This morning the Sixth Circuit issued an interesting, yet concise, FLSA decision, which is no small feat. Orton v. Johnny’s Lunch Franchise, LLC, No. 10-2044 (6th Cir. 2-22-12). In this case, the plaintiff former-executive alleged in his complaint that his former employer and the company’s president (also deemed an employer under the FLSA) failed to pay him any salary or reimburse him for expenses in the last five months that he worked in 2008 because of cash-flow problems. The defendants moved to dismiss the complaint on the grounds that the president was not an employer and on the grounds that the plaintiff was exempt. Ultimately, the district court dismissed the complaint and refused the plaintiff leave to amend on the grounds that he was an exempt employee and cannot assert a claim for back wages under the FLSA. The court held that the employer’s failure to pay any salary to the plaintiff for five months was insufficient to convert him to a non-exempt employee (who was owed minimum wages and overtime). The Sixth Circuit reversed and remanded on the grounds that the district court improperly placed the burden of proving the exemption on the plaintiff and that the employer was required to prove under the 2004 FLSA regulations that its deductions from salary actually received were permissible under the salary-basis regulations. This obviously could not be done at the 12(b)(6) stage without an evidentiary record.
First, the Sixth Circuit noted that an employee’s exempt status is an affirmative defense that must be plead in the employer’s answer and proven by evidence. Although the court was critical of the district court for overlooking this significant issue, there may have been some confusion in that the plaintiff may have conceded that his position would be exempt in normal circumstances and did not challenge the court’s finding on appeal.
Second, the Court found the 2004 amendment to the FLSA regulations modified the law on whether a failure to pay any salary is actionable under the FLSA. The former regulation provided in relevant part that:
“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 . . . .” 29 C.F.R. § 541.118(a) (1973) (emphasis added).
However, the 2004 regulation changed this to:
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) (2004) (emphasis added).
The Sixth Circuit previously addressed the impact of the 2004 changes on the salary-basis test in Baden-Winterwood v. Lifetime Fitness, Inc., 566 F.3d 618, 627-28 (6th Cir. 2009). “The new regulation now “focus[es] on pay received,” rather than the terms of the employment agreement, but the regulation still requires that a defendant show that the plaintiff was paid: “(1) a predetermined amount, which (2) was not subject to reduction (3) based on quality or quantity of work performed.” The district court improperly relied on decisions applying the pre-2004 regulation, which had made the employee’s employment agreement the starting place for any analysis.
The new (2004) regulations, which all parties correctly agree are applicable in this case, establish that employment agreements are no longer the relevant starting point for whether an employee is paid on a salary basis. Baden-Winterwood, 566 F.3d at 627. The question is therefore not what Orton was owed under his employment agreement; rather, the question is what compensation Orton actually received.
In this case, the plaintiff alleged that he was not paid any salary or wage from August until he was laid off in December 2008. The complaint also mentioned that this was because the defendants had trouble making payroll. “Whether Orton’s allegations “suggest” one reason for the deduction in salary is irrelevant; his allegations do not preclude multiple reasons for the deduction, and it was the defendants’ burden—not the plaintiff’s—to establish that the reason for the deduction was proper.” In any event, this allegation does not meet the employer’s burden for proving that the alleged deduction was permissible under the FLSA.
For example, a company experiencing cash-flow issues cannot claim the exemption if the company prevents an otherwise salaried employee from coming in three days a week and then pays him less accordingly. Such a deduction in pay would undeniably be due to an absence occasioned by the employer, see 29 C.F.R. § 541.602(a), even though the employer decided to take the action due to cash flow problems. The regulation makes no exception for deductions in pay just because they were motivated by cash flow shortages. . . ..
That is not to say a company with cash flow issues is left with no recourse. Nothing in the FLSA prevents such an employer from renegotiating in good faith a new, lower salary with one of its otherwise salaried employees. The salary-basis test does not require that the predetermined amount stay constant during the course of the employment relationship. Of course, if the predetermined salary goes below a certain amount, the employer may be unable to satisfy the salary-level test, which explicitly addresses the amount an employee must be compensated to remain exempt.
The Court also found no legal significance in a complete reduction in pay rather than a partial reduction – as existed in pre-2004 case law because of a focus on the terms of the employment agreement. “ Therefore, to the extent these cases are at all instructive regarding the new regulations, they support the general principle that the reasons for the reductions in pay are dispositive, not the amount.”
NOTICE: This summary is designed merely to inform and alert you of recent legal developments. It does not constitute legal advice and does not apply to any particular situation because different facts could lead to different results. Information here can change or be amended without notice. Readers should not act upon this information without legal advice. If you have any questions about anything you have read, you should consult with or retain an employment attorney.
