate overtime pay because the employee consented to the payment scheme. But in the context of an FLSA misclassification suit when consent is inferred from the employee’s conduct, that conduct will always, by definition, have been based on the false assumption that he was not entitled to overtime compensation. The job will have been advertised as a salaried position. The employee, if he raised the issue, will have been told that the salary is all he will receive, regardless of how many hours he works. That is the very nature of a salaried, exempt position. When it turns out that the employer is wrong, and it is learned that the FLSA required the employer to pay the employee an overtime premium, the notion that the employees conduct before he knew this is evidence that the employee somehow consented to a calculation method for the overtime pay that no one even knew was due, is perverse. If the FWW requires consent in some fashion, the employee’s actions before he knew he was due overtime pay just cannot logically be the basis of that consent.

Furthermore, 29 C.F.R. § 778.114(c) provides that the FWW method cannot be used “where all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for non-overtime hours.” In a misclassification case, because employees have not been paid overtime premiums, they are compensated for those hours worked more than forty at a rate not greater than the regular rate. Russell, 672 F.Supp.2d at 1014. Thus, attempting to retroactively apply the FWW method to a miscalculation case is akin to “the old ‘square peg in a round hole’ problem [because it requires] apply[ing] § 778.114 to a situation it was not intended to address.” EZPawn, 633 F.Supp.2d at 402.

“In making its decision here, the Court is ‘mindful of the directive that the [FLSA] is to be liberally construed to apply to the furthest reaches consistent with Congressional direction.’ ” Russell, 672 F.Supp.2d at 1014 (citing Klem, 208 F.3d at 1089). Application of the FWW in a misclassification case gives rise to a “perverse incentive” for employers, because the employee’s hourly “regular rate” decreases with each additional hour worked. In fact, the difference between the FWW method and the traditional time-anda-half method can result in an employee being paid seventy-one percent less for overtime over a given year, and under the FWW method, the effective overtime hourly rate of an employee working sixty-one hours or more is less than the non-overtime hourly rate of an employee who worked no more than forty hours per week. See Russell, 672 F.Supp.2d at 1012;
see also
Hasan, 2012 WL 3725693 at *2 (calculating the pay difference for a misclassified employer under both methods). This result is contrary to the FLSA’s purpose: encouraging employers to spread employment among more workers, rather than employing fewer workers who are then required to work longer hours. See Robertson v. Alaska Juneau Gold Min. Co. ., 157 F.2d 876, 879 (9th Cir.1946)

The court further explained that even if it had reached the opposite conclusion of law (i.e. that the FWW could be applicable in some misclassification cases), the facts of the case would still preclude its application here:

Finally, even if the Court concluded that the FWW method does apply in some miscalculation cases, it would not apply in the present case because Defendant has failed to demonstrate a “fluctuating” work week or a “clear mutual understanding” of straight pay and a contemporaneous overtime arrangement as required by the regulation. The FWW was intended to apply to “fluctuating” work schedules, ie. schedules in which an employee endures long hours some weeks but enjoys the benefit of short hours in other weeks, all at the same rate of pay. See Hasan, 2012 WL 3725693 at *4. In the present case, it is undisputed that Plaintiffs consistently worked more than 40 hours per week. Thus, Plaintiffs’ “variance, between weeks with a moderate amount of overtime hours, and weeks where a majority of hours worked exceeded the 40 hour threshold, is not the same as the up and down fluctuation contemplated by the DOL and by the Court in Missel.Id. In addition, by its plain terms, the FWW method applies only when the employee clearly understands that he will receive straight-time pay for all hours worked and extra compensation of at least half his regular rate of pay, in addition to the fixed salary, for overtime hours during the weeks when he works overtime. Hunter v. Sprint Corp., 453 F.Supp.2d 44, 59 (D.D.C.2006); Russell, 672 F.Supp.2d at 1013–14. No such clear, mutual understanding is present in this case. Defendant contends that Plaintiffs agreed to work for a set salary regardless of whether they worked “35 hours or 55 hours.” (Doc. 74, pg.13.) Defendant misquotes Plaintiffs’ testimony regarding the number of hours they anticipated working. Although Defendant describes the Plaintiffs’ testimony regarding their salary as their “sole source of income regardless of whether they worked 35 or 55 hours,” neither Plaintiff testified to any expectation of ever working less than 40 hours. (Doc. 71, pg. 10; Doc. 71–1, pgs. 35 & 52.) The undisputed evidence is that Plaintiffs expected to work 50 hours a week. Furthermore, even if Defendant could prove that Plaintiffs and Defendant had a clear, mutual understanding that Plaintiffs would work 50 hours a week without overtime pay, such an arrangement amounts to an agreement “not to receive their FLSA entitlement to overtime pay. This would be illegal. Employees cannot agree to waive their right to overtime pay.” Russell, 672 F.Supp.2d at 1014. The parties’ lack of “mutual understanding” regarding Plaintiffs’ salary is further supported by the fact that Plaintiffs, upon realizing that they were being required to work far more than 50 hours per week, complained about their hours and were eventually paid some overtime.

In sum, the Court agrees with its sister district court in Northern California which held that “If Defendants’ position were adopted, an employer, after being held liable for FLSA violations, would be able unilaterally to choose to pay employees their unpaid overtime premium under the more employer-friendly of the two calculation methods. Given the remedial purpose of the FLSA, it would be incongruous to allow employees, who have been illegally deprived of overtime pay, to be shortchanged further by an employer who opts for the discount accommodation intended for a different situation.” Russell, 672 F.Supp.2d at 1014. Accordingly, the Court concludes that the FWW method to damages calculation is not applicable in the instant case.

Click Blotzer v. L-3 Communications Corp. to read the entire Order.

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M.D.La.: Defendant Not Entitled to FWW in Salary Misclassification Case, Where Failed to Pay Plaintiff “Fixed Salary” as Required by 778.114

McCumber v. Eye Care Center of America, Inc.

This case was before the court on the parties cross-motions seeking summary judgment.  As discussed here, the court held that Plaintiff’s unpaid overtime damages, if any, were to be calculated using the FLSA’s default time and a half methodology, rather than the fluctuating workweek (“FWW”) methodology.  Although the Defendant claimed it was entitled to use the FWW to calculate Plaintiff’s damages, due to the fact that Plaintiff was salaried misclassified, the court disagreed.  The court held that Defendant had failed to pay Plaintiff a “fixed salary” as required for application of 29 C.F.R. § 778.114, because  the evidence showed that Defendant docked Plaintiff’s pay on at least 2 occasions when Plaintiff worked fewer than 40 hours in a workweek.

Reviewing the parties’ respective arguments and holding that any damages ultimately found due were to be calculated at time and a half, the court reasoned:

“Defendants’ motion for partial summary judgment seeks judgment in its favor declaring that any wages found to be due plaintiff in this case shall be calculated using the fluctuating workweek method (“FWW method”) pursuant to 29 C.F.R. § 778.114.  Subsection (a) of the provision at issue instructs that

‘[a]n employee employed on a salary basis may have hours of work which fluctuate from week to week and the salary may be paid him pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many.’

Under the FWW method, the amount of overtime owed to such an employee is paid at the rate of one-half-time pay, rather than one-and-a-half-time pay. The reason for this is that, according to the salary agreement among the parties, all the hours worked by the employee have already been compensated at straight-time pay and, thus, these hours are only shortchanged by half-time pay, rather than completely uncompensated.

In order to calculate the amount actually due under the FWW method, the fixed weekly salary is divided by the number of hours actually worked in a particular week. The resulting sum is the employee’s “regular rate of pay.” An employee found to be due overtime pay would be paid one half of the regular rate of pay for each hour of overtime worked in that particular week. While the regular rate of pay decreases as hours worked each week increase, the fixed salary must be sufficient such that the regular rate of pay never falls below the minimum wage requirement of 29 U.S.C. § 206(a)(1).

In addition to the requirement that the minimum wage requirement be sustained by the regular rate of pay calculation, the employer who has allegedly misclassified a position as exempt under the FLSA bears the burden of proving that there existed a “clear mutual understanding” among the employer and employee that the fixed weekly salary is compensation for the hours worked in any given workweek, no matter how few or many, in order to impose the FWW method for calculating overtime due.

Defendants argue that “it is undisputed that [p]laintiff was classified as exempt under the FLSA and was paid a fixed salary of $40,000 per year, regardless of the hours he worked.”  Defendants point to plaintiff’s testimony that he was “usually paid a set amount in each paycheck” and “often worked before and more often after the time set on the schedule” as evidence that plaintiff and defendants were parties to a “clear mutual understanding” that his salary was fixed, despite his varying hours .

The court has examined plaintiff’s written statement, as cited by defendants, and finds that the citation offered by defendants quotes only a portion of plaintiff’s statement. In its entirety, the passages cited by defendants reads

22. I was usually paid a set amount in each paycheck, plus production and other bonuses.

23. The weekly schedule made by the store manager was the minimum time I was expected to work. I often worked before and more often after the time set on the schedule when there were orders to fill or equipment to maintain or repair, or when I had to drive to one of the other labs in the district to repair or maintain equipment. I was also frequently called in to repair machinery on my days off.

Plaintiff asserts that he was not party to a “clear mutual understanding” as is required for application of the FWW method. Plaintiff points out that, on at least two occasions, his biweekly paycheck was reduced by 8 hours so that he was paid for only 72 hours, though he is usually paid for 80 hours.  Plaintiff argues that, pursuant to 29 C.F.R. 778.114(c), the FWW method is inapplicable in the instant case because subsection (c) clearly instructs that the employer must pay the salary agreed to by the parties even when the employee does not work the full number of hours scheduled.

Plaintiff further asserts that ECCA internal policies instruct general managers to assume a 40 hour workweek when scheduling various management personnel to work in their stores.  Plaintiff also points to the ECCA policy entitled “Work Schedules and Attendance,” which states that “[t]he normal workweek will consist of forty hours. The normal workday will consist of eight hours of work with an unpaid meal period.”  Plaintiff argues that these policies, as well as the documented deductions in his biweekly paychecks demonstrate that defendants expected plaintiff to work a minimum of 40 hours and, in the event he failed to do so and did not claim leave or other holiday to make up for the time, defendants expected not to pay him the full amount of his salary.

The court has reviewed the documentary evidence cited by plaintiff, as well as plaintiff’s statement, cited by defendants and finds that defendants have failed to demonstrate that no genuine dispute exists as to the applicability of the FWW method in this case. In light of the documentary evidence produced by plaintiff, the court finds that plaintiff has demonstrated that, pursuant to 29 C.F.R. 778.114(c), the FWW method is inapplicable to the case at bar. More specifically, the court finds that the check summary documents offered by plaintiff demonstrate that, on two occasions (9/25/2009 and 10/9/2009), plaintiff failed to work the required 80 hours in a designated two-week period and did not claim any holiday or vacation to make up for the shortage in his hours and, accordingly, eight hours worth of pay was deducted from his salary.  Thus, no sincere argument may be made by defendants that its intention was to pay plaintiff a set salary regardless of the hours he worked in a given week, as required for application of the FWW method. On the contrary, the evidence before the court demonstrates defendants’ expectation that plaintiff work a minimum of forty hours each week and that he would be compensated only for those hours he worked or for which he claimed holidays or vacation to which he was entitled. Defendants’ motion will be denied as to its request for application of the FWW method in this case and, accordingly, any overtime found by the jury to be owed to plaintiff shall be compensated at the rate of one and one-half times the amount of plaintiff’s regular hourly wage pursuant to 29 C.F.R. 541.207(a)(1).”

Click McCumber v. Eye Care Center of America, Inc. to read the entire Memorandum Ruling.

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4th Cir.: When Salaried Employees Were Misclassified, Damages Properly Calculated At “Half-Time” Rather Than Time And A Half

Desmond v. PNGI Charles Town Gaming, L.L.C.

As discussed here previously, this was the second time this case ended up at the 4th Circuit.  Previously, the 4th Circuit had vacated the trial court’s Order determining the plaintiff’s to be administratively exempt and remanded the case for further findings.  On this appeal the plaintiffs challenged the lower court’s ruling as to how their damages in this so-called “salary misclassified” case should be determined.  Additionally, the defendant cross-appealed the lower court’s determination, on summary judgment, that it’s violations were willful.  Joining other Circuits who have ruled on the calculation issue, the 4th Circuit held that the lower court properly applied a so-called “half-time” calculation in determining the plaintiffs damages.

In making its ruling, the 4th Circuit discussed, at length case law from other circuits:

“The former employees worked as racing officials with Charles Town Gaming. J.A. 50. Charles Town Gaming prepared the job descriptions for racing officials in 1999. Id. at 55-56. In doing so, Charles Town Gaming’s human resources director used a computer program to help determine whether to designate the position as exempt or non-exempt from overtime under the FLSA. Id. Charles Town Gaming paid the racing officials a per diem rate and treated them as exempt. See Aff. Karen Raffo, Nov. 20, 2007. Over the ensuing years, Charles Town Gaming changed the pay from per diem to a fixed weekly salary that the parties intended to cover all hours worked. See J.A. 56, 146-52; Aff. Karen Raffo, Nov. 20, 2007. Charles Town Gaming believed (erroneously) that the former employees were subject to the FLSA administrative exemption; therefore, Charles Town Gaming did not pay them overtime. J.A. 49. All three appellants often worked more than 40 hours in a week. Id. at 50. After the appellants unanimously declared the wrong horse to have won a race, Charles Town Gaming dismissed them from their employment. Id.

The former employees contend the district court erred in calculating their unpaid overtime compensation under 29 U.S.C. § 216(b). Charles Town Gaming contends the district court erred by concluding that their FLSA violation was willful. We review a grant of summary judgment de novo. See, e.g., United States v. Bergbauer, 602 F.3d 569, 574 (4th Cir.2010). When cross-motions for summary judgment are before a court, the court examines each motion separately, employing the familiar standard under Rule 56 of the Federal Rules of Civil Procedure. See, e.g., Ga. Pac. Consumer Prods., L.P. v. Von Drehle Corp., 618 F.3d 441, 445 (4th Cir.2010).

The former employees challenge how the district court calculated their unpaid overtime compensation under 29 U.S.C. § 216(b). The Supreme Court addressed how to calculate such unpaid overtime compensation under 29 U.S.C. § 216(b) in Overnight Motor. 316 U .S. at 580. The Court held that when calculating the “regular rate” of pay for an employee who agreed to receive a fixed weekly salary as payment for all hours worked, a court should divide the employees fixed weekly salary by the total hours worked in the particular workweek.   Id. at 579-80 (analyzing section 7 of the FLSA, now codified at 29 U.S.C. § 207(a)(1)). This calculation should be completed for each workweek at issue and results in a regular rate for a given workweek. Id. Of course, the Court recognized that the regular rate could vary depending on the total hours worked. The Court then determined that the employee should receive overtime compensation for all hours worked beyond 40 in a given workweek at a rate not less than one-half of the employee’s regular rate of pay. Id.

Although the parties agree that Overnight Motor applies in calculating the regular rate, they disagree about how to calculate the overtime premium. Specifically, the parties disagree over whether the former employees should receive 150% of the regular rate for all hours worked over 40 in a given workweek or 50% of the regular rate for all hours worked over 40 in a given workweek.

In analyzing how to calculate unpaid overtime compensation under 29 U.S.C. § 216(b) in this mistaken exemption classification case, we note that four sister circuits have addressed this issue. The First, Fifth, Seventh, and Tenth Circuits all have determined that a 50% overtime premium was appropriate in calculating unpaid overtime compensation under 29 U.S.C. § 216(b) in mistaken exemption classification cases, so long as the employer and employee had a mutual understanding that the fixed weekly salary was compensation for all hours worked each workweek and the salary provided compensation at a rate not less than the minimum wage for every hour worked. See Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir.2010); Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir.2008); Valerio v. Putnam Assocs., Inc., 173 F.3d 35 (1st Cir .1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135 (5th Cir.1988).

In Blackmon, the Fifth Circuit applied 29 C.F.R. § 778.114 to calculate unpaid overtime compensation in a mistaken exemption classification case. 835 F.2d at 1138. The employees in Blackmon were meat-market managers who were wrongly classified as exempt. Id. at 1137-38. The district court calculated their unpaid overtime compensation by dividing the weekly salary by 40 hours to determine their regular rate, multiplying that rate by 150%, and then multiplying that result by the number of overtime hours. Id. at 1138. The Fifth Circuit rejected this method, instead applying 29 C.F.R. § 778.114 to determine the regular rate, and only using a 50% multiplier. Id. The Fifth Circuit did not cite, much less discuss, Overnight Motor.

In Valerio, the First Circuit upheld an award of summary judgment in a mistaken exemption classification case. 173 F.3d at 39-40. Valerio was wrongly classified as an exempt employee. Id. at 37. Upon dismissing Valerio from employment, her employer gave her a lump-sum payment intended to cover any overtime owed to her. Id. at 38. In calculating the unpaid overtime compensation, the employer paid her a 50% overtime premium and relied on 29 C.F.R. § 778.114. The First Circuit affirmed the district court’s finding that the amount paid was more than was owed to Valerio under the FLSA. Id. In Valerio, the First Circuit cited, but did not discuss, Overnight Motor. Id. at 39-40.

In Clements, the Tenth Circuit affirmed a district court’s application of 29 C.F.R. § 778.114 to calculate unpaid overtime compensation in a mistaken exemption classification case. 530 F.3d at 1225. The employees in Clements provided recruiting services to the Army on behalf of their employer, Serco. Id. Serco had erroneously classified these employees as exempt under the “outside salesmen” exemption. Id. at 1227; cf. 29 U.S.C. § 213(a)(1). The employees claimed a 150% multiplier applied because the employer and employees had not agreed on whether overtime compensation was owed. Clements, 530 F.3d at 1230. In affirming the use of a 50% multiplier in calculating the unpaid overtime compensation, the Tenth Circuit cited 29 C.F.R. § 778.114, the First Circuit’s decision in Valerio, and our decision in Bailey v. County of Georgetown, 94 F.3d 152, 155-57 (4th Cir.1996).   Clements, 530 F.3d at 1230. The Tenth Circuit found the lack of a clear and mutual understanding on the overtime premium to be “irrelevant as to whether the Employees understood they were being paid on a salaried … basis.” Id. at 1231. In Clements, the Tenth Circuit did not cite, much less discuss, Overnight Motor.

In Urnikis-Negro, the Seventh Circuit affirmed a district court’s award of a 50% overtime premium to calculate unpaid overtime compensation in a mistaken exemption classification case. 616 F.3d at 684. However, the court rejected the district court’s retroactive application of 29 C.F.R. § 778.114, finding it a “dubious source of authority for calculating a misclassified employee’s damages.” Id. at 679. Instead, the court relied on Overnight Motor. Id. at 680-84. The court held that when an employer and employee agree that a fixed salary will constitute payment at the regular rate for all hours worked and the rate is not lower than the minimum wage, a court should rely on Overnight Motor to calculate unpaid overtime compensation under 29 U.S.C. § 216(b). Id. Moreover, in such a situation, the court calculates the unpaid overtime compensation using a 50% multiplier rather than a 150% multiplier. See id.

In addition to these decisions from our sister circuits, the Department of Labor also has approved using a 50% overtime premium to calculate unpaid overtime compensation in a mistaken exemption classification case. See Retroactive Payment of Overtime and the Fluctuating Workweek Method of Payment, Wage and Hour Opinion Letter, FLSA 2009-3 (Dep’t of Labor Jan. 14, 2009). The DOL issued the opinion letter in response to an employer who asked how to compensate employees mistakenly classified as exempt. Id. at 1. In the opinion letter, the DOL states that “because the fixed salary covered whatever hours the employees were called upon to work in a workweek; the employees will be paid an additional one-half their actual regular rate for each overtime hour …; and the employees received and accepted the salary knowing that it covered whatever hours they worked,” a retroactive payment of overtime using the 50% multiplier conforms with FLSA requirements. Id. at 2.

Here, the district court did not apply 29 C.F.R. § 778.114 to this mistaken exemption classification case. Rather, the district court relied on the logical implications of Overnight Motor to calculate unpaid overtime compensation under 29 U.S.C. § 216(b). Desmond, 661 F.Supp.2d at 584. The district court found that there was an agreement that the fixed weekly salary covered all hours worked. Id. The district court then reasoned that Overnight Motor’s regular-rate determination implies the previously paid weekly salary covers the base compensation for all hours worked. Id. Thus, the district court concluded that it need only award 50% of the regular rate to provide the employees their “unpaid overtime compensation” under 29 U.S.C. § 216(b). Id.

Appellants disagree and insist that such a reliance on Overnight Motor improperly expands federal common law. They also (confusingly) argue that Chevron deference to 29 C.F.R. § 778.114 requires courts to use a 150% multiplier and that if employers are allowed to retroactively apply section 778.114 in mistaken exemption classification cases, employers have no motive to pay for overtime as it accrues, effectively treating nonexempt employees as if they were exempt. In appellants’ view, such a holding will create an incentive for employers to pay a fixed weekly salary, never to pay overtime, and then simply pay a 50% premium on the regular rate if caught misclassifying non-exempt employees as exempt employees. Cf. 29 U.S.C. § 213(a)(1); 29 C.F.R. pt. 541 (white-collar exemption regulations).

As the district court held, appellants’ argument ignores the teaching of Overnight Motor. After all, in Overnight Motor, the Court recognized that employees and employers are free to agree to a reduced hourly wage in exchange for a fixed weekly salary, provided the fixed weekly salary covers all hours worked and meets minimum wage requirements. 316 U.S. at 580. In our view, the district court correctly concluded that Overnight Motor provides the appropriate method for calculating the unpaid overtime compensation under 29 U.S.C. § 216(b) in this case. Tellingly, in Overnight Motor, the Court provided the formula to compute the overtime due an employee who was paid a fixed weekly salary intended to cover all hours worked. Overnight Motor, 316 U.S. at 580 n. 16. Although Overnight Motor concerned the more basic question of whether overtime compensation applies to those earning more than the minimum wage requirements in the FLSA, 316 U.S. at 575, it contains nothing to indicate why such a computation would not apply in determining unpaid overtime compensation under 29 U.S.C. § 216(b) in a mistaken exemption classification case. Indeed, in Overnight Motor, the Court interpreted 29 U.S.C. § 207(a) and explained the meaning of “the regular rate at which he is employed,” and interpreted 29 U.S.C. § 216(b) and explained how to calculate “unpaid overtime compensation.” See Overnight Motor, 316 U.S. at 574 n. 2, 579-80.

Traditional principles of compensatory damages bolster this conclusion. Compensatory damages are “[d]amages sufficient in amount to indemnify the injured person for the loss suffered.” Black’s Law Dictionary 445 (9th ed.2009). Here, the former employees agreed to receive straight time pay for all hours worked in a given workweek and have already received such pay. Thus, the “loss suffered” is the 50% premium for their overtime hours. Accordingly, we affirm the district court’s judgment about how to calculate unpaid overtime compensation under 29 U.S.C. § 216(b).”

Currently, the plaintiffs in the 7th Circuit case, Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir.2010), have filed a petition for cert in the Supreme Court, so the effect of the 4th Circuit’s holding may be should-lived.

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6th Cir.: Effect Of Impermissible Deductions On Exempt Status; Under Old Regs “Significant Likelihood” Standard All Weeks Rendered Non-Exempt; Under New Regs Only Weeks Where Impermissible Deductions Actually Occurred

Baden-Winterwood v. Life Time Fitness, Inc.

In this case, the 6th Circuit addressed a common issue raised in mis-classification cases: the effect of a compensation plan which makes impermissible deductions to otherwise exempt employees, whose exemptions require they be paid on a “salary basis.”

On July 10, 2007, the district court granted in part Plaintiffs’ motion for summary judgment, finding “that the deductions from the salaries of eight Plaintiffs were deductions resulting from ‘variations in the quality or quantity of the work performed,’ in violation of the salary-basis test.”Baden-Winterwood v. Life Time Fitness, No. 2:06-CV-99, 2007 U.S. Dist. LEXIS 49777, at *42 (S.D.Ohio July 10, 2007) (quoting 29 C.F.R. § 541.602(a)). However, the district court limited Plaintiffs’ recovery to overtime pay for the three pay periods in 2005-the periods ending November 9, November 23, and December 9-during which Life Time Fitness took actual deductions from Plaintiffs’ salaries. Id. The court dismissed all other claims for overtime pay, including, in their entirety, the claims of the ten Plaintiffs who appealed.

The issue before the Court was whether Plaintiffs’ compensation plans satisfy the salary-basis test. Prior to August 23, 2004, the salary-basis test, as defined by regulation, provided:

“An employee will be considered to be paid “on a salary basis” within the meaning of the regulations if under his employment agreement he regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of his compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 29 C.F.R. § 541.118(a) (1973). In August 2004, the DOL updated the regulations defining the salary-basis test. The new regulation states: An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. 29 C.F.R. § 541.602(a) (effective August 23, 2004). Under both versions, Life Time Fitness bears the burden of proving that Plaintiffs were paid: (1) a predetermined amount, which (2) was not subject to reduction (3) based on quality or quantity of work performed. Notably, however, rather than include the term “employment agreement,” the updated regulations focus on pay received. Compare29 C.F.R. §§ 541.118(a), 541.602(a).”

Significantly, the Court explained, “[f]or our purposes, the salary-basis test has two interpretations of the phrase ‘subject to,’ both of which are relevant here. In 1997, in Auer v. Robbins, 519 U.S. 452 (1997), the Supreme Court adopted the interpretation offered by the Secretary of Labor that the salary-basis test denies exempt status “if there is either an actual practice of making … deductions [based on variations in quality or quantity of work performed] or an employment policy that creates a ‘significant likelihood’ of such deductions.” Id. at 461. Specifically, the Auer Court held

‘The Secretary’s approach rejects a wooden requirement of actual deductions, but in their absence it requires a clear and particularized policy-one which “effectively communicates” that deductions will be made in specified circumstances. This avoids the imposition of massive and unanticipated overtime liability … in situations in which a vague or broadly worded policy is nominally applicable to a whole range of personnel but is not “significantly likely” to be invoked against salaried employees.’

Thus, under Auer, an employee is not paid on a salary basis if (1) there is an actual practice of salary deductions or if (2) an employee is compensated under a policy that clearly communicates a significant likelihood of deductions. Id.

Following Auer, on March 31, 2003, the DOL provided published notice on a proposed set of new FLSA regulations. See Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 68 Fed.Reg. 15,560 (Mar. 31, 2003). After a 90-day comment period, the DOL revised and released its final regulations, defining the exemptions under the FLSA. See Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees, 69 Fed.Reg. 22,122 (Apr. 23, 2004). The new regulations became effective on August 23, 2004. Id.

Under the new regulations, the Secretary of Labor reinterpreted the salary-basis test. Life Time Fitness argues that the DOL specifically eliminated the “policy” part of the Auer test, whereby a “significant likelihood” of improper deductions was sufficient to cause an employee to lose his or her FLSA exemption. The new regulations (” § 541.603“) provide that “[a]n actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.” 29 C.F.R. § 541.603(a). Moreover, Life Time Fitness argues that the new regulations limit the scope of recovery by providing that “[i]f the facts demonstrate that the employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made for the employees in the same job classification working for the same managers responsible for the actual improper deductions.” 29 C.F.R. § 541.603(b).

In its comments, the DOL explains that while the new rule represents a departure from the Secretary’s position in Auer,”[t]he ‘significant likelihood’ test is not found in the FLSA itself or anywhere in the existing Part 541 regulations. Moreover, nothing in Auer prohibits the [DOL] from making changes to the salary[-]basis regulations after appropriate notice and comment rulemaking.” Defining and Delimiting the Exemptions, 69 Fed.Reg. at 22,180. The DOL stated its reasoning behind the changes:

Any other approach, on the one hand, would provide a windfall to employees who have not even arguably been harmed by a “policy” that a manager has never applied and may never intend to apply, but on the other hand, would fail to recognize that some employees may reasonably believe that they would be subject to the same types of impermissible deductions made from the pay of similarly situated employees.

Under the Auer test, the Court, found that Defendants’ policy whereby deductions would be made (although they were not in practice violated the salary basis requirements) violated the salary basis test, explaining:

The district court erred in concluding that there was not enough evidence to suggest Life Time Fitness intended to enforce its permissive policy. The Auer subject-to-reduction test requires only a “clear and particularized policy-one which ‘effectively communicates’ that deductions will be made in specified circumstances.” 519 U.S. at 461. The test does not require a formulaic set of “magic words” indicating that the test is mandatory. If employers can avoid overtime liability by crafting payment policies with permissive (may ) language instead of mandatory (will ) language, then the purposes of the FLSA would clearly be frustrated. Rather, as set out by this Court in Takacs and Whisman, Auer’s test is better satisfied by a policy that demonstrates that deductions are “more than a mere theoretical possibility” and that “permit[s] disciplinary or other deductions in pay ‘as a practical matter.’ ” 246 F.3d at 781

Here, Life Time Fitness’s pre-August 23, 2004 compensation plan subjected employees’ pay to reductions under the Auer test.  The compensation plan at issue does more than create a theoretical possibility of deduction; instead it plainly lays out a policy under which Life Time Fitness would make future deductions.  Therefore, under the old regs, the Court found the Plaintiffs were non-exempt for all weeks within the relevant statute of limitations period.

However, since the current regulations require an actual violation, the Court held that the otherwise exempt employees were only stripped of their exempt status, and thus entitled to overtime for the 3 weeks when the pay practice was actually used to reduce their “salary.” In all other weeks, the Court found the salary basis test met, and thus found that, aside from three weeks where actual reduction were made, the Plaintiffs remained exempt, notwithstanding the three weeks where deductions were actually made.”

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