Archuleta v. Wal-Mart Stores, Inc.

F I L E D
United States Court of Appeals
Tenth Circuit
PUBLISH
FEB 1 2005
UNITED STATES COURT OF APPEALS
PATRICK FISHER
Clerk
TENTH CIRCUIT

IN RE: WAL-MART STORES, INC.,
FAIR LABOR STANDARDS ACT
LITIGATION, MDL 1139,

------------------------

JERRY ARCHULETA; BILLY
PRESLEY; CINDY WACASTER;
MICHAEL FIORENZI, for and on
behalf of themselves and other
employees similarly situated,

Plaintiffs - Appellees,
v. Nos. 03-1432 and 03-1473
WAL-MART STORES, INC., a
Delaware corporation,

Defendant - Appellant.

JOEL D. YATES, II; JEFFREY
GOETZINGER; ROBERT BERRY;
WALTER LANE HENKHAUS, JR.,
for and on behalf of themselves and
other employees similarly situated,

Plaintiffs - Appellees,

v. No. 03-1434
 WAL-MART STORES, INC., a
Delaware corporation,

Defendant - Appellant.

CHRIS HENDERSON, individually
and as representative of all other
District and Regional Managers
similarly situated,

Defendant.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. NOS. 96-Z-91139 (CBS) , 95-Z-1705 (CBS) ,
95-Z-2050 (CBS), 97-Z-257 (CBS) )

Steven J. Merker of Dorsey & Whitney LLP, Denver, Colorado (Gregory S.
Tamkin of Dorsey & Whitney LLP, Denver, Colorado; Robert P. Davis and David
M. Gossett of Mayer, Brown, Rowe & Maw LLP, Washington, D.C., with him on
the briefs), for Defendant - Appellant.

Gerald L. Bader, Jr. of Bader & Associates, LLC, Aurora, Colorado (Renée B.
Taylor of Bader & Associates, LLC, Aurora, Colorado; Franklin D. Azar and Jon
Neil Barclay of Franklin D. Azar & Associates, Aurora, Colorado, with him on
the brief), for Plaintiffs - Appellees.

Before HARTZ , McKAY , and O’BRIEN , Circuit Judges.

HARTZ , Circuit Judge.

Under the Fair Labor Standards Act of 1938 (FLSA), 29 U.S.C. § 201

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et seq., an employer may not employ a person for more than 40 hours per

workweek unless the employee receives overtime compensation of at least one-

and-a-half times the regular hourly rate for hours exceeding 40. Id. at

§ 207(a)(2)(c). The FLSA creates an exemption to its overtime requirement,

however, for people “employed in a bona fide executive, administrative, or

professional capacity.” Id. at § 213(a)(1). A Department of Labor (DOL)

regulation states that an employee comes within the “professional” exemption

when the employee’s job functions satisfy a duties test and the employee is paid

on a salary basis. See 29 C.F.R. § 541.3 (2003). This consolidated appeal

addresses the second part of this two-part test: the salary-basis requirement.

The plaintiffs in the cases before us, who are full-time pharmacists

employed by Defendant Wal-Mart, contend that they were not paid on a salary

basis because of Wal-Mart’s alleged practice of prospectively reducing their

salaries when workloads decreased. The district court agreed and granted

summary judgment in the plaintiffs’ favor. We reverse and remand for further

proceedings. An employer’s practice of prospectively changing salaries does not

convert salaried employees to hourly employees entitled to overtime rates unless

the purported “salary” becomes a sham—the functional equivalent of hourly

wages. The plaintiffs have not established incontrovertibly that Wal-Mart

changed salaries so often that its full-time pharmacists essentially were paid an

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hourly wage.

I. BACKGROUND

When this litigation commenced, Wal-Mart employed over 6,000

pharmacists in some 2,000 pharmacies. Of these, nearly 4,000, including the

plaintiffs, were full-time employees. According to Wal-Mart’s Full-Time

Pharmacist Compensation Policy statement, “Each full-time pharmacist is paid by

salary.” Aplt. App. at 1358. Full-time pharmacists were assigned a certain

number of base hours, typically 90 hours for two weeks, and were paid a specified

minimum salary each pay period. They received certain benefits provided to

management, such as bonuses, insurance, and salary continuation if they became

unable to work. Also, they were paid for any time worked over base hours. Wal-

Mart calculated the hourly rate for such additional time by dividing a

pharmacist’s minimum salary by his or her base hours. Under the policy

statement the full-time employee “should always turn in the minimum of the base

salary hours,” unless the employee has taken a full day off without pay for

personal reasons. Id. In other words, the employee was to report having worked

the minimum base-salary hours even if the employee had not done so, except

when the employee had taken a full day off without pay.

Wal-Mart pharmacists filed two actions against Wal-Mart on July 7, 1995.

One group filed Presley v. Wal-Mart Stores, Inc., in the United States District

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Court for the District of Colorado, seeking relief for similarly situated

pharmacists nationwide. Others filed Fiorenzi v. Wal-Mart Stores, Inc., in state

court, seeking relief on behalf of similarly situated pharmacists in Colorado.

Wal-Mart removed Fiorenzi to federal court, where the two cases were

consolidated. (We shall refer to the consolidated case as Presley.) The district

court conditionally certified the case as an opt-in collective action under 29

U.S.C. § 216 (b). Later, some pharmacists who had not opted into Presley filed

Yates v. Wal-Mart Stores, Inc., in Colorado federal district court.

The plaintiffs do not contest that under Wal-Mart’s written compensation

policy, full-time pharmacists were to be paid on a salary basis. Instead, they

assert that Wal-Mart’s actual policy involved prospectively reducing full-time

pharmacists’ base hours with a commensurate reduction in salary in response to

sales declines, a policy that they contend is inconsistent with the DOL’s definition

of salary. They point to several affidavits by pharmacists who asserted that their

salaries (and base hours) were reduced in response to seasonal drops in business.

The district court granted the Presley plaintiffs’ motion for summary

judgment after determining that Wal-Mart “engaged in a practice or policy of

reducing base hours and base pay for the company’s own interest.” In re Wal-

Mart Stores, Inc., 58 F. Supp. 2d 1219, 1222 (D. Colo. 1999). The district court

then held that summary judgment should also be granted to the Yates plaintiffs

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based on collateral estoppel (issue preclusion). Wal-Mart appealed both

judgments, and Presley and Yates were consolidated for this appeal.

On appeal Wal-Mart contends that (1) summary judgment was improper in

Presley and (2) even if that summary judgment was proper, it should have had no

preclusive effect in Yates, so the Yates summary judgment was improper. In its

opening brief on appeal Wal-Mart also seeks summary judgment in its favor; but

at oral argument counsel clarified that what it seeks is dismissal of the Presley

plaintiffs’ complaint for failure to state a claim. Taking jurisdiction under 28

U.S.C. § 1291, we hold that the Presley complaint states a proper claim, but we

set aside the summary judgments in both Presley and Yates and remand for further

proceedings. Viewing the record in the light most favorable to Wal-Mart, we

cannot conclude that Wal-Mart altered the salaries of full-time pharmacists with

such frequency that the purported salary amounted to an hourly wage. We

therefore remand for further factual determinations.

II. DISCUSSION

A. Professional Exemption

The FLSA does not define professional; rather, it delegates to the DOL the

responsibility of “defin[ing] and delimit[ing]” the term through regulations. 29

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U.S.C. § 213(a)(1) 1; see Spradling v. City of Tulsa, 95 F.3d 1492, 1495 (10th Cir.

1996). Under the DOL regulation an employee must satisfy two requirements to

be an “employee employed in a bona fide professional capacity.” 29 C.F.R.

§ 541.3 (2003). 2 First, the employee must have certain duties. Id. It is

undisputed that the plaintiffs satisfied this requirement. Second, the employee

must be

compensated for services on a salary or fee basis at a rate of not less
than $170 per week . . . exclusive of board, lodging, or other
facilities: Provided, That this paragraph shall not apply in the case
of an employee who is the holder of a valid license or certificate
permitting the practice of law or medicine or any of their branches
and who is actually engaged in the practice thereof . . . .

29 C.F.R. § 541.3(e) (2003). The regulation makes clear that pharmacists are not

covered by the exception for employees who are the holders of licenses in the

medical field or its branches. See 29 C.F.R. § 541.314(c) (2003) (“In the case of

1
The relevant language of the statute provides:

(a) Minimum wage and maximum hour requirements
The provisions of section 206 [minimum wage] . . . and section 207 [maximum
hours] of this title shall not apply with respect to--
(1) any employee employed in a bona fide executive, administrative, or
professional capacity . . ., or in the capacity of outside salesman (as such terms are defined
and delimited from time to time by regulations of the Secretary, subject to the
[Administrative Procedures Act]) . . . .

29 U.S.C. § 213(a)(1).

The DOL has issued revised regulations defining professional effective August
2

23, 2004. We apply the regulations as they existed from 1993 to1998, the time period
in which the plaintiffs’ complaints arose.

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medical occupations, the exception [subsection (e)] from the salary or fee

requirement does not apply to pharmacists . . . .”). Thus, a pharmacist must be

paid on a salary basis under § 541.3(e) to meet the requirements of a

“professional” exempt from the FLSA’s maximum-hour and overtime

requirements.

The first part of the regulation’s definition of salary states:

An employee will be considered to be paid "on a salary basis"
within the meaning of the regulations if under his employment
agreement he regularly receives each pay period on a weekly, or
less frequent basis, a predetermined amount constituting all or
part of his compensation, which amount is not subject to
reduction because of variations in the quality or quantity of the
work performed. Subject to the exceptions provided below, the
employee must receive his full salary for any week in which he
performs any work without regard to the number of days or
hours worked. This policy is also subject to the general rule that
an employee need not be paid for any workweek in which he
performs no work.

29 C.F.R. § 541.118(a) (2003). The last sentence—which permits withholding

salary from an employee who misses an entire week of work—is the initial

indication that the regulation does not conform to the common understanding of

the term salary.

Further contrary to the common understanding, the regulation permits

payments in addition to salary, such as the amounts received by Wal-Mart

pharmacists for time worked beyond base hours. The regulation states:

Minimum guarantee plus extras. It should be noted that the

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 salary may consist of a predetermined amount constituting all or
part of the employee's compensation. In other words, additional
compensation besides the salary is not inconsistent with the
salary basis of payment.

29 C.F.R. § 541.118(b) (2003). See Aaron v. City of Wichita, 54 F.3d 652, 658

(10th Cir. 1995) (compensation for overtime hours is not inconsistent with the

salary basis of payment).

Moreover, the regulation permits deductions for voluntary days off:

(1) An employee will not be considered to be "on a salary
basis" if deductions from his predetermined compensation are
made for absences occasioned by the employer or by the
operating requirements of the business. Accordingly, if the
employee is ready, willing, and able to work, deductions may
not be made for time when work is not available.

(2) Deductions may be made, however, when the
employee absents himself from work for a day or more for
personal reasons, other than sickness or accident. Thus, if an
employee is absent for a day or longer to handle personal
affairs, his salaried status will not be affected if deductions are
made from his salary for such absences.

29 C.F.R. § 541.118(a)(1)-(2) (2003). Deductions are also permitted in certain

circumstances for absences due to sickness or disability, id. at § 541.118(a)(3)

(2003), or for safety-rule infractions, id. at § 541.188(a)(5) (2003). Whether an

improper deduction defeats the exemption from overtime regulations depends on

the circumstances:

The effect of making a deduction which is not permitted
under these interpretations will depend upon the facts in the
particular case. Where deductions are generally made when

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 there is no work available, it indicates that there was no
intention to pay the employee on a salary basis. In such a case
the exemption would not be applicable to him during the entire
period when such deductions were being made. On the other
hand, where a deduction not permitted by these interpretations is
inadvertent, or is made for reasons other than lack of work, the
exemption will not be considered to have been lost if the
employer reimburses the employee for such deductions and
promises to comply in the future.

29 C.F.R. § 541.118(a)(6) (2003).

Although we may well have defined salary rather differently than the DOL,

we must recognize that “the salary-basis test is a creature of the Secretary[] [of

Labor’s] own regulations,” and therefore “his interpretation of it is . . . [ordinarily]

controlling.’” Auer v. Robbins, 519 U.S. 452, 461 (1997).

B. Wal-Mart’s Payment Practice

According to the plaintiffs, Wal-Mart failed to pay them “salaries” as

defined by the regulation, because it sometimes prospectively reduced their pay in

proportion to reductions in their assigned base hours for reasons such as “business

volume decreases” or “seasonal decreases” in prescription sales. Aplee. Br. at 43-

44. For the factual predicate of this argument, the plaintiffs rely on affidavits

from several pharmacists. Pharmacy manager Ronald Moore asserted:

During the summer months pharmacy sales decreased. I
was called on a monthly basis by my District Manager Larry
Tally [sic] and given a set number of hours that were to be
cut . . . . It was my responsibility to then call each store and tell
the pharmacy manager to cut all pharmacist’s [sic] hours, full-
time included, by sending them home early or to cut an entire

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 full day out [of] the pharmacists’ schedules.

Id. at 1216. Similarly, the affidavit of pharmacist Theresa O’Neill states:

During the summer months pharmacy sales decreased. My
hours were cut unpredictably from 45 per week to as low as 36 per
week. Because the number of prescriptions filled was not high
enough to justify me working my 45 hours per week, my payroll had
to be reduced. The District Manager Hiram Mojica told the
pharmacy manager to cut hours. Not only were my hours
intentionally reduced, but so were the hours of the other full-time
pharmacists.

Id. at 1231. According to the affidavit of Karen Zielke: “While working at the

Orlando Florida store, Mr. Schneider reduced the number of hours pharmacists

worked from 10 hours to 8 hours per day. Mr. Schneider explained that this was to

reduce payroll since business is slow during summer months.” Id. at 1290. Other

supporting affidavits are from Donna Burcham (“The District Manager decided to

close our pharmacy one hour early on Saturday because business was slow.” Id. at

1117.); Bonnie Bess (“During the summers 1995 and 1996, the District Manager

Randy Miller requested the hours of the pharmacists be reduced. . . . My hours were

reduced, . . . my compensation also was reduced.” Id. at 1110.); Amy Balmer

(“[M]y District Manager Vic Edwards requested that I work less than my regularly

scheduled week.” Id. at 1089.); Billy King (“My hours were reduced from 45 per

week to 44.5 per week.” Id. at 1195.); Christopher Nevers (“District Manager

Randy Simms reduced my scheduled work week from 45 hours to 40 hours per

week. Mr. Simms explained that the pharmacists [sic] payroll was over budget.” Id.

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at 1223.); and Joan Winningham (“[M]y hours were reduced to 40 a week [from

45].” Id. at 1283.). The plaintiffs also refer to payroll documents for Scott

Kurzawa, Rogers Chase, and Robert Beitscher, which purportedly show base-hour

decreases for “seasonal decrease[s],” “business volume decrease[s], ” and “lack of

volume.” Id. at 746, 3306.

In addition, the plaintiffs point to the deposition testimony of several district

managers to illustrate Wal-Mart’s alleged practice of reducing full-time

pharmacists’ hours in response to sales declines. District manager Kurt Barry said:

“We would look at the number of prescriptions in the business and the sales of a

particular store and make decisions on each store individually. So in some cases

when business decreased, we would decrease the pharmacists’ base hours at the

particular store.” Id. at 2580. And district manager Mark Schneider testified that

he changed a pharmacist’s base hours due to a change in store hours. The plaintiffs

also produced a memorandum from district manager Norm Beck to all pharmacy

managers in Beck’s district, thanking them for “work[ing] as a team” and

“accomplish[ing] our goal” in cutting back pharmacist hours. Id. at 987. The

memorandum lists 15 stores with reduced hours.

Wal-Mart counters this evidence with affidavits from district managers

claiming that they reduced the hours of only hourly, nonexempt employees. Larry

Talley, pharmacist Moore’s district manager, stated, “Payroll hours subject to

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reduction during the summer months included only those employees paid on an

hourly basis such as relief pharmacists, part-time pharmacists, and hourly paid

associates.” Id. at 2201. Hiram Mojica, pharmacist O’Neill’s district manager, made

an identical statement. Id. at 2232. Randy Miller, pharmacist Bess’s district

manager, stated, “I never told, instructed, or required Bonnie Bess to report less

than her base salary hours in order to reduce payroll for summer budget concerns, or

any other reason.” Id. at 1925. Pharmacists Balmer’s and Nevers’s statements are

also contradicted by that of their district managers, Vic Edwards (“Contrary to

[Balmer’s] affidavit, I never told her to cut back her scheduled hours.” Id. at 1839.)

and Bill Therriault (“Contrary to Mr. Nevers’ affidavit, he was never scheduled to

work 90 in any pay period. The attached Full-Time Compensation Statement clearly

indicates his salary was based on a 40 hour schedule or 80 per pay period.” Id. at

2213.). Finally, Wal-Mart offers Norm Beck’s deposition testimony clarifying that

his memorandum to pharmacy managers was directed at reducing total weekly

pharmacist hours per store in his district and “involv[ed] eliminating some relief

pharmacists,” but “would not have involved changing pharmacists’ base.” Id. at

3873.14. In sum, Wal-Mart contends that only two or three of its 150 district

managers prospectively reduced work schedules and salaries of pharmacists under

their supervision and that only a few of its 4,000 pharmacists received such a

reduction.

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 C. Salary-Basis Test

The general rule set forth in § 541.118(a) is that

[a]n employee will be considered to be paid “on a salary basis” . . . if
under his employment agreement he regularly receives each pay period
on a weekly, or less frequent basis, a predetermined amount
constituting all or part of his compensation, which amount is not
subject to reduction because of variations in the quality or quantity of
the work performed.

The parties’ dispute centers on the meaning of the term predetermined amount. The

plaintiffs emphasize the requirement that the “predetermined amount” not be

“subject to reduction because of variations in the quality or quantity of the work

performed.” They also rely on the prohibition in §541.118(a)(1) against “deductions

from . . . predetermined compensation . . . for absences occasioned by . . . the

operating requirements of the business,” and the statement in that paragraph that “if

the employee is ready, willing, and able to work, deductions may not be made for

time when work is not available.” They conclude that Wal-Mart’s “practice” of

prospectively reducing pharmacists’ base hours with a corresponding reduction in

pay violates the salary-basis test because the “predetermined amount” varied in

accordance with the employer’s business needs or “the quantity of work performed”

even when the pharmacist was “ready, willing, and able to work.” Aplee. Br. 25-28.

We do not read the regulation so broadly. Under the text of § 541.118 and the

DOL’s interpretation of this regulation, an employer may prospectively reduce

salary to accommodate the employer’s business needs unless it is done with such

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frequency that the salary is the functional equivalent of an hourly wage.

1. Text of § 541.118

Although § 541.118 does not define “predetermined amount,” the natural

reading of the term is that it refers to the amount previously agreed on for the period

for which the salary is to be paid, not an amount that had been agreed on for some

earlier period. Nothing in the language of the regulation suggests a contrary

reading. Section 541.118 prohibits various deductions from the contractual salary,

but it contains no explicit requirement that the salary set (“determined”) for one pay

period be continued to the next. Paragraphs (2) and (3) of § 541.118(a) permit

deductions from the “predetermined amount” for full-day absences caused by the

employee; paragraph (4) prohibits deductions for employee absences due to jury

duty, being called as a witness, or temporary military leave; and paragraph (5)

permits deductions for violations of major safety rules. All these are deductions

during a pay period for which the salary has already been set. Likewise, the

provisions relied upon by the plaintiffs—requiring (1) that the predetermined

amount “not [be] subject to reduction because of variations in the quality or quantity

of the work performed,” 29 C.F.R. § 541.118(a), and (2) that deductions from the

predetermined compensation not be made “for absences occasioned . . . by the

operating requirements of the business,” id. at § 541.118(a)(1)—can readily be

understood as directed at adjustments that are made (1) with respect to a pay period

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for which salary had been set and (2) as a result of events during that pay period.

Thus, we would read the regulation as prohibiting only reductions in pay

made in response to certain events in a period for which the pay had been set, not

salary reductions to take effect in future pay periods. In any event, even if there is

an ambiguity, the ambiguity is resolved by the DOL’s opinion letters.

2. DOL Opinion Letters

The DOL’s Wage and Hour Division issues opinion letters “to explain the[]

requirements [of the FLSA and its regulations] and how they apply to particular

circumstances.” Wage & Hour Division, “Opinion Letters” at

http://www.dol.gov/esa/whd/opinion/opinion.htm (last visited Dec. 17, 2004).

Several are issued each year. See id. (displaying seven FLSA opinion letters for

2004, five for 2003, eleven for 2002, and nineteen for 2001). The DOL considers

these opinion letters to be “rulings,” 29 C.F.R. 790.17(d); and under the Portal to

Portal Act, “no employer shall be subject to any liability or punishment . . . under

the [FLSA] . . . if he pleads and proves that the act or omission complained of was

in good faith in conformity with and in reliance on any written administrative

regulation, order, ruling, approval, or interpretation of the [Administrator of the

DOL’s Wage and Hour Division] . . . .” 29 U.S.C. § 259(a) (emphasis added). See

Frank v. McQuigg, 950 F.2d 590, 598-99 (9th Cir. 1991) (Postal Service is protected

from liability for failure to pay overtime in conformity with FLSA requirements due

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to good-faith reliance on opinion letter issued by the Administrator approving

payment scheme).

Given their provenance and legal effect, these opinion letters are entitled to

great weight when they interpret the DOL’s own (ambiguous) regulations. See

Auer, 519 U.S. at 461 (“Because the salary-basis test is a creature of the Secretary’s

own regulations, his interpretation of it is . . . controlling unless ‘plainly erroneous

or inconsistent with the regulation.’” (quoting Robertson v. Methow Valley Citizens

Council, 490 U.S. 332, 359 (1989))). See also Barnhart v. Walton, 535 U.S. 212,

217 (2002) (“Courts grant an agency’s interpretation of its own regulations

considerable legal leeway” (citing Auer, 519 U.S. at 461) (emphasis added));

Humanoids Group v. Rogan, 375 F.3d 301, 306 (4th Cir. 2004) (“‘[A]gency

interpretations that lack the force of law (such as those embodied in opinion letters

and policy statements) do not warrant Chevron-style deference when they interpret

ambiguous statutes but do receive deference under Auer when interpreting

ambiguous regulations.’” (quoting Akzo Nobel Salt, Inc. v. Fed. Mine Safety &

Health Review Comm’n, 212 F.3d 1301, 1304 (D.C. Cir. 2000))). Cf. United States

v. Mead Corp., 533 U.S. 218, 226-27 (2001) (agency interpretations of statutes in

formats such as ruling letters are not due Chevron deference if not promulgated in

exercise of congressionally delegated authority to make rules carrying the force of

law). We see no reason to accord less deference to Wage & Hour opinion letters

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than the Supreme Court gave to the position of the DOL set forth in an amicus brief

to the Court, see Auer, 519 U.S. at 461, particularly when, as shown below, the

letters reflect a consistent view over an extended period of time, cf. id. at 462

(deferring to Secretary of Labor’s brief, noting that it was not a “post hoc

rationalization[] advanced by [the] agency . . . to defend past agency action” and

that there was “no reason to suspect that the interpretation [did] not reflect the

agency’s fair and considered judgment” (internal quotation marks omitted)).

The DOL has issued three opinion letters addressing employers who, when

facing economic slowdowns, inquired whether reducing the work schedule of their

salaried employees with a corresponding reduction in pay would render the

employees subject to the FLSA overtime provisions: U.S. Department of Labor,

Wage & Hour Opinion Letter dated February 23, 1998, 1998 WL 852696; U.S.

Department of Labor, Wage & Hour Opinion Letter dated March 4, 1997, 1997 WL

998010; U.S. Department of Labor, Wage & Hour Opinion Letter dated

November 13, 1970, 1970 WL 26462. These letters confirm our reading of the

salary-basis regulation: the requirement that exempt employees receive at least a

“predetermined amount” as salary does not preclude an employer from making

occasional prospective salary reductions before the affected pay period in response

to business needs.

The 1970 letter, signed by the Administrator of the Wage & Hour Division,

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responded to an employer in the aerospace industry that wished to reduce operating

costs by having 47 five-day workweeks per year and five four-day workweeks at the

end of the calendar year. 1970 WL 26462 at 1. During the four-day workweeks the

employer wished to make a proportionate reduction in salary for its exempt

employees. Id. When asked whether this would violate the salary-basis test and

render the employees nonexempt, hourly employees, the Administrator said, “A

reduction in salary resulting from a temporary reduction in the normal workweek

. . . is . . . permissible and will not defeat an otherwise valid exemption.” Id.

Although the Administrator clearly advised that such prospective salary reductions

are permissible, he also warned that “[r]ecurrent changes in an employee’s status

may lead to an across-the-board denial of the exemption.” Id. at 2.

The 1997 opinion letter, signed by a subordinate official of the Wage & Hour

Division, reiterated the DOL’s position in response to an employer in the mental-

health field that wished to reduce its workweek by eight hours per week with a

commensurate reduction in salary to accommodate the reduction in state spending

on its programs. 1997 WL 998010 at 1. The letter said:

As stated in the Administrator's opinion letter of
November 13, 1970 . . ., Section 541.118 does not preclude a
bona fide reduction in an employee’s salary which is not
designed to circumvent the salary basis requirement. A
reduction in salary resulting from a reduction in the workweek
under the circumstances you describe will not defeat an
otherwise valid . . . exemption.

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Id.

The next year the Acting Administrator of the Wage and Hour Division

responded to the inquiry of a large industrial manufacturer about a plan to take

effect when “persistent work shortages occur in a defined work-unit.” 1998 WL

852696 at 1. The employer wished to reduce the work hours for the employees in

the affected unit to 32 per week through the end of the fiscal year, with a

proportionate reduction in pay. Id. The opinion letter explained, “[W]e have

consistently taken the position that a bona fide reduction in an employee’s salary

does not preclude salary basis payment as long as the reduction is not designed to

circumvent the requirement that the employees be paid their full salary in any

week in which they perform work.” Id. at 2. According to the letter, “[A] fixed

reduction in salary effective during a period when a company operates a shortened

workweek due to economic conditions would be a bona fide reduction not

designed to circumvent the salary basis payment.” Id.

These opinion letters speak directly to Wal-Mart’s alleged practice of

reducing pharmacists’ salaries to suit its operational needs. Much like the

industrial employer facing work shortages, Wal-Mart could reduce its pharmacists’

work hours and salaries to decrease its operational costs in light of declining

prescription sales. So long as Wal-Mart’s practice was not too common, the

reduction in base hours would be a “bona fide reduction not designed to

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circumvent” the salary-basis requirement. Id.

In response, the plaintiffs urge that we must construe narrowly the

exemptions to the salary-basis test, placing on employers the burden of proving

they fall within the exemption. See Aaron v. City of Wichita, 54 F.3d 652, 657

(10th Cir. 1995). “But that is a rule governing judicial interpretation of statutes

and regulations, not a limitation on the Secretary’s power to resolve ambiguities in

his own regulations.” Auer, 519 U.S. at 462-63. “ A rule requiring the Secretary

to construe his own regulations narrowly would make little sense, since he is free

to write the regulations as broadly as he wishes, subject only to the limits imposed

by the statute.” Id. at 463. Accordingly, we need not take a jaundiced view of the

DOL’s own interpretation of “salary.”

The plaintiffs also insist that other DOL opinion letters support their

position that an employer may not reduce an exempt employee’s salary and hours

in response to work shortages. They cite U.S. Department of Labor, Wage & Hour

Opinion Letter dated May 27, 1999, 1999 WL 1002408; U.S. Department of Labor,

Wage & Hour Opinion Letter dated April 20, 1999, 1999 WL 1002390; U.S.

Department of Labor, Wage & Hour Opinion Letter dated July 3, 1997, 1997 WL

1039254; and U.S. Department of Labor; Wage & Hour Opinion Letter dated

November 20, 1995, 1995 WL 1032511. But the letters on which they rely concern

only deductions from an employee’s established salary within a pay period. These

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letters do not address the issue of prospectively reducing an employee’s salary.

The May 27, 1999, opinion letter considered whether debiting credit hours

from an employee’s “Paid Time Off” account for holidays would affect the

employee’s exempt status. 1999 WL 1002408 at 2. The letter said that debiting

credit hours from the account would be permissible, so long as no deductions to

the employee’s salary were made: “An employee will not be considered to be ‘on

a salary basis’ if deductions from his/her predetermined compensation are made

for absences occasioned by the employer (e.g. closed on certain holidays) or the

operating requirements of the business.” Id. The April 20, 1999, opinion letter

addressed an employer who paid his employees for holidays on which the

employer’s plant was closed only if the employee had been employed for three

months and worked on the workday preceding the holiday. 1999 WL 1002390 at

1. The letter explained that an employee is not considered to be paid “on salary

basis” if deductions are made from his “predetermined compensation for unworked

holidays.” Id. Likewise, the opinion letter dated July 3, 1997, determined that an

employer who requires an employee requesting a partial day off under the Family

and Medical Leave Act to take a full, personal day off without pay violates the

salary-basis test, because the requirement would constitute an absence occasioned

by the employer. 1997 WL 1039254. And the opinion letter on which the

plaintiffs most strongly rely concerns an employer who wished to require

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employees to use vacation days when a slowdown in work occurred. 1995 WL

1032511. The Administrator viewed this mandatory use of vacation time as “not

unlike a direct deduction from pay,” which was impermissible if imposed “to

accommodate the operating requirements of a business.” Id. at 2.

We are not persuaded that this authority applies to the case before us. In all

these opinion letters cited by the plaintiffs, the employee has a set salary from

which deductions are made (or may be made under the employer’s policy) as a

result of events that arise during the pay period. The DOL opinion letters as a

whole maintain a clear distinction between prohibited deductions from salary

(during a period when the worker is entitled to a particular salary) and authorized

decreases in salary (which take effect only prospectively).

3. Case Law

Finally, we note that the weight of judicial authority also supports our view.

Two district courts have reached similar conclusions that § 541.118 does not

prohibit prospective reductions in pay. In Caperci v. Rite Aid Corp., 43 F. Supp.

2d 83 (D. Mass. 1999), the court rejected the claim that the plaintiff pharmacists’

“exempt” status was lost because their salaries could be reduced in conjunction

with a reduction in the number of hours they were regularly scheduled to work.

Id. at 96-97. An employee’s schedule could be changed by an agreement between

the employee and employer, by a pharmacist’s relocation to a different store, or by

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a change in the operational needs of the pharmacy. Id. at 87. The court reasoned

that nothing in § 541.118(a) restricts employment agreements from being

“amended, terminated, or superceded.” Id. at 97. According to the court, an

employer’s exercise of its right to adjust salary for business purposes means only

that the employee receives a new predetermined amount, not that the employer

made an impermissible deduction from the previous predetermined amount. Id.

The court relied on the DOL’s 1970 opinion letter permitting prospective

reductions in salary for operational needs, finding it “directly on point.” Id.

In our own circuit, Judge Belot of the District Court of Kansas reached a

similar conclusion in Ackley v. Department of Corrections, 844 F. Supp. 680 (D.

Kan. 1994). The plaintiff argued that he was not compensated on a salary basis

because his salary was subject to reduction for less-than-satisfactory performance

evaluations. Id. at 686. The court disagreed, and held that § 541.118 does not

prohibit future reductions, because to construe the regulation otherwise would

“mean that no manager could ever have [the] employment contract renegotiated for

a lower salary regardless of . . . past performance.” Id. Under § 541.118, the

court stated, “an employee’s pay is not fixed, but is contingent in character.

Future pay adjustments do not implicate the regulation’s intent because the

employee knows before he or she performs the work what [the] pay will be.” Id.

We recognize that a third district court has come to the opposite conclusion.

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In Dingwall v. Friedman Fisher Assocs., 3 F. Supp. 2d 215, 220 (N.D.N.Y. 1998),

the employer reduced the workweek of its staff from five days to four, with a

corresponding one-fifth reduction in salary, for a period of six months. Id.

Although the employer argued that this reduction in salary was not a deduction,

but “merely a change in the ‘regular’ salaries to a new ‘predetermined’ amount,”

the court rejected this view. Id. The court held that “a reduction in work time that

is imposed by the employer may not be the basis for a reduction in salary.” Id.

The opinion is not persuasive. The court relied on the following language of

§ 541.118:

An employee will not be considered to be “on a salary basis” if
deductions from his predetermined compensation are made for
absences occasioned by the employer or by the operating
requirements of the business. Accordingly, if the employee is ready,
willing, and able to work, deductions may not be made for time when
work is not available.

Id. (quoting 29 C.F.R. § 541.118(a)(1)). But this language clearly refers only to

deductions during the current pay period, for which the salary has been fixed, not

reductions in future salary. Most importantly, and remarkably, the court made no

reference to the applicable opinion letters.

This is not to say, however, that exempt status cannot be defeated by a

pervasive manipulation of payments that makes a “sham” of what purports to be

salary. The Caperci court recognized the “likely existence of a sham exception,”

as when an employer “ha[s] a regular practice each Friday of informing its

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professional staff of the work schedule for the following week and of making

prospective adjustments in compensation to reflect any changes.” Caperci, 43 F.

Supp. 2d at 97 n.14. Such adjustments to salary —an employer’s attempt to obtain

the benefits of the FLSA exemption without accepting the burdens of a salary-

payment plan—can make the employee’s wage the functional equivalent of an

hourly wage.

An illustrative case is Thomas v. County of Fairfax, 758 F. Supp. 353 (E.D.

Va. 1991). A group of fire lieutenants claimed that they were nonexempt

employees under the FLSA and thus entitled to premium overtime for hours

worked in excess of the statutory standards. Id. at 355. Fairfax County paid the

lieutenants on a biweekly basis, determining the amount of each paycheck by

multiplying the lieutenant’s hourly wage by the number of hours he was in “pay

status” for the period. Id. at 356. Because of the shift rotation at the Fire

Department, a lieutenant could be in “pay status” for 96, 120, or 144 hours in a

pay period, resulting in a change in salary every pay period. Id. at 357. The court

reasoned that the payment policy violated the salary-basis test because the

lieutenants’ “pay [was] in fact reduced, on a cyclical basis, in direct correlation

with the number of ‘hours worked.’” Id. at 362. See also Bongat v. Fairview

Nursing Care Ctr., Inc., 341 F. Supp. 2d 181, 185 (E.D.N.Y. 2004) (where time

cards, payroll stubs, and check listings showed that plaintiffs’ weekly wages

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varied based on the number of hours worked, defendant violated salary-basis test).

III. APPLICATION TO THIS CASE

As a general rule, an employer may prospectively make adjustments in

salary with a like adjustment in scheduled hours to accommodate its business

needs. If, however, the salary changes are so frequent as to make the salary the

functional equivalent of an hourly wage, we will treat the “salary” as a sham and

deny the employer the FLSA exemption for professional employees.

The district court granted the Presley plaintiffs summary judgment on their

claim that they are not exempt. A motion for summary judgment requires

reviewing the evidence in the light most favorable to the nonmoving party. See

Simms. v. Okla. ex rel. Dep’t of Mental Health & Substance Abuse Servs., 165

F.3d 1321, 1326 (10th Cir. 1999). The movant is entitled to summary judgment

only if the evidence so viewed establishes that the movant is entitled to judgment

as a matter of law. Fed. R. Civ. Proc. § 56 (c); Simms, 165 F.3d at 1326.

The evidence before us does not satisfy that test. The record, especially

when viewed in the light most favorable to Wal-Mart, indicates that Wal-Mart

rarely reduced salaries of full-time pharmacists. Thus, we must reverse the district

court’s grant of summary judgment to the Presley plaintiffs.

As for Wal-Mart’s contention that we should remand for entry of judgment

in its favor, at oral argument it clarified that it is asserting that the Presley

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plaintiffs’ complaint failed to state a claim upon which relief can be granted. See

Fed. R. Civ. Proc. 12(b)(6). We disagree. “The court's function on a Rule

12(b)(6) motion is not to weigh potential evidence that the parties might present at

trial, but to assess whether the plaintiff’s complaint alone is legally sufficient to

state a claim for which relief may be granted.” Miller v. Glanz, 948 F.2d 1562,

1565 (10th Cir. 1991). The Presley plaintiffs’ complaint alleges: “The named

Plaintiffs were paid on an hourly basis throughout their employment with Wal-

Mart. . . . The named Plaintiffs, in all respects, were treated as and, in fact, were

hourly employees.” Aplt. App. at 199. This sufficiently pleads that Wal-Mart’s

payment scheme rendered them hourly employees. Wal-Mart’s motion to dismiss

was properly denied.

Because the summary judgment in Yates was predicated on the summary

judgment in Presley, we must also set aside the Yates judgment. We need not

address Wal-Mart’s arguments that the Presley judgment was not entitled to any

preclusive effect in Yates.

IV. CONCLUSION

We REVERSE the summary judgments in Presley and Yates and REMAND

to the district court for further proceedings.

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