Paying On a "Salary Basis" Requires Actual Payments
As we have discussed before, to be considered an exempt executive, administrative, or professional employee, most employees must be paid on a "salary basis," meaning that they receive a fixed salary for each workweek regardless of the number of hours worked or the quality or quantity of work performed. In a ruling that at first blush seems fairly obvious, the Sixth Circuit Court of Appeals ruled earlier this year that actually paying an employee's salary is a necessary condition to meeting this standard. Orton v. Johnny's Lunch Franchies, LLC.
According to court papers, John Orton went to work for Johnny's Lunch Franchise ("JLF") in September 2007 as the company's Vice President of Real Estate and Site Selection with a base salary of $125,000. In August 2008, JLF encountered financial trouble and, according to Orton, ceased paying him any wages. Orton continued working until he and the entire executive staff were formally laid off on December 1, 2008. Orton filed suit in federal court, claiming that JLF and Anthony Calamunci, one of the company's owners, violated both state law and the FLSA by failing to pay him for his work from August through December 1, 2008.
The district court dismissed Orton's complaint, finding that he was not entitled to sue under the FLSA because he admitted that he was an exempt employee and failed to allege that JLF had taken any improper deductions due to variations in the quality or quantity of work performed. Having dismissed Orton's federal claims, the court declined to exercise jurisdiction over Orton's claims under state law. Orton appealed to the Sixth Circuit Court of Appeals.
Reversing the district court's judgment, the Sixth Circuit observed that the district court incorrectly relied upon language from the pre-2004 version of the regulations defining the salary basis test, which provided that an employee is considered to be paid on a salary basis "if under his employment agreement he regularly receives pay each pay period." 29 C.F.R. § 541.118(a)(1973). In 2004, the Department of Labor revised the pertinent regulation to read as follows:
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). Thus, under the new rule, the focus was changed from the terms of the employee's agreement with the employer to the salary actually received by the employee. The court of appeals also noted that the district court erred by failing to acknowledge that exempt status is an affirmative defense under the FLSA, which JLF had the burden of proving. The allegations of Orton's complaint were not sufficient to clearly establish as a matter of law that Orton was an exempt employee. Accordingly, the district court erred by dismissing his complaint.
Insights for Employers
- It seems like this should go without saying, but if you are going to claim that you pay an employee on a salary basis, you must first actually pay the employee. As this case illustrates, this was less clear under the pre-2004 regulation, but at least in the 6th Circuit and very likely elsewhere the fact that you promised to pay but never did so is not sufficient.
- Leaving the Fair Labor Standards Act issues aside, many states have wage payment laws that require employers to regularly pay earned compensation, even for exempt employees. Many of these statutes carry significant penalties. Even if your employees are willing to work without compensation for a period of time, this may not be allowed by your state's laws.
- Additionally, both the FLSA and many state laws allow employees to sue not just the company, but individual owners and managers for failure to pay compensation required by law. In some cases there are even criminal penalties for not paying employees. Individual owners and managers need to be aware that they may be on the hook for unpaid wages if the company fails to pay.