Opinion ID: 2960213
Heading Depth: 2
Heading Rank: 1

Heading: Pay adjustments within a pay period

Text: Havey disputes Homebound’s assertion that pay levels were adjusted only at the end of each quarter on a prospective basis. According to Havey, Homebound reduced pay in the middle of the quarter for underwriters whose work had an excessive number of errors or who failed to meet their productivity targets. As we stated above, once the fixed minimum portion of an employee’s compensation has been determined, any reduction below that set amount would, in most circumstances, violate the “salary-basis test.” See 29 C.F.R. § 541.118(a), see page 4 ante (text of provision); see also Martin, 949 F.2d at 615 (“[I]t is clear that, under the strict definition contained in § 541.118(a) these employees [whose pay was docked for part-day absences] may not be considered salaried.”). Because Homeland determined salary levels on a quarterly basis, an actual practice or a clear and particularized policy that permitted intra-quarterly reductions below the predetermined amount on the basis of quantity or quality of work performed would render plaintiff a non-salaried employee. Havey has failed to present any evidence of actual intra-quarterly deductions. Before the Magistrate Judge, she presented evidence of pay adjustments for three unnamed underwriters in January 2004 and for her former co-plaintiff in July 2003. However, each of these reductions was a prospective quarterly pay adjustment.7 Lacking examples of actual mid-quarter reductions, Havey was required to show that 7 To support her contention, Havey submitted certain of Homebound’s payroll and financial records, but the records concerning two of the unnamed employees indicate that the reductions occurred at the first pay period after the end of quarter, consistent with the conclusion that these reductions were prospective. The records also show that the third employee experienced a similar reduction reflected in the first pay period after the end of the quarter. The same employee then saw an intra-quarter increase associated with a bonus received after the start of the quarter. Havey’s former co-plaintiff testified that the July 2003 salary reduction was based on her desire to have a reduced schedule in the summer months. The reduction occurred as part of an agreement at the end of a quarter concerning her prospective salary for the next quarter. Accordingly, there is no evidence of an intra-quarterly pay reduction. 9 Homebound had a “clear and particularized policy” of such reductions. Auer, 519 U.S. at 461. Havey has argued that such a policy exists with respect to reductions in pay due to quality errors. The job description sheet indicated that an underwriters’ pay could be reduced “to the next level down” if there was evidence of quality defects exceeding five per 100 folders, but did not discuss when this reduction will occur. Havey contends that this reduction could occur mid-quarter, while Homebound argues that this is impossible because a mechanism was never developed to implement this policy. The Magistrate Judge did not decide this disputed fact, because as he rightly noted, “Even assuming the policy was in place, however, any reductions were prospective, and were to efficiency pay only, never to the base salary of $48,000 per year.” Havey, 2005 WL 1719061, at . No matter how many quality errors were committed, Havey has failed to show that under Homebound’s policy, her pay could be reduced below her predetermined guaranteed salary of $48,000. Given the nature of her duties, the fact that her overall compensation for that quarter could be decreased due to quality errors does not render Havey a non-salaried employee if, under the employer’s policy, the adjustments do not affect a “predetermined amount” portion of salary exceeding the regulatory threshold rate and only impacts the size of the increase above this amount. See 29 C.F.R. § 541.118(a) (noting that any employee who “regularly receives each pay period . . . 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” is considered an employee paid “on a salary basis”). B. Homebound’s two-part salary scheme involving a “minimum guarantee plus extras” Havey next claims that Homebound’s salary scheme, which adjusts salaries each quarter on a prospective basis, is akin to the example of a non-salary system provided in 29 C.F.R. § 541.118(b). That is, she argues that although an underwriter is guaranteed a minimum compensation of $48,000 per year, any quarterly downward adjustment of a “base level” salary above $48,000 per year based on the quantity or quality of loans is still a “reduction because of variations in the quality or quantity 10 of the work performed” prohibited by 29 C.F.R. § 541.118(a). In support of her claim, Havey cites to the example of a non-salary scheme given in 29 C.F.R. § 541.118(b) which states: “The test of payment on a salary basis will not be met . . . if the salary is divided into two parts for the purpose of circumventing the requirement of payment ‘on a salary basis.’ For example, a salary of $200 in each week in which any work is performed, and an additional $50 which is made subject to deductions which are not permitted [under 29 C.F.R. § 541.118(a)].” A two-part salary scheme in which employees receive a “predetermined amount,” plus, on a quarterly prospective basis, an additional portion subject to deductions for quality errors does not violate the “salary-basis test” unless the system is designed to circumvent the requirements of the FLSA. See 29 C.F.R. § 541.118(b). There is an important difference between the example of a nonsalary scheme provided in 29 C.F.R. § 541.118(b) and Homebound’s salary scheme. Pursuant to 29 C.F.R. § 541.2(e)(2), an individual who earns more than $250 per week and is engaged primarily in work directly related to management policies or general business operations “requiring the exercise of discretion and independent judgment” qualifies as one who is employed in a “bona fide administrative capacity” and this is not subject to the overtime provisions of the FLSA. In the example given by the regulation quoted above of a non-qualifying divided salary, the predetermined amount of salary guaranteed to an employee is only $200 and therefore fails to conform to the specification of a “rate of not less than $250 per week.” The example given illustrates an effort to “circumvent[] the requirement[s]” by allowing deduction from a salary of $250 per week, which would drop the salary below the minimum threshold for the test. By contrast, Homebound’s twopart salary scheme guarantees the underwriter a predetermined amount well in excess of the regulatory threshold. The defendant’s two-part salary scheme was not designed for the purpose of circumventing the requirements of the FLSA. Rather, it was designed to give underwriters an incentive to take on larger quantities of work, while maintaining standards of care so that they were not receiving additional pay for shoddy work that needed to be done over. Havey further argues that once an employer and employee enter into an employment 11 agreement that sets a “base level” salary, there can be no reduction below that base level. Such a rigid rule finds no support in the text of the FLSA or its regulations.8 Havey’s argument might have validity if the salary scheme failed to provide an inviolable and sufficient minimum predetermined amount. Homebound, however, guaranteed to Havey a predetermined minimum of $48,000, which taken together with her administrative duties, satisfies the tests. The ability of an employer, acting unilaterally or as part of a voluntary agreement with its employee, to modify an employment agreement is not without limits. Where the practice of prospectively changing salaries occurs so as to render the salary a “sham—the functional equivalent of hourly wages,” id. at 1179, it would offend the “salary-basis test.” See 29 C.F.R. § 541.118(b). Homebound’s quarterly prospective adjustment of a “base level,” always matching or exceeding a predetermined amount of $48,000, could not be considered a sham.9 Under its tiered compensation system, Homebound and an individual underwriter prospectively set a “base level” salary each quarter, always matching or exceeding a predetermined $48,000, and potentially reaching a higher level based on the underwriter’s agreement to process an elevated volume of loans during a given quarter while maintaining a certain quality level. An underwriter would receive the predetermined portion of her pay (equivalent to $48,000 per year) for 8 In a similar context, the Tenth Circuit found that quarterly, prospective adjustments based on the reduction in workload associated with the business needs of the employer did not violate the “salary-basis test.” The Tenth Circuit reasoned that: Although [29 C.F.R.] § 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. In re Wal-Mart Stores, Inc., 395 F.3d 1177, 1184 (10th Cir. 2005). 9 While we do not have the benefit of the views of the Department of Labor in this particular case, our holding is consistent with the position of the Department in certain of its opinion letters submitted in similar cases. See Wal-Mart Stores, Inc., 395 F.3d at 1185-86 (collecting and analyzing DOL opinion letters). In one of these letters, the Department explained that it has “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.” U.S. Department of Labor, Wage & Hour Div., Opinion Letter dated February 23, 1998, 1998 WL 852696. 12 the following quarter whether or not she met the productivity or quality targets. Any changes to the “base level” for the subsequent quarter would then be agreed upon by the employer and the underwriter. (Indeed, there is evidence that some of these changes were prompted by the underwriters themselves when they wanted to work less.) The “base level,” and the employee’s pay, however was never below the predetermined $48,000 rate. Accordingly, we conclude, given an underwriter’s duties, that Homebound’s practice of quarterly, prospective adjustments to an underwriter’s “base level,” based in part on the projected amount of work undertaken for the quarter but never falling below $48,000, does not give the underwriter an entitlement to overtime pay.