Some Good News for Public Employers from
the Supreme Court
by Erin Frazier Rice
The Fair Labor Standards Act’s (FLSA) "white collar" exemption provides that "bona fide executive, administrative or professional employees" are exempt from the Act’s overtime requirements. 29 U.S.C. § 213(a)(1). In recent years, technical and even theoretical violations of regulations interpreting the white collar exemption have resulted in a potential minefield of liability for employers and a goldmine for plaintiffs’ attorneys. Under the disciplinary prong of the Department of Labor’s "salary basis" test, in order to retain their overtime exempt status, salaried employees must not be "subject to" reductions in pay due to variations in the "quality or quantity of the work performed." 29 C.F.R. § 541.118(a). An employer policy which fails to satisfy the salary basis test converts the entire classification of employees "subject to" the policy from exempt to non-exempt status, thereby exposing the employer to potential liability for unpaid overtime wages for all overtime hours worked by all of the employees in that class for the preceding two years-three if the violation is found to be willful. The employer could also be held liable for double damages and attorneys’ fees.
Employers whose policies provide for disciplinary suspensions without pay or other disciplinary pay docking measures have often found out the hard way that here in the Ninth Circuit, courts are all too willing to find that plaintiff-employees were "subject to" disciplinary pay deductions, even if the employee(s) bringing the suit never had their pay reduced. As the Court baldly stated in Abshire v. County of Kern, 908 F.2d 483 (9th Cir. 1990), the proper inquiry is not whether deductions were actually made, but whether an employee’s pay was theoretically "subject to" such a deduction! The Abshire Court’s short-sighted holding was followed by such cases as Hurley v. State of Oregon, 27 F.3d 392 (9th Cir. 1994) where the Court concluded that the mere potential for otherwise exempt Oregon State Police officers to be suspended without pay or temporarily demoted (with a corresponding reduction in pay) for violating departmental rules was sufficient to destroy the exemption for every salaried officer "subject to" their Disciplinary Procedures Manual.
The good news for public employers came in the form of Auer v. Robbins, 117 S. Ct. 1905 (1997), decided in the just completed 1996-1997 United States Supreme Court term. In Auer v. Robbins, the Supreme Court rejected the "theoretical" approach to disciplinary deductions. The Auer petitioners, St. Louis police sergeants and a lieutenant, sued police commissioners for overtime contending that they did not meet the salary basis test because under the terms of the St. Louis Police Department Manual, their compensation could be theoretically reduced (though this was not the department’s general practice) for a variety of disciplinary practices. The Police Manual listed a total of 58 possible rule violations and specified a range of penalties associated with each.
The Supreme Court first clarified that the "no disciplinary deductions" element of the salary basis rule does apply to public sector employees (many defendant employers had argued that was not clear under prior case law). The Court next held that the mere possibility that an employee’s pay may be docked does not render a salaried employee non- FLSA exempt, if no practice of making deductions exists. The Court’s holding adopted the reasoning urged by the Department of Labor that employees fell outside the exemption only if there is an actual practice of making disciplinary deductions or if there is an employment policy that creates a "significant likelihood" of such deductions. The Court rejected the sergeants’ argument that FLSAexemptions are to be strictly construed against the employer. Finally, for the single sergeant whose pay had actually been reduced in lieu of termination for violating a residency requirement, the Court held that his exempt status could be preserved by reimbursing him the amount that was deducted under the corrective provisions of 29 C.F.R. § 541.118 (a)(6).
While so-called theoretical deductions no longer threaten your salaried employees’ FLSA exempt status, the safest course for public employers remains to forgo suspending without pay or otherwise docking your FLSA exempt employees’ pay for disciplinary reasons. Specifically state this is your policy in your personnel manual. Ensure that you retain a range of flexible disciplinary options which do not include short-term suspensions without pay, such as verbal and written warnings, permanent demotions, remedial training and termination. Another option is to only impose unpaid suspensions in weekly blocks coinciding with the employee’s designated work week. Under 29 CFR § 541.118, a suspension for a week or more will not destroy the overtime exemption because there is no requirement under the FLSA that a salaried employee be paid when he or she has performed no work during the work week.
Erin Frazier Rice’s practice with the Law Offices of Eileen M. Lawrence is focused on providing advice to employers and defending employment-related claims at the administrative, trial and appellate level
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