By Rosemarie Lally, J.D./SHRM
Takeaway: Employers should not rely on conclusory language in contracts regarding employees’ status as salaried professionals.
A federal appeals court found that material factual questions remained in dispute regarding whether a public employer proved that its staff nurses were paid on a salary basis and that employees working in a bona fide professional capacity were not entitled to time-and-a-half pay for working overtime. In light of this, the court reversed summary judgment for the employer.
Two collective action complaints were brought against the city and county of San Francisco alleging that the city violated the Fair Labor Standards Act (FLSA) by failing to pay staff nurses time-and-a-half for overtime work, including per diem shifts. The FLSA provides that employees should generally receive time-and-a-half pay for working overtime but has an exemption applying to employees working in a bona fide professional capacity. The city claimed that staff nurses were compensated on a salary basis because their annual compensation figures were documented at the start of every year through employment agreements and published salary ordinances.
The plaintiffs argued that the city compensated them on an hourly basis because it divided those annual figures into hourly rates and paid staff nurses only for each hour worked. The district court granted summary judgment in favor of the city, concluding that the staff nurses were paid on a salary basis and were therefore exempt from the FLSA overtime requirements. The court concluded that the annual pay figures published in the salary ordinance, which referred to staff nurses as salaried employees, provided “dispositive evidence” that the nurses were compensated on a salary basis. Given the factual similarity between two cases, which had a total of about 353 plaintiffs, the court issued an order treating them as related.
The plaintiffs in both cases appealed. On appeal, the 9th U.S. Circuit Court of Appeals consolidated the two appeals for argument and decision. It began its analysis by stating that the dispute over whether the professional capacity exemption applies to staff nurses depends on only one issue: whether the city showed that staff nurses were paid on a salary basis during the relevant time. This required looking beyond conclusory language in contracts and documents such as the salary ordinance to analyze how employees are actually paid, the appeals court said. “The proper focus for the salary basis test is whether an employee receives a predetermined amount of compensation on a weekly or less frequent basis, irrespective of any promises made in an employment contract,” the 9th Circuit stated.
The city’s payroll department translated each nurse’s annual salary into an hourly rate by dividing the annual amount by 2,080, the number of hours a full-time nurse working 40 hours per week would expect to work in a year. A nurse who worked 40 hours every week would receive the full amount published in the salary ordinance. A staff nurse can choose to work fewer hours than a full-time nurse; they can also earn additional pay to supplement their base pay by working evening or night shifts with premium pay, working overtime shifts as a staff nurse, or working per diem shifts on an as-needed basis.
Staff nurses accrue time in designated leave banks, accumulating paid time off for vacations, sick days, and holidays. So long as a staff nurse does not take off more time than accrued in a particular leave bank, the nurse will not suffer any reduction in base compensation. However, if a staff nurse takes off more time than accrued, the city will deduct the amount of compensation equal to the amount of time missed; the city will also deduct pay if a nurse arrives late to a shift without permission from a supervisor.
All of these factors are considered when the city runs its payroll every two weeks after employees manually enter their time sheets into an accounting software system. Any discrepancies between the time reported and the payments allowed are identified, and the payroll department works together with the individual nurse to resolve the issue.
Employees who are compensated on a weekly or less frequent basis are governed by the salary basis test in 29 C.F.R. (Code of Federal Regulations) Section 541.602(a); those compensated on an hourly, daily, or shift basis are subject to the test in 29 C.F.R. Section 541.604(b). Section 602(a) requires that, to be regarded as a salaried employee under the FLSA, an employee performing any work in a given week must be paid the predetermined amount of compensation for that week regardless of the number of days or hours worked.
Alternatively, under section 604(b), an employer may compensate its salaried employees “on an hourly, a daily or a shift basis” so long as two requirements are met: 1) the employment arrangement includes “a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked,” and 2) there is a “reasonable relationship” between the employee’s guaranteed amount of money and the money actually earned.
While the FLSA prohibits private employers from deducting pay when an employee takes off one or more full days for personal reasons, under the public accountability principle, public employers are allowed to make partial-day deductions without losing the benefit of the exemption. Apart from this exception, an employer may not deduct pay from a bona fide professional employee’s paycheck without losing the exemption.
“If facts reveal that an employer maintains an ‘actual practice of making improper deductions,’ the employer will lose the benefit of the professional-employee exemption for the period in which the improper deductions were made,” the court said. “Whether an employer maintained an ‘actual practice’ of improperly deducting pay is a case-specific question of fact that asks whether the employer intended to pay its employees on a salary basis.” The appeals court held that the district court erred in granting summary judgment to the city. The court stated that the salary ordinance “is neither the starting point nor the ending point” for an inquiry into whether the staff nurses were paid on a salary basis. “Rather, the salary basis test asks whether an employee actually receives a predetermined amount of compensation on a weekly or less frequent basis as a matter of practice.”
In this case, several factual issues material to answer that question were in dispute, the court noted. “The most significant is whether staff nurses are guaranteed the opportunity to work the hours corresponding to their full-time equivalency every week.” According to an expert report submitted by the city itself, the city recorded staff nurses as working or being credited for fewer hours than their full-time equivalencies in at least 72 employee pay periods out of more than 2,200 reviewed. Because staff nurses are paid according to the number of hours they are recorded as having worked, it is uncertain whether staff members received their predetermined amounts of compensation during these irregular pay periods, the court found.
“Additionally, the FLSA’s ‘actual practice’ and ‘window of correction’ provisions offer the city no refuge, at least on summary judgment. Assuming that the 72 abnormal pay periods represent improper deductions—as we must in reviewing a grant of summary judgment against the plaintiffs—the city made improper deductions much more frequently than in cases where courts have found that no ‘actual practice’ [of making improper deductions] existed,” the court said. The plaintiffs identified evidence showing that the city made improper deductions in about 3.2% of employee pay periods. “This error rate suggests that a flaw in the city’s accounting process resulted in recurring improper deductions,” the court said.
Questions about the propriety of these 72 deductions leave material factual issues in dispute as to whether the city maintained an “actual practice” of making improper deductions. The court noted that, although it offered no definitive answer as to whether the discrepancies showed actual improper deductions from staff nurses’ predetermined amounts of compensation, “such a high number of improper deductions could support a finding that the city maintains an actual practice of making improper deductions.”
As for the window of correction defense, the city failed to provide evidence showing that the staff nurses were reimbursed for any of these possibly improper deductions, so summary judgment could not be granted or affirmed on that ground either.
“The takeaway is this: The plaintiffs identified evidence that creates a material dispute of fact as to whether staff nurses actually received a predetermined amount of compensation on a weekly or less frequent basis,” the court said. If they did not, the city is not exempt from the overtime requirement.
The court reversed the district court’s judgment and demanded the case for resolution of the factual issues in dispute.
