One-time pay deduction was not violation of salary-basis test

Affirming summary judgment in favor of J.R.’s Country Stores, the Tenth Circuit ruled that an exempt store manager failed to show that the one-time deduction from her salary—because she worked only 40.1 hours of the requisite 50 in that particular week–established a practice or policy of making inappropriate pay deductions for salaried employees. Therefore, the appeals court held, the district court properly declined the employee’s invitation to strip the company of its exemption as to the employee. Nor did the district court err in concluding that the company was entitled to rely on the window-of-correction defense. Accordingly, the court affirmed the grant of summary judgment to the convenience store chain on the employee’s FLSA overtime claim.

The employee, who began working as a manager for one of the company’s stores in 2007, was classified as an exempt salaried employee and paid $600 on a weekly basis, which increased to $625 in 2011. She also generally worked 50 or more hours a week consistent with the terms of the company’s pay plan. In April 2012, she received a paycheck that reflected a deduction of $31.20 because she had only worked 40.1 hours, rather than the requisite 50, for the pay period in question. This was the only instance during her tenure with the company that she received less than her typical, predetermined pay.

Resignation and overtime pay demand. Shortly thereafter, the employee resigned and sent the company a letter claiming that it owed her more than $42,000 in unpaid overtime. She contended that when J.R.’s made the one-time deduction, she lost her exempt status under the FLSA, which entitled her to three years’ worth of retroactive overtime pay. Although the company denied both that this singular deduction was improper and that it constituted an actual practice of improper deductions under the applicable regulatory provisions, it sent her a check for $332.88, which represented the repayment of the deduction as well as overtime she worked during the time period in which the deduction occurred.

District court proceedings. The employee then filed a lawsuit against J.R.’s alleging that her “compensation was reduced when she did not work at least 50 hours” per week, she was not an exempt employee under the FLSA because she was not paid on a true salary basis, and the failure to classify her as an hourly employee entitled her to recoup retroactive overtime pay.

The company moved for summary judgment and, instead of responding, the employee moved to conditionally certify a collective action under the FLSA. The court subsequently granted summary judgment in favor of J.R.’s, finding that its deduction did not constitute a violation of the salary-basis test. It further found that even if the employee could demonstrate that the company did not intend to pay her a salary, her FLSA claim would still fail because J.R.’s was entitled to rely on the protection of the window-of-correction defense detailed in the FLSA’s implementing regulations.

Intent to pay salary. The employee first argued that the lower court should have considered her an hourly employee based on the terms of the pay plan’s “hard floor” of 50 hours, a requirement to log the number of hours worked, and an alleged “stated policy of deducting pay for less than a day’s absence.” Under 29 C.F.R. Section 541.603(a), an “actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis” and results in the employer’s loss of the executive exemption for those employees. While the employee argued that the district court erred in focusing only on the first factor of the salary-basis test–the number of improper deductions–the appeals court found that the lower court’s ruling could be fairly read to address all of the salary-basis factors in some appreciable manner. Thus, because even a brief review of the challenged order belied her assertion that only one component of the salary-basis test received consideration, this argument failed. “All told, the district court’s straightforward application of the salary-basis test affords us no legally cognizable basis to reverse,” wrote the court.

More broadly, the employee contended that she raised a fact issue concerning the existence of an actual company practice or policy of making improper deductions. Noting that the district court appropriately invoked the Supreme Court’s Auer decision, 133 LC ¶33,490, to support its view that the company’s one-time improper deduction from her pay, “taken under unusual circumstances,” would not defeat her salaried status, the appeals court pointed out that this was “hardly an unusual conclusion in FLSA jurisprudence, and is the correct result here.”

No actual practice … Turning to the regulatory language, the court found especially telling the Secretary’s use of the term deductions (rather than deduction) multiple times in the text of the FLSA’s implementing regulations. “Our growing body of FLSA caselaw reflects this understanding of the Secretary’s regulatory focus: we have held that ‘one change in base hours [producing a deduction] . . . is not the kind of frequent change necessary to create a factual dispute,’” reasoned the court. Further, the court found it implausible that subsection (a)’s requirement of a “practice” of such deductions contemplated isolated conduct. Thus, the court found as a matter of law that the employee’s failure to identify more than the one deduction precluded a finding of an “actual practice” by the company of making improper salary deductions.

or policy. The appeals court next found that the lower court did not err in concluding that the company had no policy requiring improper deductions. Here, the court noted that the company’s policy, as set forth in its handbook, stated that “[t]he Company prohibits deductions from an exempt, salaried employee’s pay except under the circumstances set forth in the [FLSA] and state law. If you believe that improper [deductions have occurred], it will promptly reimburse the employee and ensure the mistake will be corrected in the future.” Stating that it would be hard-pressed to conclude that this language evinced a policy that mandates improper deductions, the court found that “essentially the obverse is true.”
This was so, the court pointed out, because the handbook language tracked the text of the Secretary’s guidance regarding the salary-basis test, which specifies that an employer will retain the exemption as long as it maintains “a clearly communicated policy that prohibits the improper pay deductions specified in [subsection] (a) and includes a complaint mechanism, reimburses employees for any improper deductions and makes a good faith commitment to comply in the future.”

Thus, the lower court correctly found no evidence that the company had an actual practice of making improper deduction or of a policy of making improper deductions, concluded the appeals court.

Evasion of spirit of FLSA. As to the employee’s contention that the lower court should be
reversed based on its “evasion of the spirit of the FLSA,” and specifically that the district court improperly cited DOL statements and opinion letters in order to avoid addressing her allegedly “extraordinary” working conditions, the Tenth Circuit noted that in lodging this argument, she overlooked the deference that it and other courts have shown to the DOL’s interpretation of its own regulations. “We are not unsympathetic to the hours of diligent work [the employee] provided to the Company as a store manager. Nonetheless, it is pellucid that she was aware of this requirement throughout her employment–indeed, she admits that the Company’s leadership regularly apprised store managers of the Pay Plan’s position on work hours, “stated the court, finding it critical that she did not meet her burden of proving that the 50-hour-week minimum or the directive to track her hours expressly violates the FLSA. Accordingly, the court affirmed the district court’s judgment insofar as it based its grant of summary judgment on a finding that the company did not violate the salary-basis test, concluding that it intended to pay the employee a salary, “which means that she is exempt and may not receive overtime pay under the FLSA.”

Window-of-correction defense. Nor did the lower court err in concluding that the company was entitled to rely on the window-of-correction defense in C.F.R. Section 541.603(c), which provides that “[i]mproper deductions that are either isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions, if the employer reimburses the employees for such improper deductions.” The district court noted that the employee identified one improper deduction, the company reimbursed her for the improper deduction as well as for overtime worked during the relevant pay period shortly after making the improper deduction, and that this was an isolated deduction.
Here, the appeals court found that the lower court did not err in concluding that the lone improper deduction was isolated–even without addressing whether it was also inadvertent. “Generally speaking,” wrote the court, “we understand statutes containing disjunctive language to require that only one of the listed requirements must be satisfied.” While the court noted that the employee “repeatedly argues that the FLSA is a remedial statute designed to be resolved” in favor of employee coverage, it observed that the “fact that one purpose of the FLSA is to ensure overtime pay for non-exempt employees does not preclude the possibility that an employer may “intentionally dock an exempt employee’s pay and avoid all liability for overtime simply by reimbursing the employee.” Such a situation, wrote the court, “does not necessarily abuse the window-of-correction defense or eviscerate the employee’s exempt status–provided, of course, that the intentional (i.e., not inadvertent) deduction was ‘isolated.’”

And while other circuits have intimated that this defense can only apply when an employer has made an innocent mistake, the court pointed out that those decisions were not binding on it. “Our own precedent makes clear that “[t]he ‘window of correction’ provided by [the predecessor version of subsection (c)] allows employers to treat otherwise eligible employees as salaried, regardless of the employer’s one-time or unintentional failure to adhere to” the statute’s prohibition on improperly deducting salaried employees’ pay based on quantity of work performed,” said the court.
Finally, the appeals court found that the district court did not abuse its discretion in declining to grant the employee additional time to conduct discovery relating to any improper deductions made from other employees’ salaries. In this regard, it noted that, at the precise moment the company filed its motion for summary judgment, the scope of the lawsuit was explicitly limited to one named plaintiff: the employee. (Ellis v J.R.’s Country Stores, Inc., 10thCir, 165 LC ¶36,322.)

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