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News | Jan 01, 2011

In the Third Circuit, “Guaranteed Salary” Plans Might Not Always Satisfy the Salary Basis Test

I recently wrote a brief in which we argued that our client was not paid on a salary basis and, therefore, could not be overtime exempt under the professional or executive exemptions to the Fair Labor Standards Act or the Pennsylvania Minimum Wage Act. In this case, the employer purportedly paid the plaintiff a “guaranteed salary” plus and hourly bonus for every hour worked over 40 in a workweek. We argue that the sceme is a sham to circumvent the overtime pay provisions of state and federal law. In this regard, we came accross the Third Circuit’s decision in Brock v. The Claridge Hotel and Casino, 846 F.2d 180 (3d Cir. 1988). Brock is very helpful in arguing that certain “guarantees salary” plans are a sham. Here is what we wrote about Brock:
In Brock, an Atlantic City casino paid certain supervisors according to a “Weekly Salary Guarantee” plan under which the supervisors were “guaranteed a weekly salary of $250.00 for any week in which [they] perform[ed] any service.” Brock, 846 F.2d at 182. In addition, the supervisors “were paid by the hour, according to the number of hours [they] worked.” Id. The supervisors almost always worked sufficient hours to exceed their guaranteed salary. See id. at 184-85.

The Brock District Court saw through the casino’s “Weekly Salary Guarantee” plan as an obvious ruse to escape its obligation to pay overtime to hourly employees: “The issue squarely before us is whether Boxpersons, Floorpersons, and Pit Bosses of the Claridge Hotel and Casino are compensated on a salary basis, or on some other basis, namely an hourly basis. Just as dressing a mannequin up in a skirt and blouse does not transform it into a woman, so too masquerading an hourly employee’s compensation as a guaranteed salary plus hour-based bonuses does not transfer the compensation scheme into a salary-based plan. We conclude that despite defendant’s designation of the supervisory employees’ compensation in terms of X amount per 8 hour day, it is nothing more than an hourly wage. Further, the $ 250.00 Weekly Salary Guarantee is nothing more than an illusion. Boxpersons, Floorpersons, and Pit Bosses are not compensated on a salaried basis.” 664 F. Supp. 899, 904 (D.N.J. 1986).

On appeal, the Third Circuit was equally unimpressed by the casino’s “Weekly Salary Guarantee.” The Court’s detailed reasoning is worth repeating: “From the record, it is plain that the district court’s finding that the supervisors’ wages were actually calculated on an hourly basis is not clearly erroneous. That fact is supported by the payroll records, which show that a supervisor’s wage can be calculated by multiplying an hourly wage by the number of hours worked. The underlying issue in this case is whether an otherwise hourly wage can be transformed into payment on a salary basis within the meaning of the regulations by virtue of the guaranteed minimum weekly payment. We hold that, in these circumstances, it cannot. Claridge claims that this minimum was a salary under 541.118(b), and that all wages above that level were “additional compensation.” The concept is fundamentally incoherent. Salary is a mark of executive status because the salaried employee must decide for himself the number of hours to devote to a particular task. 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. Brock, 846 F.2d at 184. Later in its opinion, the Court further explained why the casino’s “Weekly Salary Guarantee” conflicted with the very nature of overtime-exempt employment: “The ‘additional’ compensation claimed by Claridge . . . varies with the number of hours worked. If an incentive at all, it does not encourage the supervisor to make better use of his time, but only to work more hours. Such encouragement is inconsistent both with salary payment and executive employment. Where, as here, the employee’s usual weekly income far exceeds the “salary” guarantee, the guarantee can have no impact on the employee’s performance or his status. Id. at 185; accord Kinney, 994 F.2d at 11.

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