Lead Opinion
OPINION
John Orton appeals from the district court’s dismissal of his claims against Johnny’s Lunch Franchise, LLC, and Anthony Calamunei for unpaid wages and expenses from August 2008 to December 2008. Orton sued under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201, et seq., and various state laws. The district court granted the defendants’ motion to dismiss the FLSA claim оn the ground that Orton was an exempt salaried employee and subsequently dismissed the remaining state-law claims. Because we hold that Orton has adequately pleaded a claim under the FLSA, we REVERSE and REMLAND for further proceedings.
I. BACKGROUND
John Orton’s complaint alleges that he began working for Johnny’s Lunch Franchise (“JLF”) in September 2007 as Vice President of Real Estate and Site Selection. His annual base salary was set at $125,000. From September 2007 until August 2008, JLF paid Orton his wages according to plan, although throughout 2008 Orton alleges JLF had trouble making payroll. In August 2008, Orton alleges that JLF ceased paying him any wages even though he did not cease working. On December 1, 2008, Orton along with the entire executive staff was formally laid off. Orton sued his alleged employers JLF and Anthony Calamunei (“Calamunei”) in April 2010 for damages stemming from the period he claims he worked but was not paid between August and December 2008.
The defendants moved to dismiss on the basis of Federal Rules of Civil Procedure 12(b)(2), (3), and (6). Initially, the defendants sought dismissal of only Calamunei for failure to state a claim under Rule 12(b)(6), arguing that Calamunei was not an “employer” within the meaning of § 203(d) of the FLSA.
On July 20, 2010, the district court issued its opinion granting the defendants’ motion to dismiss. Orton v. Johnny’s Lunch Franchise, LLC, No. 10-11013,
Having concluded that the FLSA claim was not viable, the district court did not address the arguments with respect to Calamunci’s status as an employer and dismissed the state-law claims without prejudice because it decided it “lackfed] a basis to exercise subject matter jurisdiction” over the state-law claims. Id. at *6. The district court denied Orton’s motion for leave to file a second amended complaint as moot. Id. Orton timely appealed the district court’s judgment.
II. FLSA CLAIM
We review de novo a district court’s decision to dismiss a complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Hensley Mfg., Inc. v. ProPride, Inc.,
A. Overview of FLSA Exemptions
The FLSA requires employers to pay minimum wages to certain employees. 29 U.S.C. § 206. Employers must also pay overtime to employees who work more than forty hours a week. 29 U.S.C. § 207. Some employees, however, are “exempt” from these requirements under 29 U.S.C. § 213. Relevant to this case, § 213(a)(1) exempts workers employed in a “bona fide executive, administrativе, or professional capacity,” as defined by the Secretary of Labor. For each of these three functions, the Secretary of Labor has promulgated rules regarding when an employee qualifies as exempt. See 29 C.F.R. § 541.100 (executive employees); 29 C.F.R. § 541.200 (administrative employees); 29 C.F.R. § 541.300 (professional employees). Each rule requires the defendant to satisfy three “tests” to qualify: (1) а duties test; (2) a salary-level test; and (3) a salary-basis test. See 29 C.F.R. § 541.700 (duties test); 29 C.F.R. § 541.600 (salary-level test); 29 C.F.R. § 541.602 (salary-basis test); see also Baden-Winterwood v. Life Time Fitness, Inc.,
An employer may raise a plaintiffs status as an exempt employee as an affirmative defense to claims brought under the FLSA. Thomas v. Speedway Su
The district court determined that “the parties appear to concede that Mr. Orton’s job is administrative in nature,” Orton,
B. Salary-Basis Test
The relevant regulation defining the salary-basis test was updated in 2004 and now states the following:
General Rule. An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the еmployee’s 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 in paragraph (b) of this section, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions mаy not be made for time when work is not available.
29 C.F.R. § 541.602(a) (2004). The old version stated, in relevant part: “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....” 29 C.F.R. § 541.118(a) (1973) (emphasis added).
We addressed at length the impact of the 2004 changes on the salary-basis test in Baden-Winterwood,
The new regulations also clarified the effect of an improper deduction on an employee’s status as exempt. 29 C.F.R. § 541.603. An improper deduction alone will not necessarily render an employee non-exempt: “An employer who makes improper deductions from salary shall lose the exemption if the facts demonstrаte that the employer did not intend to pay employees on a salary basis.” 29 C.F.R. § 541.603(a) (2004). An employer’s intent to make improper deductions is demonstrated by “[a]n actual practice of making improper deductions.” Id.
The district court held that the “Defendants’ failure to pay Mr. Orton for several months [did not] convert[ ] his job from a salary-based position to an hourly-based position.” Orton,
First, the district court’s holding rests on an outdated rule of law. The new (2004) regulations, which all parties correctly agree are applicable in this case, establish that employment agreements are no longer the relevant starting point for whether an employee is paid on a salary basis. Baden-Winterwood,
Second, the district court neglected to placе the burden of establishing the exemption on the defendants, failing even to acknowledge that the exemption is an affirmative defense. The district court instead focused solely on the sufficiency of Orton’s complaint and the not-yet-created record in this case: “Nothing in the record indicates that this base salary was subject to reduction because of valuations in the quality or quantity of the work performed. Rather, Mr. Orton’s allegations suggest only that Defendants stopped paying him this promised salary because of cash flow issues.” Orton,
Furthermore, even if Orton had explicitly pleaded that the sole reason for the deduction was because JLF was experiencing a decline in cash flow, this alone would tell us nothing about whether the deduction was proper undеr the FLSA. For example, a company experiencing cash-flow issues cannot claim the exemption if the company prevents an otherwise salaried employee from coming in three days a week and then pays him less accordingly. Such a deduction in pay would undeniably be due to an absence occasioned by the employer, see 29 C.F.R. § 541.602(a), even though the employer decided to take the action due to cash flow problems. The regulation makes no exception for deductions in pay just because they were motivated by cash flow shortages.
JLF and Calamunci also seek to distinguish between an employee whose pay was reduced partially and one whose pay was reduced entirely. At first glance, this argument has some support in рre2004 case law. See, e.g., Nicholson v. World Bus. Network, Inc.,
The burden should have been placed on the defendants to show that Orton “receive[d] ... [a] predetermined amount.” 29 C.F.R. § 541.602(a). If he did not, the defendants must have shown by a preponderance of the evidence that their failure to pay him the predetermined аmount was proper either under § 541.602(a) or under one of the delineated exceptions in subsection (b). We therefore reverse the district court’s dismissal of Orton’s FLSA claim and remand for further proceedings.
III. LEAVE TO FILE SECOND AMENDED COMPLAINT
Orton sought leave to amend his complaint for a second time to add allegations that would address the affirmative defenses, to plead more accurately Calamunci’s rolе as an employer, and to add a new defendant in light of the sale of JLF. The district court did not consider the motion, deeming it moot. Orton,
IV. STATE-LAW CLAIMS
After dismissing Orton’s FLSA claim, the district court incorrectly held that it no longer had supplemental jurisdiction over Orton’s related state-law claims. The district court had original subject matter jurisdiction over Orton’s FLSA claim pursuant to 28 U.S.C. § 1331; it therefore had supplemental jurisdiction over Orton’s related state-law claims under 28 U.S.C. § 1367. Such supplemental jurisdiction does not disappear when the federal claim that gave rise to original jurisdiction in the first plаce is dismissed. Carlsbad Tech, Inc. v. HIF Bio, Inc.,
V. CONCLUSION
For the aforementioned reasons, we REVERSE the district court’s dismissal оf the plaintiffs complaint and REMAND for further proceedings consistent with this opinion.
Notes
. The only arguments advanced by JLF in the motion, which was made jointly with Calamunci, were that dismissal was appropriate under Rules 12(b)(2) and (3) for lack of personal jurisdiction and lack of venue. Those arguments have since been dropped by the defendants and are not before us on appeal.
. Calamunei had erroneously cited solely Third Circuit law as controlling.
. It is unclear where the parties make this concession, or how the single sentence in Orton's complaint summarizing his primary responsibilities would be sufficient for the defendants to meet their burden of establishing that Orton was employed in an administrative capacity, as the district court held he was. Id. at *6. We do not address this issue on appeal, however, because Orton has not raised it. At oral argument, Orton conceded that he was employed in at least one of the three relevant capacities: administrative, executive, or professional.
. These revisions were partly in response to the Supreme Court’s holding in Auer v. Robbins,
. That is not to say a company with cash flow issues is left with no recourse. Nothing in the FLSA prevents such an employer from renegotiating in good faith a new, lower salary with one of its otherwise salaried employees. The salary-basis test does not require that the predetermined amount stay constant during the course of the employment relationship. Of course, if the predetermined salary goes below a certain amount, the employer may be unable to satisfy the salary-level test, which explicitly addresses the amount an employee must be compensated to remain exempt. See 29 C.F.R. § 541.600(a) (“To qualify as an exempt executive, administrativе or professional employee under section 13(a)(1) of the Act, an employee must be compensated on a salary basis at a rate of not less than $455 per week....”).
. But see Takacs v. Hahn Auto. Corp.,
Concurrence Opinion
concurring.
I agree with the court that the “exemption” issue should be decided after the defendant describes the issue in an affirmative defense and after further proceedings. That was not done here. The district court decided the case only on a motion to dismiss under Rule 12(b)(6). We do not know what the facts are. It may be that the parties еntered into a new agreement based on the company’s cash