Amy Baden-Winterwood v. Life Time Fitness, Inc.

RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 09a0177p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

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Plaintiffs-Appellants/Cross-Appellees, -

AMY BADEN-WINTERWOOD, et al.,

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Nos. 07-4437/4438

v.

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Defendant-Appellee/Cross-Appellant. -

LIFE TIME FITNESS, INC.,

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Appeal from the United States District Court

for the Southern District of Ohio at Columbus.

No. 06-00099—Gregory L. Frost, District Judge.

Argued: October 22, 2008

Decided and Filed: May 19, 2009

Before: BOGGS, Chief Judge; COLE and COOK, Circuit Judges.

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COUNSEL

ARGUED: Nicole T. Fiorelli, Patrick J. Perotti, DWORKEN & BERNSTEIN CO., L.P.A.,

Painesville, Ohio, for Appellants. Douglas R. Christensen, DORSEY & WHITNEY, LLP,

Minneapolis, Minnesota, for Appellee. ON BRIEF: Nicole T. Fiorelli, Patrick J. Perotti,

DWORKEN & BERNSTEIN CO., L.P.A., Painesville, Ohio, for Appellants. Douglas R.

Christensen, Marilyn J. Clark, Zeb-Michael Curtin, Michael J. Wahoske, DORSEY &

WHITNEY, LLP, Minneapolis, Minnesota, for Appellee.

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OPINION

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COLE, Circuit Judge. Plaintiffs-Appellants/Cross-Appellees Amy Baden-

Winterwood, et al., (collectively, “Plaintiffs”) seek overtime compensation from Defendant-

Appellee/Cross-Appellant Life Time Fitness, Inc. (“Defendant” or “Life Time Fitness”) for

alleged violations of the Fair Labor Standards Act (“FLSA”), 29 U.S.C. § 201 et seq.

Specifically, Plaintiffs claim that because Life Time Fitness’s compensation plan (“corporate

1

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 2

bonus-pay plan” or “compensation plan”) was not consistent with the salary-basis test set

forth in 29 C.F.R. § 541.602, Plaintiffs were not exempt from overtime compensation.

Defendant counters that its compensation plan was at all times compliant with the FLSA, or,

in the alternative, that, if Plaintiffs are entitled to overtime compensation, such compensation

is limited to that earned during the time period in which Defendant made actual deductions

from Plaintiffs’ salaries.

On the parties’ cross-motions for summary judgment, the district court bifurcated the

time period at issue, finding that the Supreme Court’s interpretation of the salary-basis test

in Auer v. Robbins, 519 U.S. 452 (1997) (“Auer test” or “Auer subject-to-reduction test”),

controlled for the time period before August 23, 2004, while 29 C.F.R. § 541.603 controlled

for the time period between August 23, 2004 and March 3, 2006. Applying these tests, the

district court concluded that certain Plaintiffs were entitled to overtime compensation but

only for the three pay periods occurring in November and December, 2005, when actual

deductions were taken from Plaintiffs’ pay.

Plaintiffs appeal the district court’s bifurcation determination as well as its finding

that Plaintiffs were entitled to overtime compensation for only the three pay periods in which

1

deductions were made. Life Time Fitness cross-appeals the district court’s

determination that its compensation plans violated the FLSA and that Plaintiffs are

entitled to any compensation.

I. BACKGROUND

A. Factual Background

Plaintiffs are current or former employees of Life Time Fitness, a Minneapolis

corporation that owns and operates approximately sixty health and fitness centers

throughout the United States. (Joint Appendix (“JA”) 53-57.)

In district court, the parties submitted the following stipulated facts:

1

Plaintiffs also claim that Plaintiff Tina Seals has a separate basis for overtime compensation

because Seals’s compensation did not meet the salary-level test. However, this issue was not adequately

presented to the district court, and genuine issues of material fact remain as to Seals’s compensation level.

As such, our summary judgment review requires that this issue be remanded to the district court for further

consideration.

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 3

1. Life Time Fitness is an employer covered by the FLSA.

2. Plaintiffs’ claim is that Defendant’s method of

compensating Plaintiffs was not consistent with the

salary[-]basis test, presently codified at 29 C.F.R.

§ 541.602, and, thus, Plaintiffs contend that Plaintiffs

were not exempt from the overtime provisions of the

FLSA during the pay period falling within the limitations

period, and thus are entitled to overtime for hours worked

over forty for each week during said limitations period,

whatever said limitations period is determined to be.

Defendant contends that its pay plan at all times complied

with the FLSA and that Plaintiffs are not entitled to

overtime for any pay period during their employment

with Defendant. In the alternative, Defendant contends

that to the extent any Plaintiffs are entitled to overtime,

such liability period is limited to the period of time during

which actual deductions occurred from Plaintiffs’

salaries.

3. The [FLSA’s] salary[-]basis test is explained in 29 C.F.R.

§ 541.602(a), which provides, in part:

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 employee’s compensation,

which amount is not subject to reductions

because of variations in the quality or

quantity of the work performed.

4. Specifically, Plaintiffs believe that language in certain

corporate bonus[-]pay plans which covered them during

their employment with Defendant, under which

Defendant reserved the right to make deductions from

their base salaries to recover for earlier bonus

overpayments on a year-to-date basis, and the fact that

such deductions were made from eight Plaintiffs as set

forth [below], was inconsistent with the salary[-]basis

test.

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 4

Corporate Bonus[-]Pay Plans

5. Each Plaintiff was compensated under a corporate

bonus[-]pay plan for some period of time during which

he or she was employed by Defendant during the time

period potentially relevant to this lawsuit (February 8,

2003 through March 3, 2006).

6. During the periods of time for which each Plaintiff was

covered by a corporate bonus[-]pay plan, he or she

generally was paid a pre-determined amount of

compensation, identified by Life Time Fitness as base

salary, on a semi-monthly basis. In addition to base

salary, each Plaintiff was eligible to receive monthly

bonus payments based on year-to-date performance

according to guidelines set forth in his or her corporate

bonus[-]pay plan.

7. The first date any Plaintiff was covered by a corporate

bonus[-]pay plan which contained language reserving

Defendant’s right to make deductions from Plaintiffs’

base salaries to recover for earlier bonus overpayments

on a year-to-date basis was January 1, 2004. The

periods of time each Plaintiff was covered by such

corporate bonus[-]pay plans (referred to as “corporate

bonus[-]pay plans at issue in [these stipulations]”) are

set forth below in paragraphs 21 through 46.

2004 Corporate Bonus[-]Pay Plans

8. Defendant’s 2004 corporate bonus[-]pay plans,

effective January 1, 2004, covered Plaintiffs employed

during 2004 as senior management, [specifically]

Member Activities Department Heads. Around April 1,

2004, the plans were further extended to Life Café

Department Heads. The following Plaintiffs were

covered by corporate bonus[-]pay plans for some or all

of 2004 . . . : Baden-Winterwood, Barge, Brevard,

Chaney, Davenport, Galloway, Gregorich, House,

Konieczny, Mendez, Nutinsky, and Schroeder.

9. Plaintiffs’ 2004 corporate bonus[-]pay plans contained

the following language: “If, during the year, YTD

EBITDA Before Occupany $ performance drops below

the minimum performance level of 80% of plan, and

payments have been made in previous months, then

[Life Time Fitness] reserves the right to reclaim the

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 5

amount of previous payments by reducing future semi-

monthly guarantee payments.”

10. No Plaintiff had his or her base salary reduced in 2004

to recover earlier bonus overpayments.

2005 Corporate Bonus[-]Pay Plans

11. Defendant’s 2005 corporate bonus[-]pay plans,

effective January 1, 2005, covered Plaintiffs employed

during 2005 as senior management, [specifically]

Member Activities Department Heads, Life Café

Department Heads, and Life Spa Department Heads.

The following Plaintiffs were covered by corporate

bonus[-]pay plans for some or all of 2005 . . . : Baden-

Winterwood, Barclay, Barge, Brevard, Chaney,

Erdman, Fuss, Galloway, Gregorich, House, Johnson,

Lloyd, Mann, McCarthy, Mendez, Nutinsky, Richards,

Seals, Visser, Volbrecht, Weiler, West, and Young.

12. Plaintiffs’ 2005 corporate bonus[-]pay plans contained

the following language: “If, during the year,

performance drops to a level such that bonus payments

made exceed the amount earned, Life Time Fitness

reserves the right to reclaim the amount of the

overpayment by reducing future semi-monthly base

salary payments.”

13. Across three pay dates in November and December

2005—namely, November 9, November 23, and

December 9—a total of 8 Plaintiffs had their base

salaries reduced to recover some of the amounts of

unearned bonus overpayments they had received earlier

in the year.

14. Plaintiffs whose base salaries were reduced for the

November 9, 2005 pay date were Baden-Winterwood,

Barclay, Gregorich, House, and Young.

15. Plaintiffs whose base salaries were reduced for the

November 23, 2005 pay date were Baden-Winterwood,

Erdman, Gregorich, House, and Young.

16. Plaintiffs whose base salaries were reduced for the

December 9, 2005 pay date were Baden-Winterwood,

Barclay, Erdman, Galloway, Gregorich, House,

Mendez, and Young.

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 6

2006 Corporate Bonus[-]Pay Plans

17. Defendant’s 2006 corporate bonus[-]pay plans,

effective January 1, 2006, applied to the same universe

of relevant positions as the 2005 corporate plans.

Accordingly, the Plaintiffs employed as Member

Activities Department Heads, Life Café Department

Heads, and Life Spa Department Heads during some or

all of 2006 generally were covered by the 2006

corporate bonus[-]pay plans. These individuals were

Baden-Winterwood, Barclay, Erdman, Fuss, Galloway,

Gregorich, Lloyd, Mann, McCarthy, Mendez, Visser,

Weiler, West, and Young.

18. Effective January 1, 2006, Defendant altered its

corporate bonus[-]pay plans to implement a 20% hold

back “bank,” which Defendant designed to protect the

corporation from bonus overpayments on a year-to-date

basis. Defendant revised Plaintiffs’ 2004 and 2005

corporate bonus[-]pay plans to provide that “[o]n a

YTD basis if the amount of At Risk Pay or Performance

Pay earned is less than the amount paid, Life Time

Fitness Inc. reserves the right to reclaim the amount of

overpayment by reducing the 20% monthly hold-back

and if necessary future semi-monthly base salary

payments. On an annual basis, in no case will the

Guarantee Pay be lowered.”

19. Following the filing of the instant lawsuit [in district

court], in recognition of the fact that at least one of its

employees believed its corporate bonus[-]pay plans may

have violated the FLSA, and as an employee relations

measure, Defendant decided to further alter its 2006

corporate bonus[-]pay plans so that any attempts to

recover earlier bonus overpayments would be taken

only from the 20% hold back bank. On or around

March 3, 2006, Defendant issued revised copies of its

2006 corporate bonus[-]pay plans, which Defendant

backdated to be effective January 1, 2006, and which

contained the following language: “On a YTD basis if

the amount of At-Risk Pay or Performance Pay earned

is less than the amount paid, Life Time Fitness Inc.

reserves the right to reclaim the amount of overpayment

from the banked Performance Pay hold-back. In no

case will the Guaranteed Pay be reduced.”

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 7

20. None of the Plaintiffs had his or her base salary reduced

at any point during 2006 to recover earlier bonus

overpayments.

Facts Relevant to Individual Plaintiffs’ Claims

21. Amy Baden-Winterwood has been employed by Life

Time Fitness as a Member Activities Department Head

from July 1, 1999 through the present. She was covered

by a corporate bonus[-]pay plan at issue in this lawsuit

from January 1, 2004 through March 3, 2006.

...

23. Victor Barge was employed by Life Time Fitness as a

Director-Project Management Organization from July

6, 2004 through September 1, 2005. He was covered by

a corporate bonus[-]pay plan at issue in this lawsuit

from July 6, 2004 through September 1, 2005.

24. Kristina Brevard was employed by Life Time Fitness as

a Member Activities Department Head from April 30,

2004 through August 31, 2005. She was covered by a

corporate bonus[-]pay plan at issue in this lawsuit from

April 30, 2004 through August 31, 2005.

25. Teresa Chaney was employed by Life Time Fitness

from approximately August 1, 1999 through August 2,

2005. She was employed as a Member Activities

Department Head during the period from February 8,

2003 through August 2, 2005. She was covered by a

corporate bonus[-]pay plan at issue in this lawsuit from

January 1, 2004 through August 2, 2005.

26. Elizabeth (Campbell) Davenport was employed by Life

Time Fitness as a Member Activities Department Head

from October 15, 2002 through February 14, 2004. She

was covered by a corporate bonus[-]pay plan at issue in

this lawsuit from January 1, 2004 through February 14,

2004.

...

32. Chrisondra Johnson was employed by Life Time

Fitness from September 15, 2004 through October 15,

2005. She was employed as a Life Spa Department

Head from February 1, 2005 through October 15, 2005;

however, she went on unpaid leave on August 8, 2005,

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 8

and performed no work thereafter. She was covered by

a corporate bonus[-]pay plan at issue in this lawsuit

from February 1, 2005 through October 15, 2005.

33. Scott Konieczny was employed by Life Time Fitness as

a Life Café Department Head from October 24, 2002

through October 1, 2004. He was covered by a

corporate bonus[-]pay plan at issue in this lawsuit April

1, 2004 through October 1, 2004.

...

38. Robert Nutinsky was employed by Life Time Fitness

from approximately December 2, 2003 to June 15,

2006. He was employed as a Member Activities

Department Head from March 1, 2004 through April

30, 2005. He was covered by a corporate bonus[-]pay

plan at issue in this lawsuit from March 1, 2004 through

April 30, 2005.

...

40. Andrea Schroeder was employed by Life Time Fitness

as a Member Activities Department Head from March

29, 2004 through September 2, 2004. She was covered

by a corporate bonus[-]pay plan at issue in this lawsuit

from March 29, 2004 through September 2, 2004.

41. Tina Seals was employed by Life Time Fitness at

various times from approximately January 12, 1999

through October 24, 2005. She was employed as a

Member Activities Department Head from August 1,

2005 through October 24, 2005. She was covered by a

corporate pay plan at issue in this lawsuit from August

1, 2005 through October 24, 2005.

...

43. Aaron Volbrecht was employed by Life Time Fitness

from approximately November 16, 2000 until August 1,

2005. He was employed as a salaried Sales Manager

from March 1, 2005 through August 1, 2005. He was

covered by a corporate bonus[-]pay plan at issue in this

lawsuit from March 1, 2005 through August 1, 2005.

(Stipulation of Certain Undisputed Facts (“Stip.”) 3-10, JA 49-56.)

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B. Procedural Background

Plaintiff Amy Baden-Winterwood initiated this litigation on February 8, 2006

in the United States District Court for the Southern District of Ohio on behalf of

herself and as a putative class representative, asserting claims for unpaid wages,

overtime, and injunctive relief under the FLSA. The parties stipulated to certification

of a conditional class, which, before the district court, consisted of twenty-six

individuals.

Plaintiffs and Life Time Fitness filed cross-motions for summary judgment.

Plaintiffs argued that Life Time Fitness misclassified them as salaried exempt

employees and failed to pay them overtime as required by the FLSA. Specifically,

Plaintiffs alleged that Life Time Fitness’s payment plans violated the salary-basis test,

29 C.F.R. § 541.602(a), because Plaintiffs’ pay was subject to reduction “because of

variations in the quality or quantity” of their work. Plaintiffs requested liquidated

damages under 29 U.S.C. § 216(b) as well as attorney fees and costs.

Life Time Fitness argued that any salary deductions were made to recover

overpayments of bonus pay. Life Time Fitness claims that these deductions were

unrelated to the quality or quantity of Plaintiffs’ work, and therefore did not violate the

FLSA. Life Time Fitness further argued that, to the extent that any salary reduction

violated the FLSA, Plaintiffs could recover overtime pay for only those pay periods

during which actual deductions were made.

On July 10, 2007, the district court granted in part Plaintiffs’ motion for

summary judgment, finding “that the deductions from the salaries of eight Plaintiffs

were deductions resulting from ‘variations in the quality or quantity of the work

performed,’ in violation of the salary-basis test.” Baden-Winterwood v. Life Time

Fitness, No. 2:06-CV-99, 2007 U.S. Dist. LEXIS 49777, at *42 (S.D. Ohio July 10,

2007) (quoting 29 C.F.R. § 541.602(a)). However, the district court limited Plaintiffs’

recovery to overtime pay for the three pay periods in 2005—the periods ending

November 9, November 23, and December 9—during which Life Time Fitness took

actual deductions from Plaintiffs’ salaries. Id. The court dismissed all other claims

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for overtime pay, including, in their entirety, the claims of the ten Plaintiffs here. Id.

at *42-43.

In its review of Plaintiffs’ overtime claims, the district court undertook a

thorough three-part analysis. First, the district court determined the effect of the

Department of Labor’s (“DOL”) new salary-basis regulations. Id. at *21-24. The

court found that “[u]nder the new regulations, [effective August 23, 2004,] only ‘[a]n

actual practice of making improper deductions demonstrates that the employer did not

intend to pay employees on a salary basis.’” Id. at *22 (quoting 29 C.F.R.

§ 541.603(a)). This meant that Plaintiffs’ claims covering the period of time before

August 23, 2004 would be analyzed under the Auer test, while claims related to the

period after August 23, 2004, would be governed by the DOL’s new regulation. Id.

at *24-43.

Second, the district court found that Life Time Fitness did not violate the

salary-basis test during the period prior to August 23, 2004. Id. at *31. The court

found that “there is no evidence that [Life Time Fitness]—between January 1, 2004,

and August 23, 2004—had developed any kind of plan that would indicate more of an

intent to actually make improper salary deductions, or that it actually docked the pay

of any salaried employees pursuant to the program’s terms . . . .” Id.

Third, the district court turned to Plaintiffs’ post-August 23, 2004 claims and

determined that improper deductions from Plaintiffs’ salaries occurred on three distinct

dates during November and December 2005. Id. at *41-42. The court reasoned that

these deductions violated the salary-basis test because they specifically related to the

quality or quantity of work each Plaintiff had performed. Id. Applying the new DOL

regulations, the court concluded that those parties whose salaries had been reduced

during those pay periods, as well as employees in the same job classification as those

with such salary deductions, were entitled to overtime pay. Id. at *42. As stated

above, the court also dismissed all claims for overtime for “parties to this action who

were not department heads working for [Life Time Fitness] during those pay periods

. . . .” Id. at *43.

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On October 9, 2007, the district court entered final judgment under Rule 54(b)

against the ten Plaintiffs whose claims were dismissed in their entirety in the court’s

July 10, 2007 opinion and order. Baden-Winterwood v. Life Time Fitness, No. 2:06-

CV-99, 2007 U.S. Dist. LEXIS 77618, at *1 (S.D. Ohio Oct. 9, 2007). Those ten

Plaintiffs filed a timely notice of appeal and Life Time Fitness filed a timely notice of

cross-appeal.

II. LAW AND ANALYSIS

A. Standard of review

The parties contend that the district court erred in its resolution of their cross-

motions for summary judgment. In reviewing a grant of summary judgment on cross-

motions for summary judgment, this Court applies the same legal standards as the

district court. Relford v. Lexington-Fayette Urban County Gov’t, 390 F.3d 452, 456

(6th Cir. 2004). A party’s request for summary judgment should be granted “only

where the pleadings and evidence ‘show that there is no genuine issue as to any

material fact and that the moving party is entitled to a judgment as a matter of law.’”

Id. at 456-57 (quoting Fed. R. Civ. P. 56(c)). In reviewing the district court’s decision

on each party’s motion, we must view all facts and inferences in the light most

favorable to the nonmoving party. Relford, 390 F.3d at 456 (citing Lenning v.

Commercial Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001)). Our review is de

novo as to questions of law. See Benefits Comm. of Saint-Gobain Corp. v. Key Trust

Co. of Ohio, N.A., 313 F.3d 919, 925 (6th Cir. 2002).

B. The regulatory framework

Congress enacted the FLSA in 1938 as a remedial statute “designed to correct

‘labor conditions detrimental to the maintenance of the minimum standard of living

necessary for health, efficiency, and general well-being of workers . . . .’” Dunlop v.

Carriage Carpet Co., 548 F.2d 139, 143 (6th Cir. 1977) (quoting 29 U.S.C. § 202(a)).

The FLSA provides that employers may not require employees to work more than forty

hours per workweek unless those employees receive overtime compensation at a rate

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 12

of not less than one-and-one-half times their regular pay. 29 U.S.C. § 207(a)(1). The

FLSA contains certain exemptions from the overtime compensation requirement, 29

U.S.C. § 213; however, “[e]xemptions under the FLSA are narrowly construed against

the employer.” Takacs v. Hahn Auto. Corp., 246 F.3d 776, 779 (6th Cir. 2001). The

applicability of an FLSA exemption is an affirmative defense that an employer must

establish by a preponderance of the evidence. Renfro v. Indiana Michigan Power Co.,

497 F.3d 573, 576 (6th Cir. 2007) (citing Walling v. Gen. Indus. Co., 330 U.S. 545,

547-48 (1947)).

Life Time Fitness claims that employees in Plaintiffs’ positions are exempt

from the FLSA’s overtime provisions under the “bona fide executive, administrative,

or professional capacity” exemption. 29 U.S.C. § 213(a)(1). Under the FLSA

regulations, an employee’s position must satisfy three tests to qualify for this

exemption: (1) a duties test; (2) a salary-level test; and (3) a salary-basis test. Acs v.

Detroit Edison Co., 444 F.3d 763, 767 (6th Cir. 2006) (citing Takacs, 246 F.3d at 779);

see also 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).

The issue before this Court is whether Plaintiffs’ compensation plans satisfy

the salary-basis test. Prior to August 23, 2004, the salary-basis test, as defined by

regulation, provided:

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 on a weekly, or less frequent basis,

a predetermined amount constituting all or part of his compensation,

which amount is not subject to reduction because of variations in the

quality or quantity of the work performed.

29 C.F.R. § 541.118(a) (1973). In August 2004, the DOL updated the regulations

defining the salary-basis test. The new regulation states:

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 employee’s compensation, which

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 13

amount is not subject to reduction because of variations in the quality

or quantity of the work performed.

29 C.F.R. § 541.602(a) (effective August 23, 2004). Under both versions, Life Time

Fitness bears the burden of proving that Plaintiffs were paid: (1) a predetermined

amount, which (2) was not subject to reduction (3) based on quality or quantity of

work performed. Notably, however, rather than include the term “employment

agreement,” the updated regulations focus on pay received. Compare 29 C.F.R.

§§ 541.118(a), 541.602(a).

For our purposes, the salary-basis test has two interpretations of the phrase

“subject to,” both of which are relevant here. In 1997, in Auer v. Robbins, 519 U.S.

452 (1997), the Supreme Court adopted the interpretation offered by the Secretary of

Labor that the salary-basis test denies exempt status “if there is either an actual

practice of making . . . deductions [based on variations in quality or quantity of work

performed] or an employment policy that creates a ‘significant likelihood’ of such

deductions.” Id. at 461. Specifically, the Court held:

The Secretary’s approach rejects a wooden requirement of actual

deductions, but in their absence it requires a clear and particularized

policy--one which “effectively communicates” that deductions will be

made in specified circumstances. This avoids the imposition of

massive and unanticipated overtime liability . . . in situations in which

a vague or broadly worded policy is nominally applicable to a whole

range of personnel but is not “significantly likely” to be invoked

against salaried employees.

Id. Thus, under Auer, an employee is not paid on a salary basis if (1) there is an actual

practice of salary deductions or if (2) an employee is compensated under a policy that

clearly communicates a significant likelihood of deductions. Id.

Following Auer, on March 31, 2003, the DOL provided published notice on a

proposed set of new FLSA regulations. See Defining and Delimiting the Exemptions

for Executive, Administrative, Professional, Outside Sales and Computer Employees,

68 Fed. Reg. 15,560 (Mar. 31, 2003). After a 90-day comment period, the DOL

revised and released its final regulations, defining the exemptions under the FLSA.

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 14

See Defining and Delimiting the Exemptions for Executive, Administrative,

Professional, Outside Sales and Computer Employees, 69 Fed. Reg. 22,122 (Apr. 23,

2004). The new regulations became effective on August 23, 2004. Id.

Under the new regulations, the Secretary of Labor reinterpreted the salary-basis

test. Life Time Fitness argues that the DOL specifically eliminated the “policy” part

of the Auer test, whereby a “significant likelihood” of improper deductions was

sufficient to cause an employee to lose his or her FLSA exemption. The new

regulations (“§ 541.603”) provide that “[a]n actual practice of making improper

deductions demonstrates that the employer did not intend to pay employees on a salary

basis.” 29 C.F.R. § 541.603(a). Moreover, Life Time Fitness argues that the new

regulations limit the scope of recovery by providing that “[i]f the facts demonstrate

that the employer has an actual practice of making improper deductions, the exemption

is lost during the time period in which the improper deductions were made for the

employees in the same job classification working for the same managers responsible

for the actual improper deductions.” 29 C.F.R. § 541.603(b).

In its comments, the DOL explains that while the new rule represents a

departure from the Secretary’s position in Auer, “[t]he ‘significant likelihood’ test is

not found in the FLSA itself or anywhere in the existing Part 541 regulations.

Moreover, nothing in Auer prohibits the [DOL] from making changes to the salary[-

]basis regulations after appropriate notice and comment rulemaking.” Defining and

Delimiting the Exemptions, 69 Fed. Reg. at 22,180. The DOL stated its reasoning

behind the changes:

Any other approach, on the one hand, would provide a windfall to

employees who have not even arguably been harmed by a “policy” that

a manager has never applied and may never intend to apply, but on the

other hand, would fail to recognize that some employees may

reasonably believe that they would be subject to the same types of

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 15

impermissible deductions made from the pay of similarly situated

employees.

Id.

C. Bifurcation

Plaintiffs assert that the Auer Court’s interpretation of the salary-basis test

should apply to the entire claim period. They argue that this Court should look to the

date the claims arose, which they argue is January 1, 2004, to determine the applicable

salary-basis test. (Final Br. of Plaintiffs (“Pls.’ Br.”) 43 (citing LaCourse v. GRS III

L.L.C., No. 05-73613, 2006 U.S. Dist. LEXIS 89935, at *42 (E.D. Mich. Dec. 13,

2006) (“The Court believes that cases decided after the amendment date must apply

the prior regulations if the claim arose before the new regulations took effect.”)

(citations omitted))). Plaintiffs claim that the district court erred in applying Auer only

from January 1, 2004 through August 29, 2004 because “Auer’s ‘policy or practice’

test is looked at over the entire claim period.” (Pls.’ Br. at 44.)

Life Time Fitness counters that the district court did not err in applying the

Auer test before August 23, 2004 and in applying § 541.603 after August 23, 2004.

Life Time Fitness asserts that “[t]here is no question the new regulations apply to all

of Plaintiffs’ claims for work performed after August 23, 2004,” and, in fact, points

to cases that have gone farther—applying the new regulations to all work performed,

including work occurring before August 23, 2004. (Final Br. of Defendant (“Df.’s

Br.”) 28-29 (citing Bowman v. Builder’s Cabinet Supply Co., No. 04-201-DLB, 2006

U.S. Dist. LEXIS 62712, at *10 (E.D. Ky. Aug. 23, 2006) (applying new regulations

to pre-section-603 employment where plaintiffs filed suit after the new regulations

took effect); Johnson v. Target Corp., No. 3:05-CV-153, 2006 U.S. Dist. LEXIS

15876, at *12 n.1 (E.D. Tenn. Mar. 8, 2006) (same); Casto v. Royal Oak Indus., Inc.,

No. 5:04-CV-195, 2006 U.S. Dist. LEXIS 8282, at *11 n.6 (W.D. Mich. Feb. 10, 2006)

(same)).)

The district court did not definitively decide that Auer applied to the pre-

August 23, 2004 time period. Instead, the court determined that it “need not decide

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 16

which interpretation of the salary-basis test to use” because, as to the pre-August 23,

2004 period, “[u]nder either interpretation . . . [Life Time Fitness] did not violate the

test.” Baden-Winterwood, 2007 U.S. Dist. LEXIS 49777, at *25.

Today, we decide that the proper approach is to apply Auer’s salary-basis test

to pay periods occurring before August 23, 2004 and to apply § 541.603 to pay periods

occurring after the same, § 541.603's effective date. Plaintiffs correctly point out that

DOL regulations do not apply retroactively. See Kennedy v. Commonwealth Edison

Co., 410 F.3d 365, 369 (7th Cir. 2005) (concluding that the Secretary’s new FLSA

interpretations do not apply retroactively). In Bowen v. Georgetown Univ. Hosp., 488

U.S. 204, 208 (1998), the Supreme Court recognized that “a statutory grant of

legislative rulemaking authority will not, as a general matter, be understood to

encompass the power to promulgate retroactive rules unless that power is conveyed by

Congress in express terms.” No such terms apply here, and therefore the proper pre-

August 23, 2004 standard is Auer’s salary-basis test.

As to the post-August 23, 2004 period, the DOL’s new regulations apply. The

district court correctly held that “the Secretary of Labor’s interpretation of the [salary-

basis] test controls unless it is ‘plainly erroneous or inconsistent with the regulation.’”

Baden-Winterwood, 2007 U.S. Dist. LEXIS 49777, at *32 (quoting Auer, 519 U.S. at

461). Simply put, the DOL’s 1997 interpretation of the salary-basis test is not

understood to control indefinitely. As stated by the district court, the Supreme Court

“clearly considered the possibility that the Secretary of Labor’s interpretation could

change over time and decided that courts should give great deference to the

interpretation regardless of any changes.” Id. at *32-33. After the proper notice and

comment period, § 541.603, which became effective on August 23, 2004, represents

the DOL’s current interpretation and implementation of the salary-basis test. As such,

§ 541.603 controls and is applicable to pay periods occurring after August 23, 2004.

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 17

D. The pre-August 23, 2004 period

Plaintiffs assert that the district court erred by applying Auer’s subject-to-

reduction test to the pre-August 23, 2004 claim period. They argue that the district

court improperly concluded that because Life Time Fitness made no deductions from

January 1, 2004 through August 23, 2004, there was neither an actual practice nor a

policy creating a significant likelihood of deductions. (Pls.’ Br. at 48-57.) Plaintiffs

claim that the district court erred in two distinct ways: “First it was error to bifurcate

the entire time period by the date of the regulation . . . . Second, the District Court

improperly considered the fact that no actual deductions were made . . . —not to

determine there was no actual practice, but that there was not a policy [creating a

significant likelihood of deductions].” Id. at 45-46. As previously discussed,

Plaintiffs are incorrect that the DOL’s new regulation does not bifurcate the class

period. However, Plaintiffs are correct that the district court erred in determining that

Plaintiffs’ salaries were not subject to deduction under Auer.

As explained above, the proper test for analyzing the pre-August 23, 2004

period is set out in Auer. The Auer test asks “if there is either an actual practice of

making such deductions or an employment policy that creates a ‘significant likelihood’

of such deductions.” 519 U.S. at 461 (emphasis added). We examine both sections

of the Auer test below.

1. Actual practice of deductions

Plaintiffs argue that Life Time Fitness’s compensation plan had an actual

practice of deductions during the pre-August 23, 2004 period. Plaintiffs contend that,

in analyzing the pre-August 23, 2004 period, that the district court should have looked

at the number of deductions and the number of employees affected over the entire time

period. See Takacs, 246 F.3d at 781 (concluding that an actual practice of deductions

existed where seven members of management (including three plaintiffs) faced pay

reductions over the course of a year and a half) (other citations omitted)). But this

argument simply rehashes an old one. The analysis period for actual deductions is

determined by the promulgation of the DOL’s new rules, and it is undisputed that Life

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 18

Time Fitness made no actual deductions between January 1, 2004 and August 23,

2004. Thus, the district court properly found there was no “actual practice” of

deductions under Auer before August 23, 2004.

2. Significant likelihood of deductions

Plaintiffs also argue that Life Time Fitness’s 2004 corporate bonus-pay plan

created a significant likelihood of deductions. They argue that the district court

improperly failed to find that the bonus-pay plan created a significant likelihood of

improper deductions. In this instance, Plaintiffs are correct.

The district court looked to Whisman v. Ford Motor Co., 157 F. App’x 792

(6th Cir. 2005), for support of the proposition that the possibility of salary deductions

alone is not enough as it “is not the same thing as working under a policy that makes

it significantly likely that deductions will occur.” Baden-Winterwood, 2007 U.S. Dist.

LEXIS 49777, at *30. In Whisman, a company executive issued a memorandum

warning of possible pay deductions based on audit reports that were being generated

as employees entered and exited the building. 157 F. App’x at 795. Despite the threat

of deduction, there was no evidence that the company routinely monitored the

employees or that such deductions were ever made, id., and this Court concluded that

there was no more than a “theoretical possibility” that deductions would occur. Id. at

798. Relying on Whisman, the district court determined that Life Time Fitness’s

policy reserved the right to make salary deductions as a theoretical possibility but did

not rise to the level of providing clear notice that Plaintiffs’ pay was subject to

deduction. Baden-Winterwood, 2007 U.S. Dist. LEXIS 49777, at *31. Thus, the

district court determined that Life Time Fitness’s policy did not establish a significant

likelihood that deductions would occur. Id.

The district court erred in concluding that there was not enough evidence to

suggest Life Time Fitness intended to enforce its permissive policy. The Auer subject-

to-reduction test requires only a “clear and particularized policy—one which

‘effectively communicates’ that deductions will be made in specified circumstances.”

519 U.S. at 461. The test does not require a formulaic set of “magic words” indicating

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 19

that the test is mandatory. If employers can avoid overtime liability by crafting

payment policies with permissive (may) language instead of mandatory (will)

language, then the purposes of the FLSA would clearly be frustrated. Rather, as set

out by this Court in Takacs and Whisman, Auer’s test is better satisfied by a policy that

demonstrates that deductions are “more than a mere theoretical possibility” and that

“permit[s] disciplinary or other deductions in pay ‘as a practical matter.’” 246 F.3d

at 781.

Here, Life Time Fitness’s pre-August 23, 2004 compensation plan subjected

employees’ pay to reductions under the Auer test. The compensation plan at issue does

more than create a theoretical possibility of deduction; instead it plainly lays out a

policy under which Life Time Fitness would make future deductions. First, as in

Takacs, Life Time Fitness’s compensation plan targeted specific members of

management. Second, the policy set out a particularized formula whereby Plaintiffs’

pay would be in jeopardy:

If, during the year, YTD EBITDA Before Occupany $ performance

drops below the minimum performance level of 80% of plan, and

payments have been made in previous months, the [Life Time Fitness]

reserves the right to reclaim the amount of previous payments by

reducing future semi-monthly guarantee payments.

(Stip. 5, JA 50.) Third, unlike in Whisman, Life Time Fitness took affirmative steps

to demonstrate that the pay-deduction plan would be enforced: Life Time Fitness

organized a Performance Pay Committee, which oversaw the administration of the

corporate bonus plans, monitored performance levels, and ultimately determined when

deductions would be made. Moreover, at least one company official testified that Life

Fitness employees were keenly aware that Life Time Fitness would take deductions

from their guaranteed pay if an employees’ performance dropped below certain

benchmarks. Life Time Fitness’s Compensation and Human Resource Information

Systems manager provided the following testimony:

Q. . . . Prior to 2005 fall, these employees had no idea that they

were subject to this deduction, did they?

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 20

A. I don’t know that. I would disagree with that.

Q. Why would you disagree with that?

A. Well, it’s on the comp plan.

Q. Their performance -- or their compensation plan?

A. Well, it says right there on the front page.

Q. And you’re holding which exhibit?

A. 6.

Q. And did they receive those plans?

A. Oh, yeah.

Q. Well, those – wouldn’t you agree that those plans are very

ambiguous, that I could read it and say, Well, I’m not going to

be subject to that; that’s not too clear?

A. I would disagree with that.

Q. Would you say that it’s very clear that under that plan, that if

there was an overpayment, it wasn’t an income; it was definite

that you’re subject to this deduction?

A. Yes.

(Deposition of Derrick Boaz 49-50, JA 198-99.) Thus, it was clear to the Plaintiffs,

and those in charge of compensation, that pay was subject to deduction under the

compensation plans at issue here.

Lastly, Life Time Fitness did indeed take actual deductions from Plaintiffs’

salaries not long after employees stopped meeting their performance goals. While

these deductions fell outside the time period governed by Auer (January 1, 2004

through August 23, 2004), there is no reason that this Court cannot consider those later

deductions to be relevant in analyzing whether the compensation plan creates a

“significant likelihood” of deductions. We find the actual deductions from Plaintiffs

guaranteed pay in 2005 support the conclusion that Plaintiffs pay was “subject to

reduction” under Life Time Fitness’s 2004 corporate bonus-pay plan.

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 21

For the above reasons, this Court reverses the district court and concludes that

Life Time Fitness’s compensation plan satisfies Auer’s subject-to-reduction test for the

period January 1, 2004 through August 23, 2004. Therefore, for this time period,

Plaintiffs were not exempt from the FLSA’s overtime requirements, and Life Time

Fitness is liable for overtime for all Plaintiffs subject to a corporate bonus-pay plan

from January 1, 2004 through August 23, 2004.

E. The post-August 23, 2004 period

Here, Plaintiffs argue, again, that the district court erred in finding that

§ 541.603 and its “actual deduction” requirement supplanted the Auer test. Having

dealt with this issue previously, and because the DOL has ample authority to issue new

regulations after the requisite notice-and-comment period, we conclude that Plaintiffs’

argument fails.

On the other hand, Life Time Fitness, on cross-appeal, argues that the district

court erred in finding that the deductions from Plaintiffs’ salaries made in late 2005

were impermissible. Life Time Fitness contends that the district court: (1) failed to

follow proper legal standards in analyzing whether deductions made under the plan

were because of variations in the quality or quantity of work, and (2) failed to give

weight to material facts showing that deductions were not made because of quality or

quantity of work.

1. Legal issues related to § 541.603

Life Time Fitness concedes that it took deductions from guaranteed pay in

November and December of 2005, but it argues that it did so in order to recoup

overpayment, not because of the quality or quantity of Plaintiffs’ work. Life Time

Fitness claims that it is “well established that an employer is permitted to reduce wages

or salary to recoup for earlier overpayments,” and it cites to DOL opinion letters

allowing the recovery of overpayment. One letter, in relevant part, provides:

Q.1. What percentage of the employee’s paycheck may [the employer]

deduct to recoup the money owed it?

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 22

A.1. It has been our longstanding position that where an employer

makes a loan or an advance of wages to an employee, the principal may

be deducted from the employee’s earnings even if such deduction cuts

into the minimum wage or overtime pay due the employee under the

FLSA. Thus, the percentage that [the employer] may deduct to recoup

the money owed to it would be at its own discretion or per agreement

with employee.

Department of Labor, Wage and Hour Division Opinion Letter of Mar. 20, 1998, 1998

WL 852662; see also Department of Labor, Wage and Hour Division Opinion Letter

of Oct. 8, 2004, 2004 WL 3177896 (same). Thus, Life Time Fitness argues that there

was nothing improper about paycheck deductions that simply recovered the overpaid

bonus amount.

We disagree. Life Time Fitness did not provide loans to its employees. To be

sure, it did make advance bonus payments. However, to recover overpayments, Life

Time Fitness impermissibly dipped into Plaintiffs’ guaranteed salaries. Unlike the

situation in both DOL letters, Life Time Fitness knowingly made salary deductions as

part of a pre-designed bonus compensation plan. See Baden-Winterwood, 2007 U.S.

Dist. LEXIS 49777, at *38-39. The deductions were not made to recover irregular

salary advances or payments mistakenly made by the payroll department. See id. The

plain language of 29 C.F.R. § 541.602 provides, “[s]ubject to the exceptions provided

in [section 541.602(b)], an exempt employee must receive the full salary for any week

in which the employee performs any work . . . .” 29 C.F.R. § 541.602(a). Section

541.602(b) provides, generally, that deductions may be made for absentee-ism, sick

leave (in certain circumstances), penalties imposed in good faith for infractions of

safety rules, unpaid disciplinary suspensions, and, under the DOL letters described

above, for mistaken overpayments. But, there is no support for the contention that the

FLSA allows for the reduction of guaranteed pay under a purposeful, incentive-driven

bonus compensation plan. We conclude therefore that the district court properly

determined that Life Time Fitness took improper deductions under § 541.603. The

district court correctly explained that “the DOL materials cited by [Life Time Fitness],

while supportive of the recovery of advances and overpayments in certain situations,

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 23

do not sanction the recovery of overpayments in this case.” Baden-Winterwood, 2007

U.S. Dist. LEXIS 49777, at *38.

2. Evidentiary issues related to § 541.603

In the alternative, Life Time Fitness argues that the district court ignored

material facts showing that the compensation plans at issue in this lawsuit were

computed based on departmental performance rather than on any variance in the

quality or quantity of an individual’s work. Life Time Fitness alleges that the evidence

in the record “demonstrates that monthly-paid bonus advances were dependent upon

a number of factors and were not tethered solely or directly to the hours any covered

employee worked or the quality of her work.” (Final Second Br. of Life Time Fitness

at 57.) By way of example, Life Time Fitness contends that a Department-Head-level

employee’s bonus was affected by her supervisees’ performance, the size and location

of a particular club, club-usage volume, and other factors.

We find Life Time Fitness’s argument that its corporate bonus compensation

plans are not based on individual performance to be dubious, at best. As stated by the

district court, “it is strange for Defendant to argue that individual performance was

mainly irrelevant to the computation of bonus payments. [Life Time Fitness] offered,

after all, that it created the bonus plans ‘[a]s a means for providing incentives for

certain of its employees . . . .’” Baden-Winterwood, 2007 U.S. Dist. LEXIS 49777, at

*39. In fact, Plaintiffs set forth an extensive record—including stipulated facts and

testimony—to show that Life Time Fitness’s corporate bonus compensation plans were

tied to individual performance and varied based on the quality and quantity of each

individual’s work. Id. at *39-42.

F. The effect of post-August 23, 2004 deductions

Plaintiffs argue that the district court erred in limiting recovery to the three pay

periods in 2005, rather than granting overtime to all Plaintiffs for the entire post-

August 23, 2004 claim period. Here, again, Plaintiffs’ claims are flawed. To the

extent that we are considering only the post-August 23, 2004 salary-basis test, when

Nos. 07-4437/4438 Baden-Winterwood, et al. v. Life Time Fitness, Inc. Page 24

actual deductions were made, § 541.603(b) and its implementing regulations explain

that “the exemption is lost during the time period in which the improper deductions

were made for employees in the same job classification working for the same managers

responsible for the actual improper deductions.” 29 C.F.R. § 541.603(b) (emphasis

added). Therefore, the district court properly determined that only Plaintiffs who

worked in the appropriate job classification during the relevant deduction period were

entitled to overtime compensation under § 541.603 after August, 23, 2004.

III. CONCLUSION

For the preceding reasons, the Court AFFIRMS the district court’s decision

bifurcating the class period, finding that violations of 29 C.F.R. § 541.602 occurred in

November and December of 2005, and limiting § 541.603 overtime compensation to

those three pay periods. However, the Court REVERSES the district court insofar as

it found that the pre-August 23, 2004 compensation plan did not create a substantial

likelihood of deductions. The Court, therefore, concludes that Life Time Fitness is

liable for overtime compensation to those Plaintiffs employed and subject to the

corporate bonus-pay plan from January 1, 2004 to August 23, 2004. Finally, the Court

REMANDS the issue of whether Plaintiff Tina Seals’s compensation met the salary-

level test to the district court for further consideration consistent with this opinion.