Compliance with salary basis requirements is one pre-requisite for exempt status under the FLSA’s “white collar” exemptions.   A recent decision issued by the Court of Appeals for the Tenth Circuit analyzed this requirement and upheld the employer’s salary basis of payment, rejecting the Plaintiff’s claim that an isolated deduction from an exempt employee’s salary destroys exempt status.  Ellis v. J.R.’s Country Stores, Inc., 2015 U.S. App. LEXIS 3667 (10th Cir. Mar. 9, 2015)

The plaintiff, Sandra Ellis, worked as a manager at one of defendant’s stores.  As a manager plaintiff was expected to work a minimum of 50 hours per week and a minimum of five days per week.  Defendant paid plaintiff a weekly salary of $600, which was increased to $625 during her employment, and classified her as exempt under the Fair Labor Standards Act.  Following a week in which she reported working only 40.91 hours, Plaintiff received a paycheck in the amount of $593.80, from which defendant deducted $31.20 due to her partial-day absence. The parties asserted “different, though overlapping, explanations as to why” Plaintiff’s pay was reduced. The Court found the differences in those positions immaterial to the question of whether Plaintiff had been paid on a salary basis.   In affirming the district court’s grant of summary judgment in favor of defendant, the Tenth Circuit concluded that defendant did not have an “actual practice of making improper deductions” such that it forfeited its ability to treat plaintiff as exempt.  The Court observed that plaintiff worked less than 50 hours per week on “13 separate occasions,” but defendant reduced her pay “on only one occasion.”  Further, defendant’s employee handbook “clearly communicate[d] that improper deductions [were] prohibited,” and provided a mechanism for reimbursement of improper deductions made in good faith.

Finally, the Court concluded that defendant could take advantage of the “window-of-correction defense” which permits employers to maintain their exemptions by reimbursing employees for improper deductions that “are either isolated or inadvertent.”  In so holding, the Court rejected plaintiff’s argument that the “window-of-correction defense” should apply only where the employer’s decision to deduct money was both isolated and unintentional.  Rather the court held that the defense applies when the deduction is isolated or inadvertent.

Ellis illustrates the importance of maintaining a clear policy prohibiting improper deductions from wages of exempt salaried employees. Such a policy enhances the likelihood of avoiding liability by reimbursing employees for deductions that are inadvertently or improperly made. State law rules governing deductions also must be taken into consideration.