Withheld pay doesn’t surrender hourly computer exemption

Addressing what looks to be an issue of first impression in the circuit courts, the Eleventh Circuit held an hourly employee who is exempt under the FLSA’s computer employee exemption does not lose that exemption for his last three weeks on the job because his employer has withheld his pay from that period. The appeals court saw no compelling reason to find that his exempt status was undone because his paychecks were held back due to a dispute over improper per diem payments—particularly where, having already taken in $180,000 in pay that year, he was not the kind of worker that the FLSA was designed to protect. At issue was a contract dispute cloaked as an FLSA claim, and it had rightly been dismissed on summary judgment, the appeals court found. On the other hand, the lower court should not have disposed of the employer’s state-law counterclaim for unjust enrichment, which might well have been viable.

A computer software and hardware engineer, the plaintiff had worked for the company for 10 years, starting at $50 per hour but earning $85.40 per hour at the time he resigned. His work hours varied by week and he worked over 40 hours some workweeks, but only at his regular rate, no overtime premium. The employee took an offer to work directly with one of the employer’s clients, and he purchased a home nearby. He was told the company provided a per diem allowance for travel to and from work, but the allowance only applied to employees living more than 50 miles from the worksite. Nonetheless, for the eight years following his transfer, he was given per diem allowances—ultimately amounting to $147,230—because he gave the employer his former, pre-transfer home address, which would have qualified him for the travel expenses. A company audit uncovered the “error” and, when he resigned, the employer withheld the last three weeks of his pay to recoup at least a portion of the improper payments.

The employee sued, alleging violations of the FLSA’s minimum wage and overtime provisions. The employer conceded that it had not paid him for his last three weeks after the results of its audit; it argued, though, that the employee was exempt from coverage pursuant to FLSA, Section 213(a)(17) as an hourly computer employee. It also responded with a counterclaim for unjust enrichment. A district court granted summary judgment on the FLSA claim but also found the employer’s unjust enrichment claim failed because the per diem payments amounted to wages, which were not recoverable from an employee in an FLSA suit.

Still exempt

On appeal, the employee insisted he was nonexempt, at least for those last three weeks, and so was entitled to $13,367.20 in unpaid wages. In his view, even if he was exempt from the FLSA’s overtime compensation requirements, the computer employee exemption didn’t bar him from using the FLSA’s minimum wage provision to recover his final three weeks of pay—at his final hourly rate of $85.40 per hour. (He didn’t explain why he was entitled to his regularly rate, which far outpaced the minimum wage.)

Whether an hourly exempt employee becomes nonexempt by virtue of having pay withheld was an issue of first impression. A few circuit courts (including the Eleventh Circuit) have addressed whether the failure to pay an otherwise-exempt salaried employee renders that employee nonexempt during a period of nonpayment. The rationale set forth in two of those appellate decisions, if carried over to hourly exempt employees, would back the district court’s finding that the employee here remained FLSA-exempt.

The employee pointed to a Sixth Circuit ruling which arguably supported his claim: An executive vice president sued for five months of pay he was entitled to under an employment agreement. The district court, in dismissing his suit, had relied on pre-2004 FLSA regulations; the DOL had since amended the rules, such that employment agreements were “no longer the relevant starting point for whether an employee is paid on a salary basis.” Yet while the revised regulations did cut against the other circuits’ interpretation of the salary-basis test, salary basis is just one of three tests for analyzing a salaried employee’s exempt status under Section 213(a)(1), the Eleventh Circuit observed, and there is equivalent test like the salary-basis test for hourly computer employees under Section 213(a)(17), the exemption at issue here. Consequently, the Sixth Circuit’s arguably favorable precedent didn’t help the employee.

No sympathy here

More compelling to the appeals court was the Supreme Court’s 2012 decision in Christopher v. SmithKline Beecham Corp—a case involving highly paid pharmaceutical reps who earned more than $70,000 per year, on average, and, as such, were ”hardly the kind of employees that the FLSA was intended to protect,” in the High Court’s view. Likewise, the employee here earned well over six figures, a rate considerably higher than the $27.63 minimum for the hourly computer employee exemption to apply—or the $7.25 minimum wage, for that matter. Setting overtime considerations aside, the employee’s final hourly rate amounted to $3,416 for a 40-hour workweek, which “knocks the statutory minimum of $455 per week for salaried employees out of the park.” It’s also three times higher than the exempt hourly computer employee would make at the statutory minimum. And, even without his last three weeks of pay, his earnings that year were “well above the benchmark salaries contemplated for both salaried and hourly exempt computer employees under the FLSA.”

As such, the appeals court was not inclined to allow the employee to use the FLSA to recover his unpaid compensation. He was essentially trying to assert a state-law breach of contract claim, for his agreed-to hourly rate, through the FLSA. The appeals court wouldn’t have it.

Unjust enrichment counterclaim

The district court should not have granted judgment in the employee’s favor on the employer’s unjust enrichment claim, though. The lower court had reasoned that the per diem payments were indeed “wages” and an employer is not permitted to assert counterclaims to recover wages from an employee in an FLSA case. But the court failed to account for the fact that the employee no longer had an FLSA case. If he wasn’t entitled to recover under the FLSA, there was no reason to bar the employer’s countersuit under this rationale.

“We recognize that some courts, including our own, have been hesitant to allow employers to assert state-law counterclaims against employees in FLSA cases,” the appeals court acknowledged. But here, the employee was exempt from overtime protection, and he was paid a set daily per diem that reflected his expected expenses for distant travel. The per diem payments didn’t change based on the hours he worked, and there was no concern that the employer used per diem payments to avoid paying overtime. Accordingly, the Eleventh Circuit held that, “if an employee who sues under the FLSA is not covered by (or is exempt under) the Act, there is no bar to the employer asserting a state-law counterclaim against the employee.”

In this case, the employer presented evidence that the employee improperly collected $147,230 in per diem payments by misleading the company for years about where he lived. Such evidence would have at least gotten the unjust enrichment claim before a jury. Consequently, after finding the employee was exempt, the lower court should have, at most, dismissed the unjust enrichment claim without prejudice. On remand, the lower court was instructed either to decline to exercise supplemental jurisdiction over the unjust enrichment counterclaim or to decide, in the first instance, whether the employer’s attempt to recover per diem payments was unequivocally a claim to recover wages—which would now be time-barred under Florida law. (Pioch v. Ibex Engineering Services, Inc., 4thCir, 166 LC ¶36,452.)

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