An exempt employee must actually be paid in order to retain that exempt status, the 6th U.S. Circuit Court of Appeals recently held.
The case, Orton v. Johnny’s Lunch Franchise, involved a salaried employee who sued his employer for wages and overtime when, after beginning to experience cash flow problems, the employer stopped paying his annual salary. The company argued that as an exempt employee, Orton was not covered by the Fair Labor Standards Act (FLSA) and therefore was ineligible for hourly pay as a non-exempt “administrative” employee. The appeals court, however, disagreed.
To qualify for the FLSA’s “administrative” exemption, three tests must be satisfied: the duties test (that is, the duties must be sufficient for the administrative exemption); the salary level test (payment must be at least $455/week) and the salary basis test (payment must be “on a salary basis”). Orton argued that the company’s failure to pay a salary converted his position to non-exempt. The 6th Circuit agreed.
In reaching its conclusion, the 6th Circuit focused on an FLSA regulation issued in 2004 that clarified two parts of the analysis used to determine whether an employee qualifies as “exempt” and whether a deduction is proper. First, it focuses the exemption decision onto the payment the employee actually received (rather than the employment agreement terms). Second, it explains the effect of an improper deduction on an employee’s “exempt” status.
Before the 2004 regulation, employers could cite the employment agreement terms to avoid liability for things like overtime. However, the 2004 regulation recognized that employment agreements should not shield employers from liability and permit them to ignore the agreement. Without FLSA protection, the employment agreement would be meaningless for the employee, particularly in a case like Orton, where Orton was not even receiving payment.
Additionally, the regulation states that an improper deduction alone does not necessarily render an employee non-exempt. Improper deductions that are either isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions, so long as the employer reimburses the employees for those deductions. In Orton’s case, however, several months of deducted salary and failure to pay him for the hours worked rendered his employer liable.
The bottom line for employers: Even if an employee is a highly paid executive (and normally considered FLSA-exempt), an employer cannot use that exempt status to avoid paying that employee for work performed. Even Orton, who earned a $125,000 salary under the terms of his employment agreement, was converted to a non-exempt employee once he stopped receiving his agreed-upon salary.