Opinion
No. 95-5276.
Argued January 22, 1996.
Filed May 16, 1996.
Steven P. Weissman (argued) Weissman Mintz One Executive Drive Suite 200 Somerset, New Jersey 08873 COUNSEL FOR APPELLANTS.
Steven Sutkin (argued) Office of New Jersey Attorney General Division of Law/Transportation Richard J. Hughes Justice Complex Trenton, New Jersey 08608 COUNSEL FOR APPELLEE.
On Appeal from the United States District Court for the District of New Jersey, D.C. No. 93-cv-02209.
BEFORE: STAPLETON, COWEN and GARTH, Circuit Judges.
Plaintiff-appellants, thirty-six project engineers and one supervising engineer, filed this lawsuit against the New Jersey Department of Transportation ("DOT"), in the United States District Court for the District of New Jersey, seeking overtime compensation under the Fair Labor Standards Act of 1938, ("FLSA"), 29 U.S.C. §(s) 201 et seq. They claim that, in light of the DOT's disciplinary policy, they fail to satisfy the "salary test" promulgated by the Department of Labor. The "salary test" determines, in part, whether an employee qualifies for the professional exemption under the FLSA. Granting the DOT's motion for summary judgment, the district court invalidated the "salary test" as applied to the public employees, holding that it was not rationally related to the objectives of the FLSA. As an alternative holding, the district court found that the engineers satisfied the "salary test" because the DOT had never actually deducted pay under its disciplinary policy. Because we find that the salary test is valid as amended and that the engineers fail to satisfy it, however, we will affirm in part, reverse in part, and remand the case with instructions to enter summary judgment in favor of the appellant engineers.
I.
The following facts pertaining to the terms of employment of the engineers are not disputed. The DOT does not pay its engineers time and a half overtime rates. Rather, DOT engineers are compensated for all work performed in excess of 40 hour weeks in accordance with state regulations codified in Title 4A, Chapter 3, Subchapter 5 of the New Jersey Administrative Code, N.J.A.C. 4A:3-5.1 et seq. Under these regulations, DOT engineers are paid either a "special project rate" used for projects approved by the Department of Personnel; compensatory time paid on an hourly basis; or emergency rates in emergency situations.
DOT engineers may be disciplined, similar to other DOT employees, according to the DOT's disciplinary policy entitled the "Supervisory Guidelines for Discipline." The disciplinary policy allows for suspension without pay for such infractions as tardiness, insubordination or neglect of duty. No engineer has ever suffered a reduction in pay under the disciplinary policy. DOT engineers may also be docked pay for taking time off work in increments of less than a day if they have exhausted all paid leave time and compensatory time.
II.
The principles governing our review are well established. We exercise plenary review over the district court's grant of summary judgment. Rosen v. Bezner, 996 F.2d 1527, 1530 (3d Cir. 1993). The district court had jurisdiction pursuant to 28 U.S.C. §(s) 1331, and we have appellate jurisdiction under 28 U.S.C. §(s) 1291.
III. A.
The Fair Labor Standards Act forbids an employer from retaining any employee "for a workweek longer than forty hours unless such employee receives compensation . . . at a rate not less than one and one-half times [his or her] regular rate." 29 U.S.C. Section(s) 207(a)(1). The FLSA exempts bona fide executive, administrative and professional employees. Id. at Section(s) 213(a)(1). Employers who claim that this exemption applies to their employees have the burden of proof, Corning Glass Works v. Brennan, 417 U.S. 188, 197 n. 12, 94 S.Ct. 2223, 2229 n. 12 (1974), and must show that the employees fit "plainly and unmistakably within [the exemption's] terms and spirit." Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S.Ct. 453, 456 (1960).
The Act does not define the term "executive, administrative, and professional employees," but instead instructs the Department of Labor ("DOL") to define it "from time to time by regulations." 29 U.S.C. §(s) 213(a)(1). The DOL has done this in a pair of regulations, known as the "duties test," 29 C.F.R. Section(s) 541.1(f), and the "salary test." Id. at Section(s) 541.118. The parties agree that the engineers satisfy the "duties test." The question we must address on this appeal is whether the "salary test" is valid and, if it is, has it been met in this case.
The test for whether an employee is paid on "a salary basis" is set out at 29 C.F.R. Section(s) 541.118(a):
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.
The DOL has established certain exceptions under which an employer may dock an employee's pay and still retain the professional exemption. Deductions from salary are permissible for absences greater than a day when the employee is absent for personal reasons, id. Section(s) 541.118(a)(2), or absent for sickness or disability when the employee has no more leave time, id. Section(s) 541.118(a)(3). Penalties may also be imposed "in good faith for infractions of safety rules of major significance" without affecting an employee's salaried status. Id. Section(s) 541.118(a)(5). Finally, an employer may dock an employee's pay without losing the exemption if done inadvertently and the employee is reimbursed. This exception, known as the "window of correction," allows the employer who makes an impermissible but inadvertent deduction to the compensation of an otherwise salaried employee to correct the error. Id. 541.118(a)(6).
In 1985 the Supreme Court announced that the overtime provisions of the FLSA were applicable to state and local government employees. Garcia v. San Antonio Metro. Transit Auth., 469 U.S. 528, 105 S.Ct. 1005 (1985). However, the 1954 salary test conflicted with state and local public accountability regulations which prohibit public employees from being paid for time not actually worked. See generally Service Employees Int'l Union, Local 102 v. County of San Diego, 35 F.3d 483 (9th Cir. 1994), op. amended and supplemented by 60 F.3d 1346 (9th Cir. 1995), cert. denied, 116 S.Ct. 774 (1996) (discussing history of the salary test). Recognizing this tension, on September 6, 1991, the DOL passed an interim final regulation amending the salary test as applied to public sector employees "paid according to a pay system that requires the use of paid leave and, absent the use of paid leave, reduces the employee's pay for absences of less than one work-day." Exemption from Minimum Wage and Overtime Compensation Requirements of the FLSA, 56 Fed.Reg. 45,824, 45,825 (1991) (adopting interim final rule). On August 19, 1992, the DOL published its substantially similar final regulation. 57 Fed.Reg. 37,666 (1993) (adopting final rule), codified at 29 C.F.R. Section(s) 541.5d (1993). These revisions were directed to account for the "public accountability" requirements for public employees. Following the 1991 amendment to the salary test, a public employee may qualify for the professional exemption even if she is subject to a reduction for less than a day's absence pursuant to principles of public accountability. In promulgating the 1992 final rule, DOL emphasized that all other requirements of the salary test were left unchanged. 57 Fed.Reg. at 37,673.
29 C.F.R. Section(s) 541.5d provides that
(a) An employee of a public agency who otherwise meets the requirements of Section(s) 541.118 shall not be disqualified from exemption under Section(s) 541.1, 541.2, or 541.3 on the basis that such employee is paid according to a pay system established by statute, ordinance, or regulation, or by a policy or practice established pursuant to principles of public accountability, under which the employee accrues personal leave and sick leave and which requires the public agency employee's pay to be reduced or such employee to be placed on leave without pay for absences for personal reasons or because of illness or injury of less than one work-day when accrued leave is not used by the employee . . . .
Public accountability is the notion that "governmental employees should not be paid for time not worked due to the need to be accountable to the taxpayers for expenditure of public funds." Hilbert v. District of Columbia, 23 F.3d 429, 435 (D.C. Cir. 1994) (Henderson, J., concurring in part, dissenting in part) (quotation omitted).
B.
The district court held that the salary test is invalid as applied to the DOT engineers who are public employees. In so holding, the district court relied solely on Service Employees Int'l Union, Local 102 v. County of San Diego, 60 F.3d at 1346, a case in which the Court of Appeals for the Ninth Circuit held that the salary test, as applied to public employees prior to the 1992 final regulation, was invalid. Finding that the salary test was infirm prior to the 1992 final regulation, the Service Employees court struck it down in its entirety as applied to public employees before the interim regulation was published on September 6, 1991. Id. at 1353. The Service Employees court reasoned that because virtually all public employees are constrained by pay systems based on public accountability, no public employee could qualify for the professional exemption before the DOL amended the regulation. The Service Employees court held that the salary test as it existed prior to the 1991 revision conflicted with Congress' intent that the professional exemption apply to public sector employees. Id.
We agree with the Service Employees court that virtually all public employees are constrained by public accountability requirements, and therefore no public employee could qualify for the professional exemption before the DOL amended the salary test. Before the salary test was amended, it deprived public entities of the professional exemption created by Congress, and conflicted with Congress' intent for public employers to claim the professional exemption. See Service Employees, 60 F.3d at 1353-54. We hold that the application of the 1954 salary test to the public sector is contrary to the FLSA and therefore is invalid. Through September 6, 1991, public sector employees need only satisfy the duties test to qualify for the professional exemption under the FLSA.
The dissent advises that, instead of holding section 541.118(a) invalid as applied to all public employees, we should declare the regulation invalid as applied to the subset of "public employees who but for the fact that they served under public accountability systems would meet the salary test." Dissent, infra at 3 (emphasis original).
However, the dispositive issue here is whether the invalid portion of the pre-1991 salary test can be severed and the valid portions of the test applied despite the infirmities of the severed portion. Judge Stapleton, in dissent, believes that the offending portion of the salary test is severable. We respectfully cannot agree.
As noted by the Service Employees court, the DOL's nonenforcement policy, in force in the period prior to 1991, "covered the entire salary test, not just part of it; and essentially no valid test applicable to the public sector existed until the DOL finally conducted rulemaking in 1991 and 1992." Service Employees, 60 F.3d at 1354 (emphasis original). Like the Service Employees court, we decline to apply those portions of the salary test not related to the defective prohibition against partial day docking because such an attempt to salvage the invalid regulation "would be tantamount to rulemaking, a power with which we are not invested." Id.
The district court in this case held that the salary test even as amended in 1991 and 1992 is also invalid. In so holding, its reliance on the Ninth Circuit's decision in Service Employees, 60 F.3d at 1346, is misplaced. The Service Employees court only struck down the pre-September 6, 1991 salary test. Here, in contrast, the DOT requests that this court strike down the salary test even as amended by the 1992 final regulation. The 1991 regulation, as finalized in 1992, remedied the problem addressed by the Service Employees court by allowing public sector employers to reduce pay for absences as required by local public accountability regulations and still retain the professional exemption. Since the Ninth Circuit's decision was based upon a regulatory scheme that was subsequently amended, the Service Employees court's reasoning and analysis cannot be relied upon to strike down the present version of the salary test.
We must still determine, however, whether the amended salary test is rationally related to the objectives of the FLSA. See Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-45, 104 S.Ct. 2778, 2781-83 (1984). The DOT provides no circuit authority for its proposition that the salary test as amended is not rationally related to the objectives of the FLSA, and we are aware of none. The only court of appeals that has addressed the issue concluded that the regulation was valid. In Mueller v. Reich, 54 F.3d 438 (7th Cir. 1995), the court held that the salary test, which included the 1992 final regulation, 29 C.F.R. Section(s) 541.5d, was rationally related to the objectives of the FLSA. We agree. Congress intended to exempt from the overtime provisions of the FLSA those employees who are not in any realistic sense hourly-wage employees. 29 U.S.C. §(s) 213(a)(1). The DOL revised the salary test in order to bring public employees who from a functional standpoint are professional employees within the scope of the statutory exemption. Mueller, 54 F.3d at 442. We cannot say that the salary test as amended by the 1991 interim and 1992 final regulations is not rationally related to the objectives of the FLSA.
C.
We must next decide whether the engineers qualify for the professional exemption under the FLSA. Having struck down the preamended salary test, through September 6, 1991, only the duties test need be satisfied. The engineers concede that they satisfy the duties test. Therefore, prior to September 6, 1991, the engineers qualify for the professional exemption, and are not entitled to overtime compensation under the FLSA.
We determine that the engineers are not owed overtime compensation prior to September 6, 1991 irrespective of whether a two or three-year statute of limitation applies, see 29 U.S.C. Section(s) 255, because the DOT did not violate the FLSA or any valid regulation promulgated thereunder prior to September 6, 1991. Although the engineers filed their complaint on May 21, 1993, prior to September 6, 1991, they qualified for the professional exemption. As professional employees, they are not entitled to overtime compensation under the FLSA. See 29 U.S.C. Section(s) 207(a)(1) and 213(a)(1).
Having affirmed the validity of the amended salary test, we must further determine whether the engineers qualify for the professional exemption under the amended salary test. The engineers give numerous reasons why they should be considered "hourly" as opposed to "salaried" employees, and therefore are entitled to overtime compensation as required by the Act. 29 U.S.C. §(s) 207(a)(1). We hold that because the DOT's disciplinary policy subjects the engineers to reductions in pay for minor, non-safety related disciplinary infractions, the engineers fail to meet the amended salary test.
The DOL regulations allow employers to dock an employees's pay for "infractions" of "safety rules of major significance" without losing the professional exemption. 29 C.F.R. Section(s) 541.118(a)(5). Safety rules of major significance are those "relating to the prevention of serious danger to the plant, or other employees, such as rules prohibiting smoking in explosive plants, oil refineries, and coal mines." Id. Infractions of rules that are non-major and not safety related are not permissible exceptions under the DOL's interpretations. See Wage Hour op. letter No. 90-42NR (Mar. 29, 1991) ("The only disciplinary type of deduction permissible is one imposed as a penalty 'in good faith for infractions of safety rules of major significance.'"). The engineers are subject to suspension without pay for a range of offenses including being tardy, incompetent, inefficient or neglecting their duties. These infractions exceed the scope of the safety exception to the professional exemption. The DOT may not dock the engineers' pay for these minor, non-safety related infractions and, at the same time, realistically claim that their employees fall within the exemption because the safety exception applies.
Under the salary test, an employee does not qualify for the professional exemption if his or her pay is "subject to reductions in compensation because of variations in the quantity or quality of the work performed." 29 C.F.R. Section(s) 118(a). The DOT's disciplinary policy authorizes the reduction of the engineers pay because of "variations in the quantity or quality of work performed." Id. The DOT argues, however, that it should nevertheless retain the exemption because it has not enforced the disciplinary policy and no engineer has ever suffered a reduction in pay under it. The DOT asserts that an actual docking must occur in order for the engineers to lose the professional exemption. In contrast, the engineers contend that the potential that their pay could be reduced for violations of the disciplinary policy renders them "subject to" reductions in their pay. 29 C.F.R. Section(s) 118(a).
There is a circuit split on the issue of whether docking must have actually occurred in order to place the employee outside the scope of the exemption. Some courts of appeals have read the words "subject to" in 29 C.F.R. Section(s) 118(a) as meaning that anytime there is the potential for a reduction in pay, the affected employee is not paid "on a salary basis," and not exempt from the FLSA overtime requirements. See Kinney v. District of Columbia, 994 F.2d 6, 11 (D.C. Cir. 1993) (the phrase "subject to reduction" encompasses plaintiffs' claims that employer's policy may theoretically result in reduction of salary based on quality or quantity of work); Martin v. Malcolm Pirnie, Inc., 949 F.2d 611, 614 (2d Cir. 1991) (same); Abshire v. County of Kern, 908 F.2d 483, 485 (9th Cir. 1990) (same).
Other courts of appeals hold that an employee still qualifies for the professional exemption if the employer has a policy that theoretically could result in that employee's pay being docked, but no deduction has actually occurred. See McDonnell v. City of Omaha, Nebraska, 999 F.3d 293, 296-97 (8th Cir. 1993) (mere fact that employees' salary might be reduced did not preclude them from qualifying as a "salaried executive"); York v. City of Wichita Falls, Texas, 944 F.2d 236, 242 (5th Cir. 1991) (absent evidence of an actual deduction in pay, summary judgment is improper); Atlanta Professional Firefighters Union, Local 134 v. City of Atlanta, 920 F.2d 800, 805 (11th Cir. 1991) (same); see also McGrath v. City of Philadelphia, 864 F. Supp. 466, 488 (E.D.Pa. 1994).
The Court of Appeals for the Third Circuit has yet to address the issue. We conclude that the language of the regulation would be strained by holding that an employee is "subject to" a reduction only if an actual reduction has occurred. As the one court has explained, "[e]ither pay is fixed and immutable, and not subject to . . . deductions, or it is contingent." Abshire, 908 F.2d at 487. We believe that the DOT's disciplinary policy, even if not enforced, renders the engineers' salary contingent rather than fixed. Accordingly, we will embrace the approach taken by the Courts of Appeals for the D.C., Second, and Ninth Circuits. We hold that being "subject to" reductions in pay pursuant to a minor non-safety related, disciplinary rule does not require actual docking of pay to have occurred.
We believe this approach more accurately comports with reality. Payment on a salary basis is generally thought to identify professional personnel precisely because it indicates employees who are given discretion in managing their time, and who are not answerable merely for the number of hours worked. Employees, paid under a system that subjects them even theoretically, to docking for being tardy or insubordination lack one of the characteristics integral to being a professional employee as set out in the DOL's regulation. This approach is also consistent with the policy that the FLSA is a remedial act and exemptions from its coverage are to be narrowly construed against employers. Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392, 80 S.Ct. 453, 456 (1960).
Finally, it would be rather arbitrary to hold that whether an employer qualifies for the professional exemption shall be determined by the employees' collective good behavior: If one employee violates the disciplinary policy and is docked, so the argument goes, all the employees would lose the professional exemption and be entitled to FLSA-required overtime rates. Such an approach raises the further question whether only the docked employee or all the employees subject to the disciplinary policy should lose the professional exemption if one employee violates the disciplinary rules. The DOT's argument that the good behavior of its employees is not relevant because its disciplinary policy is not enforced is not persuasive. An unenforced employment policy causes confusion as to whether that policy is in effect, and should be followed. The DOT may threaten to dock its employees for insubordination or misconduct, but the price for doing so is the loss of its ability to qualify its employees for the professional exemption. The DOT is at liberty to revise its disciplinary policy to bring it in accordance with the FLSA and regulations promulgated thereunder so that the engineers satisfy the salary test.
The DOT argues that even if any docking had occurred, which it has not, the "window of correction" exception to the professional exemption allows the DOT to retain the exemption if they reimburse the docked pay and promise to comply in the future. 29 C.F.R. Section(s) 118(a)(6). However, the "window of correction" only applies to inadvertent errors. See Malcolm Pirnie, 949 F.2d at 611. Any docking made pursuant to a written policy, as is the case here, may not be considered "inadvertent." The "window of correction" does not save the DOT from failing to qualify the engineers for the professional exemption.
IV.
We hold that the salary test set forth in 29 C.F.R. 541.118(a), as amended by 29 C.F.R. Section(s) 541.5d, is valid as applied to public employees. The engineers fail to satisfy the amended salary test because the DOT's disciplinary policy subjects them to reductions in their pay for nonsafety-related infractions. We will affirm in part, and reverse in part the district court's grant of summary judgment for the DOT. We will affirm the district court's grant of summary judgment in favor of the DOT for the time period prior to September 6, 1991, and reverse the district court's grant of summary judgment in favor of the DOT for the time period from September 6, 1991 on. We will remand with instructions to enter judgment in favor of the engineers for the time period beginning on September 6, 1991.
I agree fully with the majority's analysis and disposition of this appeal. I take the occasion to write separately to call attention to still another reason why I believe the district court's grant of summary judgment in favor of the State of New Jersey, Department of Transportation ("DOT") should be reversed. In my view, even if the DOT were to amend its disciplinary policy to conform with the requirements of the salary basis test, the plaintiff engineers would still not be exempt from the Fair Labor Standards Act (FLSA). Specifically, under this court's case law, the payment of additional compensation on an hourly basis, in and of itself, is sufficient to destroy an employee's exempt status.
It should be noted that the DOT's hourly rate is less than the time-and-a-half rate prescribed by the FLSA.
The DOT correctly noted that the regulations promulgated by the Department of Labor (DOL) specifically allow salaried employees to receive "additional compensation":
[A]dditional compensation besides the salary is not inconsistent with the salary basis of payment. The requirement will be met, for example, by a branch manager who receives a salary of $155 or more a week and in addition, a commission of 1 percent of the branch sales. The requirement will also be met by a branch manager who receives a percentage of the sales or profits of the branch. If the employment arrangement also includes a guarantee of at least the minimum weekly salary (or the equivalent for a monthly or other period) required by the regulations. Another type of situation in which the requirement will be met is that of an employee paid on a daily or shift basis, if the employment arrangement includes a provision that the employee will receive not less than the amount specified in the regulations in any week in which the employee performs any work.
29 C.F.R. Section(s) 541.118(b).
From the examples provided, however, I am of the opinion that such "additional payments" may not be based on the number of overtime hours worked. Indeed, as I read our opinion in Brock, we have previously held that any form of hourly compensation is inconsistent with a salaried status. Brock v. Claridge Hotel Casino, 846 F.2d 180, 185 (3d Cir. 1988), cert. denied, 488 U.S. 925 (1989). See also Abshire v. County of Kern, 908 F.2d 483, 486 (9th Cir. 1990) ("Such additional compensation for extra hours worked is . . . not generally consistent with salaried status."), cert. denied, 498 U.S. 1068 (1991); Thomas v. County of Fairfax, 758 F. Supp. 353, 364 (E.D.Va. 1991) (stating that "additional pay at an hourly rate for hours worked beyond their regularly scheduled time" is indicative that employees were hourly employees); Banks v. City of North Little Rock, 708 F. Supp. 1023, 1024 (E.D.Ark. 1988) ("Payment of a fixed amount plus additional hourly wages for extra hours worked is not consistent with salaried status.").
In Brock, we held that casino employees who were paid by the hour but received a $250 minimum weekly payment were not bona fide executives entitled to exemption from FLSA's overtime provisions. 846 F.2d at 186. In so deciding, we noted that "none of the three examples [of allowable 'additional compensation'] reach hourly compensation plans." Id. at 185.
Moreover, we explained the distinction between pay plans that provide extra compensation through commissions, bonuses and shift payments and plans that provide extra compensation based solely on the number of hours worked. Id. The former plans link compensation to effort and work output whereas the latter plans allow employees to work more hours to obtain more hourly wages. Id. This distinction is significant because the hallmark of an executive, managerial or professional employee is that such an employee "must decide for himself the number of hours to devote to a particular task." Id. at 184.
In other words, the salaried employee decides for himself how much a particular task is worth, measured in the number of hours he devotes to it. With regards to hourly employees, it is the employer who decides the worth of a particular task, when he determines the amount to pay the employee performing it. Paying an employee by the hour affords that employee little of the latitude the salary requirement recognizes. Thus, a basic tension exists between the purpose behind a salary requirement and any form of hourly compensation.
Id. (footnote omitted).
Paying a salaried or executive employee "additional compensation" in the form of a bonus or commission "provid[es] an incentive for the employee to perform better." Id. at 185. Paying "additional compensation" which varies with the number of hours worked, on the other hand, "does not encourage the [employee] to make better use of his time, but only to work more hours. Such encouragement is inconsistent both with salary payment and executive employment." Id. (emphasis added).
Contrary to the DOT's assertion, Brock is not inapposite to FLSA suits brought by public employees. In Brock, we interpreted a portion of the salary basis test that is fully applicable to public employees. For that reason, I am of the view that Brock applies with full force to the present case.
Moreover, other courts which have cited our opinion in Brock (including those which have disagreed with our decision in Brock) have interpreted Brock as holding that hourly overtime pay is generally inconsistent with salaried status. See, e.g., Hilbert v. District of Columbia, 23 F.3d 429, 431-32 (D.C. Cir. 1994) (noting that the Third and Ninth Circuits have endorsed the theory that "no one who receives hourly overtime is paid 'on a salary basis'"); id. at 438-39 (Mikva, J., concurring in the result and dissenting in part) (stating that "[t]he Third and Ninth Circuits have agreed with the district court that hourly overtime supplementing a guaranteed weekly salary strongly suggests compensation on an hourly basis"); Kinney v. District of Columbia, 994 F.2d 6, 11 n.3 (D.C. Cir. 1993) (citing Brock for the proposition that hourly overtime compensation is "inherently inconsistent with compensation on a salary basis"); Klein v. Rush-Presbyterian-St. Luke's Med. Ctr., 990 F.2d 279, 284 (7th Cir. 1993) (noting that some courts, including the Third Circuit, have held that "overtime pay is generally inconsistent with a salaried status"); Aaron v. City of Wichita, 797 F. Supp. 898, 907 (D.Kan. 1992) (citing Brock for proposition that "additional compensation for extra hours worked is not generally consistent with salaried status"), rev'd, 54 F.3d 652 (10th Cir.), cert. denied, 116 S.Ct. 419 (1995); Service Employees Int'l Union, Local 102 v. County of San Diego, 784 F. Supp. 1503, 1510 (S.D.Cal. 1992) (relying on Brock for proposition that "payments [that are] contingent on the hours worked [are] indicative of hourly, rather than salary, status"), rev'd, 60 F.3d 1346 (9th Cir. 1994), cert. denied, 116 S.Ct. 774 (1996); Dole v. Malcolm Pirnie, Inc., 758 F. Supp. 899, 903 (S.D.N.Y. 1991) (noting that under Brock, "payment of overtime qua overtime to an employee is an indicator of hourly status"), rev'd sub nom., Martin v. Malcolm Pirnie, Inc., 949 F.2d 611 (2d Cir. 1991), cert. denied, 506 U.S. 905 (1992); Thomas, 758 F. Supp. at 360 (explaining that Brock majority rejected view that salary compensation for executives may vary with the number of hours worked); Banks, 708 F. Supp. at 1024 (citing Brock for proposition that "[p]ayment of a fixed amount plus additional hourly wages for extra hours worked is not consistent with salaried status"); but see Michigan Ass'n of Gov't Employees v. Michigan Dep't of Corrections, 992 F.2d 82, 84 n.3 (6th Cir. 1993).
Although some courts in other jurisdictions have interpreted the salary basis test as allowing for "additional compensation" on an hourly basis, see, e.g., Hilbert, 23 F.3d at 432, these decisions conflict squarely with our decision in Brock. In short, I am convinced that the DOT's overtime compensation scheme is inconsistent with compensation "on a salary basis" under this court's jurisprudence, to which we are bound. Hence in my view, the DOT, if it seeks to conform to the salary test for its engineers, would not only be obliged to amend its disciplinary policy but would also be obliged to comply with the teachings of Brock.
I concur fully in the court's opinion with respect to the period from September 6, 1991 on: the defendant Department of Transportation ("DOT") cannot meet its burden of proof that the plaintiff engineers qualify as bona fide "professional" employees exempt from the overtime compensation requirements of the Fair Labor Standards Act ("FLSA") because the DOT subjects the engineers' pay to reductions for minor, non-safety-related disciplinary infractions. Because I believe that these disciplinary policies are just as inconsistent with bona fide FLSA-exempt "professional" status prior to September 6, 1991 as they are after that date, however, I would reverse and remand with instructions to enter summary judgment in favor of the plaintiff engineers for the entire period. To the extent the court reaches a contrary conclusion, I respectfully dissent.
With respect to the pre-1991 period, the court's opinion faithfully tracks the Ninth Circuit Court of Appeals' opinion in Service Employees Int'l Union, Local 102 v. County of San Diego, 35 F.3d 483 (9th Cir. 1994), op. amended and supplemented by 60 F.3d 1346 (9th Cir. 1995), cert. denied, 116 S.Ct. 774 (1996). The decision in Service Employees turned on the undisputed fact that Congress in 1974 intended to extend to the public sector the same fair labor standards that had theretofore governed in the private sector. Thus, Congress intended that public employees generally would receive time-and-a-half overtime compensation just as private employees generally would. By the same token, Congress intended that public employers would also be entitled to have FLSA-exempt "employee[s] employed in a bona fide executive, administrative, or professional capacity." 29 U.S.C. §(s) 213(a)(1). The problem with the salary test of 29 C.F.R. Section(s) 541.118(a) prior to its amendment on September 6, 1991 was that, because nearly all public employees served under public accountability systems, the salary test prevented otherwise bona fide FLSA-exempt public employees from qualifying for the statutory exemptions. This result was, therefore, inconsistent with Congress' intent that public-sector and private-sector employers alike be able to have employees who are exempt from FLSA's overtime compensation requirements.
This is so because, whereas the salary test of 29 C.F.R. Section(s) 541.118(a) permits reductions in pay for absences of a day or more, it does not permit reductions in pay for partial-day absences, and public accountability principles forbid paying public employees for hours not spent at work. The 1991 and 1992 amendments to the salary test (codified at 29 C.F.R. Section(s) 541.5d) corrected this problem by adding an exception to Section(s) 541.118(a) to account for public accountability constraints, but otherwise left the salary test intact.
This analysis of congressional intent was the rationale for the Service Employees court's ultimate conclusion. See 60 F.3d at 1352-53. The court's holding, however, was that Section(s) 541.118(a) was valid as applied to all private sector employees but invalid as applied to all public sector employees. This holding, followed by the court today, results in an unjustified dichotomy between the private sector and the public sector that is itself inconsistent with the congressional intent used to justify the partial invalidation of the regulation in the first place.
Rather than declaring that the regulation is invalid as applied to all public employees, the Ninth Circuit had (as we have) the option of declaring that the regulation is invalid as applied only to those public employees who but for the fact that they served under public accountability systems would meet the salary test. Put differently, congressional intent forbids application of the pre-1991 salary test to deny a public employer the ability to claim FLSA exemption if the sole reason for such denial is that the employer operates under a public accountability system. I would opt for this second alternative because it produces a result consistent with the congressional intent that public sector employees and private sector employees be treated as nearly the same under the FLSA as possible. In other words, the scope of the solution I favor is precisely tailored to the scope of the problem. Not surprisingly, this is the approach the Department of Labor took when it got around to amending the regulation in 1991 and 1992.
See 29 C.F.R. Section(s) 541.5d(a) (providing that a public employee "who otherwise meets the requirements" of the salary test shall not be disqualified from FLSA exemption on the basis that such employee is subject to pay reductions for partial-day absences pursuant to public accountability principles).
The choice between these two alternatives is important here, of course, because the plaintiff employees were not salaried "professionals" under the regulation in the pre-1991 period for two independent reasons. First, they served under a public accountability system and, accordingly, were subject to pay reductions for partial-day absences. Second, and of equal importance, they were subject to pay reductions for minor disciplinary infractions involving the quality and quantity of work performed. Because of this second reason, the engineers would have been entitled to FLSA time-and-a-half overtime compensation in both the pre- and post-1991 periods if they had been employed in the private sector. Therefore, to carry out the intent of Congress, they should be entitled to time-and-a-half in both periods despite the fact that they were public employees.
The essence of the salary test, both before and after 1991, was that a salaried employee's pay cannot be "subject to reduction because of variations in the quality or quantity of the work performed." 29 C.F.R. Section(s) 541.118(a). The 1991 and 1992 amendments merely added an exception to this rule to allow for public accountability constraints, but otherwise left the salary test intact. See 29 C.F.R. Section(s) 541.5d(a).
Thus, the same disciplinary system that kept the project engineers from being salaried "professionals" in the post-1991 period should keep them from being salaried "professionals" in the pre-1991 period. The disciplinary rules have nothing to do with public accountability or any other principle unique to the public sector, and we accordingly have no justification for invalidating the pre-1991 salary test as applied to public employees who would fail the salary test due to such disciplinary rules. See Mueller v. Reich, 54 F.3d 438, 443 (7th Cir. 1995) (rejecting the state's argument that the salary test is invalid for failing to exempt public employees from the provision on discipline "because the state has not shown what is so special about state employment that makes greater disciplinary flexibility than is permitted to the private sector indispensable to the effective functioning of state government"), petition for cert. filed, 64 U.S.L.W. 3297 (U.S. Oct. 10, 1995) (No. 95-586). In short, the DOT's disciplinary policies are just as inconsistent with the FLSA professional exemption before 1991 as after.
As the court itself states, employers who claim in good faith that their employees fit within one of the narrow exemptions from the generally-applicable fair labor standards "must show that the employees fit 'plainly and unmistakably within [the exemption's] terms and spirit.'" Maj. Op. at 4 (quoting Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960) (referring to "retail or service establishment" exemption under FLSA Section(s) 13(a)(2), 29 U.S.C. §(s) 213(a)(2) (repealed 1989)) (alteration in original; emphasis added). Because of the DOT's disciplinary policies, which subject employees to pay-docking for such minor infractions as tardiness or neglect of duty, the plaintiff engineers "plainly and unmistakably" do not fit within either the terms or the spirit of the statutory exemption. As the court acknowledges, "[p]ayment on a salary basis is generally thought to identify professional personnel precisely because it indicates employees who are given discretion in managing their time, and who are not answerable merely for the number of hours worked." Maj. Op. at 14.
5. We must remember that the essence of the salary test, both before and after 1991, was that a salaried employee's pay cannot be "subject to reduction because of variations in the quality or quantity of the work performed." 29 C.F.R. Section(s) 541.118(a). It is this main provision that cannot validly be applied to disqualify public employees from FLSA exemption on the basis of public accountability constraints (indeed, it is this same provision that the DOT's disciplinary rules offend). There is an exception to this rule for absences of a day or more, 29 C.F.R. Section(s) 541.118(a)(2), but to sever this exception would obviously do nothing to solve the problem.
The court's reasoning does not support its conclusion that the pre-1991 salary test is invalid as applied to all public sector employees — rather than invalid only as applied to those public employees who would satisfy the salary test but for their being paid according to public accountability principles. The court paraphrases the Service Employees decision and reasons that, because "virtually all public employees are constrained by public accountability requirements" and therefore most public employees could never meet the salary test prior to its amendment in 1991, the pre-1991 salary test "deprived public entities of the professional exemption created by Congress and conflicted with Congress' intent for public employers to claim the professional exemption." Maj. Op. at 8; see 60 F.3d at 1352-53. While this analysis aptly describes the problem, it does not indicate why the court chose to adopt its holding as the solution.
In a footnote, the court states:
[T]he dispositive issue here is whether the invalid portion of the pre-1991 salary test can be severed and the valid portions of the test applied despite the infirmities of the severed portion. . . . Like the Service Employees court, we decline to apply those portions of the salary test not related to the defective prohibition against partial day docking because such an attempt to salvage the invalid regulation would be tantamount to rulemaking . . . .
Maj. Op. at 9 n.3 (internal quotation marks omitted). Contrary to the court's assertion, however, the "dispositive issue" here is not the severability of the regulation, because there are no "portions of the salary test not related to the defective prohibition against partial day docking," id., and thus there is nothing to sever. Rather, the central issue here is the applicability of an intact regulation to various classes of employees. The court concludes that the pre-1991 salary test cannot validly be applied to any public employees, but the court has no trouble applying the test to all private sector employees. I believe that the court's distinction between private employees and those public employees who would fail the test for reasons unrelated to public accountability constraints is insupportable because it is inconsistent with congressional intent under the FLSA.
The settling parties argue that In re School Asbestos Litig., 789 F.2d 996 (3d Cir.), cert. denied sub nom. Celotex Corp. v. School Dist. of Lancaster, 479 U.S. 852, 107 S.Ct. 182, 93 L.Ed.2d 117, and National Gypsum Co. v. School Dist. of Lancaster, 479 U.S. 915 107 S.Ct. 318, 93 L.Ed.2d 291 (1986), requires the Court to take the possibility of settlement into account in applying Rule 23(b)(3). We reject this contention. In re School Asbestos Litig. stated, in relevant part:
Concentration of individual damage suits in one forum can lead to formidable problems, but the realities of litigation should not be overlooked in theoretical musings. Most trot cases settle, and the preliminary maneuverings in litigation today are designed as much, if not more, for settlement purposes than for trial. Settlements of class actions often result in savings for all concerned.
Id. at 1009. This statement, whatever its import, does not constitute a holding. Its language is broad, general, and grammatically permissive. Moreover, this statement appears in a section in which the Court does both a Rule 23(a) and 23(b) analysis. Thus, insofar as In re School Asbestos Litig. requires a consideration of settlement, this requirement would apply to Rule 23(a) as well as 23(b). But GM Trucks held that Rule 23(a) must be applied without reference to settlement, thereby rejecting the settling parties' argument.
Contrary to the court's suggestion, application of the pre-1991 salary test to public employees who would fail the test for reasons having nothing to do with public accountability constraints would not constitute judicial "rulemaking" for two reasons. First, we would be applying the regulation as written. Second, we would hold that the employees fail the test for a reason that is valid and consistent with congressional intent under the FLSA. To hold, as the court itself does, that the pre-1991 salary test is valid as applied in one context but invalid as applied in another, does not constitute judicial "rulemaking."
The problem is limited to reconciling public accountability constraints with the statutory exemption, and the solution should be tailored to address only that problem. The question before us is simply one of where to draw a clearly-defined line (dividing those employees to whom the pre-1991 salary test may validly be applied from those to whom it may not), and the line should be drawn where it precisely furthers congressional intent. After all, it is congressional intent that determines whether a particular application of the salary test is valid. The court draws its line too loosely, so that pre-1991 employees who ought not to qualify for the professional exemption (such as our plaintiffs here) are able so to qualify, contrary to the intent of Congress. My holding would allow pre-1991 public employers with bona fide professional employees to claim FLSA exemption without allowing public employers to avoid FLSA's overtime compensation requirements with respect to employees who are not FLSA-exempt bona fide professionals.
As the Supreme Court has stated in the context of a challenge to the validity of a statute, "a federal court should not extend its invalidation of a statute further than necessary to dispose of the case before it." Brockett v. Spokane Arcades, Inc., 472 U.S. 491, 502 (1985). I think an analogous rule should apply here, especially where we are considering the validity of an old regulation that has since been amended prospectively, and the agency has no express authority to amend it retroactively. See Service Employees, 60 F.3d at 1353 n.5 (noting that the DOL initially intended the salary test amendment to apply retroactively but concluded that it lacked such authority under Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988) (holding that a statutory grant of legislative rulemaking authority does not include the power to promulgate retroactive rules unless Congress so provides in express terms)).