Judgment for Employees Challenging Exemption Status Reversed

By Rosemarie Lally, J.D. September 16, 2020
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Dassault Falcon 8X

The 8th U.S. Circuit Court of Appeals found that an employer's payroll system arguably was consistent with regulations governing the Fair Labor Standards Act's (FLSA's) exemption of certain employees from overtime-compensation requirements. The court therefore reversed summary judgment for the employees.

A team leader and a production liaison sued their employer, Dassault Falcon Jet Corp., alleging that it had violated the FLSA and the Arkansas Minimum Wage Act (AMWA) by failing to pay them 1 1/2 times their regular rates for hours worked in excess of 40 per week since June 6, 2014. Sixteen other team leaders and production liaisons opted into the collective action.

The employer argued that team leaders and production liaisons—compensated at roughly $74,250 and $71,550 per year, respectively—were, as executive or administrative employees, exempt from FLSA and AMWA overtime-compensation requirements.

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The U.S. District Court for the Eastern District of Arkansas held that the exemptions did not apply because the employer failed to provide enough evidence that the plaintiffs were paid on a salary basis. The court awarded the plaintiffs $167,378 in liquidated damages.

On appeal, the 8th Circuit noted that "the FLSA exempts from its overtime requirements any employee engaged in a bona fide executive, administrative or professional capacity." Specific regulations govern each exemption, the court said, but "to establish any exemption, an employer must establish that the employee's primary duty is the performance of exempt work, that he is paid not less than the minimum salary level, and that he is paid on a salary basis."

Further, the regulations state an employee is paid on a salary basis "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."

The plaintiffs were paid biweekly. Their hourly rate was calculated by dividing each employee's predetermined annual salary by 2,080—40 hours per week multiplied by 52 weeks a year. If an employee recorded fewer than 40 hours in a workweek, the employer deducted available time from the employee's paid-leave bank. Unpaid leave taken under the Family and Medical Leave Act (FMLA) was deducted at the regular hourly rate.

Although Falcon Jet classified the employees as exempt salaried employees, it required them to clock in and out of work, and it also required them to track their projects on an hourly basis so the employer could determine project costs and pay the plaintiffs straight-time overtime compensation for hours worked over 40 in a one-week period.

"On its face, Falcon Jet's payroll construct was consistent with the above summarized rules interpreting the secretary's general definition of 'salary basis,' provided that, in actual practice, the predetermined biweekly salaries were not subject to reduction because of variations in the quality or quantity of the work performed," the appellate court said, adding that it was at least evidence that the plaintiffs were compensated on a salary basis.

The district court had ruled, however, that the plaintiffs were not paid on a salary basis as a matter of law. The court had relied on interrogatory responses from an HR representative that the "plaintiffs were paid for the hours posted on their time cards" or the "plaintiffs were paid a salary using an hourly rate multiplied by hours." In a deposition, the employer's HR generalist accurately described the company's hourly based payroll record system but added that he assumed a liaison or team leader who recorded fewer than 80 hours in a biweekly pay period and had no vacation or sick leave banked may not be paid the predetermined amount. The district court had said that this system described wages paid on an hourly basis.

"The district court's observation reflects a misunderstanding of the governing FLSA standards," the appellate court stated. Noting that Falcon Jet had told the plaintiffs that they would be paid an annual salary at a specific, predetermined amount on a biweekly basis, the court said the FLSA "requires no other contractual bells and whistles."

"Rather, the salary-basis requirement is substantive—the predetermined amount must not be subject to reduction based on the quality or quantity of the work performed," the court said. "If Falcon Jet complied with those fact-intensive interpretive rules, the plaintiffs were exempt employees, no matter how much Falcon Jet's method of compensation resembled payroll procedures for the typical hourly wage earner."

The HR generalist's testimony did not establish as a matter of law that Falcon Jet failed to pay any plaintiff a guaranteed salary in a predetermined amount that was not subject to impermissible reductions, the appeals court said. "Proof of that requires affirmative evidence of noncompliance, not the assumptions of a human resource generalist explaining, in general terms, an hourly based payroll system," the court stated. His admission could be overcome by detailed evidence and did not serve as a basis to grant summary judgment for the plaintiffs, the court said.

The court also found that the plaintiffs' claims that seven plaintiffs had not received pay equal to the predetermined biweekly rate did not establish that they were not exempt employees. First, the record did not conclusively establish that Falcon Jet made any impermissible salary reductions; some hourly shortfalls were based on unpaid FMLA leave or full-day leaves of absence, while others resulted from a weeklong shutdown during which two employees allegedly did no work and had no sick or vacation leave available. These disputed factual issues cannot be resolved on the limited record presented, according to the court.

Further, even if impermissible deductions were made, the employer did not lose any exemption unless the facts demonstrate that the employer did not intend to pay employees on a salary basis. The plaintiffs have the burden of proof on this issue, the court said.

Finally, even if the plaintiffs establish an actual practice of making improper deductions, the exemption is lost only during the period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. Again, the limited summary judgment record fails to establish this, the court said.

Concluding that the district court erred in granting summary judgment to the plaintiffs on this limited record, the appellate court sent the case back to the district court for further proceedings.

Coates v. Dassault Falcon Jet Corp., 8th Cir., No. 19-2167 (June 10, 2020), petition for en banc rehearing denied (July 30, 2020).

Professional Pointer: Employers relying on the FLSA's exemption from overtime-compensation requirements for executive, administrative and professional employees should be careful not to run afoul of the salary-basis requirement. They should ensure their exempt employees are paid according to a pay plan under which they are, in fact, guaranteed to receive no less than 1/26th of their annual salary each biweekly pay period, except for deductions otherwise expressly permitted. Improper deductions from salary will result in loss of the exemption if the facts demonstrate the employer did not intend to pay employees on a salary basis.

Rosemarie Lally, J.D., is a freelance legal writer based in Washington, D.C.

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