When Plaintiff John Orton’s employer stopped paying his annual base salary, he brought suit under the Fair Labor Standards Act seeking unpaid wages and expenses. Dismissing Mr. Orton’s claims under the FLSA, the district court found that the employer’s failure to pay him did not convert his position from salary based to hourly, stressing that “administrative employees are exempt from coverage within the meaning of the FLSA based on the salary that they were owed under their employment agreements and not based on the compensation that they actually received.”
Under Section 213(a)(1) of the FLSA, an employee is exempt if they are employed in a “bona fide executive, administrative, or professional capacity,” as defined by the Secretary of Labor. For each of these three functions, the Secretary of Labor has promulgated rules regarding when an employee qualifies as exempt. For each rule, the defendant must satisfy three “tests” to qualify: (1) a duties test; (2) a salary-level test; and (3) a salary-based test. This appeal focuses exclusively on the salary-based test outlined at 29 C.F.R. § 541.602.
The Sixth Circuit reversed and remanded the matter, finding the lower court had applied an outdated rule of law. Instead, the Sixth Circuit clarified that the 2004 amendment to the regulations governing the salary-based test changed the test to “focus on pay received,” rather than the terms of the employment agreement. The Sixth Circuit clarified that the question was not what the employee was owed under the employment agreement; rather, it was what compensation the employee had actually received.
Likewise, the Sixth Circuit noted that an improper deduction alone will not necessarily render an employee non-exempt; rather, “[a]n employer who makes improper deductions from salary shall lose the exemption if the facts demonstrate that the employer did not intend to pay employees on a salary basis.” 29 C.F.R. § 541.603(a) (2004). Intention is demonstrated by an actual practice of making improper deductions; however, isolated or inadvertent deductions will not result in loss of the exemption, if the employer reimburses the employee for such improper deductions.
In addition, the Sixth Circuit found that the district court had neglected to place the burden of establishing the exemption on the defendants, who were required to show that the employee: (1) received a predetermined amount under 29 C.F.R. 541.602(a); or if not, (2) that the failure to pay the employee the predetermined amount was either proper under Section 541.602(a) or under one of the delineated exemption in subsection (b). Based on these errors, the court reversed the dismissal of Mr. Orton’s FLSA claim and remanded the case for further proceedings.