229 F. Supp. 3d 840
D. Minn.2017Background
- The Tile Shop employed ~150 Store Managers (2011–2014) who received a fixed salary plus variable incentive pay (commissions, spiffs, bonuses); fixed salaries ranged roughly $42k–$85k and did not vary with each pay period.
- Regional Managers calculated bonuses, but centralized Human Resources controlled payroll and policy and asserted negative bonuses should be offset against commissions/spiffs and never deducted from fixed salary.
- Payroll audit revealed 22 occasions (16 managers) where negative bonuses were deducted from fixed salaries (≈0.5% of 4,737 paychecks; total ≈ $5,032.89); The Tile Shop reimbursed affected managers after discovery of the errors.
- Plaintiffs (Store Managers) sued under the FLSA, alleging improper salary deductions destroyed exempt status by violating the salary-basis test and thus rendered them nonexempt for overtime.
- Plaintiffs argued broader systemic practice (109 deductions) by treating commissions/spiffs as part of fixed salary and relied on threatening emails from a Regional Manager; defendant contended commissions/spiffs are additional, deductible compensation and the salary deductions were isolated/inadvertent, correctable errors.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether commissions/spiffs are part of fixed salary (salary-basis test) | Commissions/spiffs are effectively salary; deductions from them show non-salary basis | Incentive pay is additional, variable compensation distinct from fixed salary | Held: commissions/spiffs are additional compensation; deductions from them do not defeat salary-basis |
| Whether improper deductions from fixed salary occurred and their scope | Plaintiffs identified numerous improper deductions (argues 109 total) and an alleged policy allowing salary deductions | Defendant concedes 22 improper salary deductions, reimbursed; many other asserted deductions were from commissions/spiffs | Held: only 22 deductions from fixed salary were improper; defendant reimbursed those amounts |
| Whether isolated or inadvertent improper deductions can preserve exemption (window of correction) | Plaintiffs argue window unavailable if deductions were intentional or evidence an actual practice | Defendant argues window of correction applies to isolated or inadvertent deductions even if intentional, if reimbursed | Held: Window of correction applies; isolated deductions (22 over 3 years, 0.5% of paychecks) were sufficient to preserve exemption once reimbursed |
| Whether employer had an "actual practice" of making improper deductions (loss of exemption) | Plaintiffs point to manager threats and national pattern to show actual practice | Defendant points to HR policy, instances where deductions were not taken, limited number and remediation, and that threatening managers lacked payroll authority | Held: No actual practice as a matter of law; threats by powerless managers and isolated deductions do not show employer intent to abandon salary basis |
Key Cases Cited
- Auer v. Robbins, 519 U.S. 452 (Sup. Ct.) (deference to Secretary of Labor regulation interpreting salary-basis test)
- Ellis v. J.R.’s Country Stores, Inc., 779 F.3d 1184 (10th Cir.) (window-of-correction applies to deductions that are isolated even if intentional)
- Kennedy v. Commonwealth Edison Co., 410 F.3d 365 (7th Cir.) (isolated, negligible deductions do not establish actual practice)
- Cash v. Cycle Craft Co., 508 F.3d 680 (1st Cir.) (few aberrant paychecks do not constitute an actual practice)
- Havey v. Homebound Mortgage, Inc., 547 F.3d 158 (2d Cir.) (additional, performance-based compensation may be reduced without defeating salary-basis)
- Specht v. City of Sioux Falls, 639 F.3d 814 (8th Cir.) (FLSA remedial purpose; standards for exemption inquiry)