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May 07, 2012
Can He Sue for Unpaid Salary?

A Michigan vice president was hired as a salaried, exempt employee and promised annual pay of $125,000. He was paid for 11 months, but then his employer encountered financial problems and couldn’t meet payroll. So the VP worked for 4 additional months without pay and was then, along with all other executives, laid off. He sued for the pay he was owed.

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What happened. “Harris” joined Johnny’s Lunch Franchise as VP of real estate and site selection in September 2007, and he was paid through July of 2008. That’s when Johnny’s cash flow fell apart, and it appears that none of the executive staff was paid. Harris sued in federal district court, charging violation of the Fair Labor Standards Act (FLSA), the Michigan Wage and Fringe Benefits Act, and common law principles of unjust enrichment. But the judge consulted FLSA and ruled against Harris.

He reasoned that the employer’s failure to pay Harris did not convert his position from salary-based to hourly, stressing that “administrative employees are exempt from coverage within the meaning of the FLSA based on the salary they were owed under their employment agreements and not based on the compensation that they actually received.” That is, the judge ruled that receiving no pay for 4 months wasn’t meaningful under the law. Harris appealed to the 6th Circuit, which covers Kentucky, Ohio, Michigan, and Tennessee.

What the court said. Appellate judges looked at revisions to FLSA made in 2004 and found that the district judge had not consulted them and had ruled according to a 1973 version. The 1973 revision stressed the importance of the employment agreement between an employee and an employer. The district judge also found no indication that Harris’s salary had been reduced because of variations in the quality or quantity of the work he performed, which would have violated his exempt status under FLSA.

Appellate judges said the 2004 revisions provide, in part, that an employee will be considered to be compensated on a salary basis “if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation.” They went on to say, “The question” under the current regulations “is what compensation [Harris] actually received.” So they sent his case back to the district court for reconsideration. Orton v. Johnny’s Lunch Franchise, U.S. Court of Appeals for the 6th Circuit, No. 10-2044 (2012).

Point to remember: The 2004 revisions to FLSA were the first meaningful changes, especially in terms of minimum salaries for exempt employees, revisions that were long overdue.

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