Whetsel, Vicky v. Network Property

In the

United States Court of Appeals

For the Seventh Circuit

No. 00-2798

Vicky Whetsel,

Plaintiff-Appellant,

v.

Network Property Services, LLC,

Defendant-Appellee.

Appeal from the United States District Court

for the Southern District of Indiana, Indianapolis Division.

No. IP 99-0674-C-F/D--Kennard P. Foster, Magistrate Judge.

Argued February 23, 2001--Decided March 29, 2001

Before Flaum, Chief Judge, and Ripple and Williams,

Circuit Judges.

Flaum, Chief Judge. Vicky Whetsel appeals the

district court’s grant of summary judgment in

favor of Network Property Services, LLC ("NPS")

on her claim under the Fair Labor Standards Act

("FLSA"). The court determined that regardless of

whether Whetsel was subject to a practice or

policy of improper deductions, NPS properly took

advantage of the regulatory window of correction.

Whetsel, joined by the Secretary of Labor

("Secretary") as amicus curiae, argues that the

window is not available where the employer

maintains a practice or policy of docking

employees’ pay. For the reasons stated herein, we

reverse and remand.

I. Background

Whetsel was an employee of NPS from January 3,

1996 to January 27, 1999. NPS considered her

employment to be exempt from the FLSA, and so she

was not paid overtime regardless of the number of

hours she worked. During the relevant time

period, NPS employed a total of sixteen salaried

employees that it claimed were exempt from the

overtime provisions of the FLSA.

Whetsel filed her complaint against NPS on May

11, 1999, seeking unpaid overtime, liquidated

damages, and attorney’s fees. She claimed that

NPS had an unwritten policy based on "benefit

hours" which subjected her to the possibility of

deductions in her pay for partial day absences.

Under this policy, Whetsel claimed that NPS’s

employees were required to use benefit hours from

a bank of time to cover absences of less than a

day or else their pay would be docked. She also

stated that NPS had in fact made at least eight

partial day deductions to the salaries of four of

its supposedly exempt employees, which amounted

to a practice of docking. Because of the alleged

practice and policy, Whetsel claimed her

employment had not been covered by an exemption

from the FLSA and thus she was owed for the

overtime she had worked while at NPS.

NPS responded that Whetsel had been employed in

an executive capacity and thus was not entitled

to overtime pay. NPS further claimed that it

regularly permitted salaried employees to take

partial day absences after exhausting their

allotted benefit hours without any reduction in

pay, and did not have any policy of reducing

salaried employees’ pay for absences of under one

day. The company noted that Whetsel herself

repeatedly had been absent for less than a day

for various reasons without ever having her pay

reduced. NPS also claimed that the eight partial

day deductions were irregular occurrences caused

by unusual circumstances in each case.

On January 20, 2000, NPS circulated a

memorandum to all of its employees stating that

on "isolated occasions" in the past it had made

partial day deductions to the salaries of exempt

employees and that it had reimbursed those

employees. The memorandum further stated that

NPS’s policy, both in the past and currently, is

not to make deductions from the salaries of

exempt employees for partial day absences

regardless of whether the employee has any

benefit time available. On the same day, NPS

circulated another memorandum stating that any

exempt employee who was leaving the company’s

employ would not have his or her pay reduced

because of a negative balance in his or her

available benefit hours account at the time

employment was terminated.

On February 25, 2000, NPS moved for summary

judgment, arguing that it did not have a practice

or policy of improper deductions and that it had

taken advantage of the regulatory window of

correction through its January 20 memoranda and

repayment to the four affected salaried

employees. The district court, relying on DiGiore

v. Ryan, 172 F.3d 454, 465 (7th Cir. 1999),

stated that it did not need to determine whether

NPS maintained such a practice or policy because,

even if the company had done so, any violation of

the FLSA was remedied through the window of

correction. On this basis, the district court

granted summary judgment to NPS. Whetsel, aided

by the Secretary, appeals.

II. Discussion

A. Structure of the FLSA and Regulations

The relevant legal background of the FLSA

provisions and the Secretary’s regulations on

exemptions is set forth in DiGiore, 172 F.3d at

460-61, and so will not be repeated in depth

here. NPS argues that it was exempt from the FLSA

with respect to Whetsel’s employment because she

was an executive employee under 29 U.S.C. sec.

213(a)(1) and 29 C.F.R. sec. 541.1. Of the three

requirements for an employee to qualify for the

executive exemption, the parties agree that

Whetsel’s employment satisfied the supervisory

and managerial aspects, and so the only issue is

whether she was paid on a salary basis as

required by 29 C.F.R. sec.sec. 541.1(f),

541.118(a).

Section 541.118(a) states that an employee is

paid on a salary basis if he or she receives "a

predetermined amount . . . of [ ] compensation,

which amount is not subject to reduction because

of variations in the quality or quantity of the

work performed." "This requirement, commonly

referred to as the ’no-docking rule’ prohibits

employers from deducting an employee’s pay based

on partial day absences" and certain other

forbidden reasons. DiGiore, 172 F.3d at 461. The

"subject to" phrase in this regulation was

interpreted in Auer v. Robbins, 519 U.S. 452,

461-62 (1997), where the Supreme Court held that

an employee’s compensation could be subject to

reduction even if deductions were not taken from

his or her salary. The "subject to" standard is

met whenever the employer maintains (1) an actual

practice of impermissible deductions or (2) a

policy that creates a significant likelihood of

deductions, so long as the policy is "clear and

particularized" so as to "’effectively

communicate[ ]’ that deductions will be made in

specified circumstances." Id.; see also DiGiore,

172 F.3d at 462-63. Whetsel admits that her own

pay was never reduced for partial day absences,

but argues that NPS maintained both a policy and

a practice of impermissible deductions that made

her subject to having her salary docked.

B. Window of Correction

Section 541.118(a)(6), which establishes a

window for correcting violations of the salary

basis test, states:

The effect of making a deduction which is not

permitted under these interpretations will depend

upon the facts in the particular case. Where

deductions are generally made when there is no

work available, it indicates that there was no

intention to pay the employee on a salary basis.

In such a case the exemption would not be

applicable to him during the entire period when

such deductions were being made. On the other

hand, where a deduction not permitted by these

interpretations is inadvertent, or is made for

reasons other than lack of work, the exemption

will not be considered to have been lost if the

employer reimburses the employee for such

deductions and promises to comply in the future.

The Secretary argues that this provision can

aid an employer only if it first establishes that

it objectively intended to pay its employees on

a salary basis. Maintaining a policy or practice

of improper deductions as defined in Auer shows

that the employer lacked such an intention, and

thus cannot use the window of correction. The

Secretary claims that her construction of the

regulation is entitled to controlling deference

under the interpretive principles affirmed in

Auer, 519 U.S. at 461. She further notes that two

other circuits have adopted this interpretation

in Yourman v. Giuliani, 229 F.3d 124, 128 (2d

Cir. 2000) and Klem v. County of Santa Clara, 208

F.3d 1085, 1093 (9th Cir. 2000). Finally, the

Secretary argues that any language in DiGiore

that is contrary to her position is dicta and was

made without the benefit of her considered views.

Thus, the Secretary claims that the district

court erred by applying the window without

determining whether NPS had a policy or practice

of docking.

NPS responds that the plain language of sec.

541.118(a)(6) states that the window is available

to correct a practice or policy of impermissible

deductions resulting from absences which are

primarily within the control of the employee. NPS

emphasizes the language of the second sentence

and the beginning of the fourth sentence in

supporting its argument. NPS also contends that

this circuit answered the issue of the

availability of the window of correction in an

alternate holding of DiGiore, 172 F.3d at 465,

which controls the outcome of this case.

Setting aside for the moment the potential

effect of DiGiore as precedent, we defer to the

Secretary’s interpretation of the FLSA

regulations unless her construction is "plainly

erroneous or inconsistent with the regulation."

Auer, 519 U.S. at 461 (internal quotation marks

omitted); see also Bowles v. Seminole Rock & Sand

Co., 325 U.S. 410, 414 (1945). The Supreme Court

has recently emphasized that such deference is

warranted only where the language at issue is

ambiguous. Christensen v. Harris County, 529 U.S.

576, 588 (2000). If the regulation is ambiguous,

then we defer to any reasonable construction by

the Secretary, even though this interpretation

might "not be the best or most natural one by

grammatical or other standards." Pauley v.

BethEnergy Mines, Inc., 501 U.S. 680, 702 (1991).

1. Ambiguity.

We conclude that the regulation is ambiguous

regarding whether the window is available to

correct a policy or practice of docking. We rely

on the fact that the regulation does not

explicitly state that it is available to correct

a policy or pattern of deductions, thus leaving

open the question of whether it applies to those

circumstances. By comparison, in recent cases

where the Supreme Court has rejected an agency’s

construction of its own regulation, the Court has

done so only where the proffered interpretation

contradicts explicit language in the regulation.

See Christensen, 529 U.S. at 587-88 (rejecting

agency’s attempt to read word "may" as mandatory

rather than permissive); Norfolk S. Ry. Co. v.

Shanklin, 529 U.S. 344, 356 (2000) (rejecting

agency’s argument that regulation that applied to

"any" federally funded railroad crossing project

affected only a subset of such projects).

NPS’s argument for the clarity of the statute

is based primarily on the second sentence, which

precludes the possibility to correct only where

deductions for lack of work are "generally made."

The term "generally made" conveys a policy or

practice of making deductions. NPS also relies on

the fourth sentence, which states that if its

conditions are complied with the exemption will

be maintained if the deductions were

"inadvertent, or for reasons other than lack of

work" (emphasis added). This sentence might also

be read as implying that deductions cannot be

corrected only where the deduction was made

deliberately and for lack of work. NPS contends

that because the regulatory language singles out

only practices or policies of deductions for lack

of work for incorrigibility, the regulation

implicitly indicates that any other kind of

policy or practice can be corrected. While NPS’s

argument might have merit in other contexts, the

canon of expressio unius est exclusio alterius

has reduced force in the context of interpreting

agency administered regulations and will not

necessarily prevent the regulation from being

considered ambiguous. See Pauley, 501 U.S. at

703; Cheney R.R. Co. v. ICC, 902 F.2d 66, 68-69

(D.C. Cir. 1990) (stating that expressio unius is

"an especially feeble helper in an administrative

setting" and that such reasoning "can rarely if

ever" demonstrate unambiguity so as to prevent

deference to an agency’s interpretation).

We also note that the issue facing this court

has not been settled by Auer. Near the end of

that opinion in a discussion of remedying a one-

time reduction in pay, the Court held that the

"plain language of the regulation sets out

’inadverten[ce]’ and ’made for reasons other than

lack of work’ as alternative grounds permitting

corrective action." 519 U.S. at 463 (alteration

in original). This language could be read as

supporting NPS’s argument that the window is

available for any deductions made for a reason

other than lack of work, including a policy or

practice of such deductions, but this would be a

misunderstanding of the context in which the

Court’s statement appears. The Court had already

determined that the employer’s actions in that

case did not amount to a practice or policy. Id.

at 461-62. The section of Auer quoted above

considered only whether a single impermissible

deduction had to be unintentional to permit

correction, and the Court held that it did not as

long as it was made for reasons other than lack

of work. Because this section of Auer was

discussing only a single deduction, the Court did

not confront the question of whether the window

was available to ameliorate a practice or policy

of deductions. See Klem, 208 F.3d at 1093-94.

2. Reasonableness.

Having determined that the regulation is

ambiguous, we further hold that the Secretary’s

interpretation of the regulation is reasonable.

The Secretary’s construction, which focuses on

objective intention, finds support in the second

sentence of sec. 541.118(a)(6), whose language

indicates that intention is the key to when the

window is available. Similarly, the fourth

sentence, which discusses when "the exemption

will not be considered to have been lost"

provides some modicum of support for the

Secretary’s interpretation. See Klem, 208 F.3d at

1093. Use of the word "lost" suggests that an

employer must first establish that it was

entitled to the exemption, which requires inter

alia that the employer demonstrate it was paying

its employees on a salary basis. According to the

Secretary, this requires that the employer evince

an objective intention to use a salary basis in

compensating its employees. But where the

employer maintained a policy or practice of

improper deductions, the employer had no

objective intention to pay on a salary basis, and

thus had no exemption which could be "lost." Id.

We emphasize that the question is not which

interpretation of sec. 541.118(a)(6) is best or

most natural, but only whether the Secretary’s

construction is reasonable. See Pauley, 501 U.S.

at 702; Klem, 208 F.3d at 1092-93. While one may

argue that the Secretary’s interpretation is

strained, it sufficiently comports with the

language of the regulation so as not to be

declared unreasonable or plainly erroneous.

3. Precedent.

Returning to the question we set aside earlier

in this opinion, we must determine what effect

DiGiore has on the issue before us. In that

opinion, we first concluded that the employer did

not have a policy or practice of impermissible

deductions. 172 F.3d at 463-65. We then stated

that even if the employer’s five improper

deductions constituted a practice, the defendant

employer would not be liable under the FLSA

because it had complied with the last sentence of

sec. 541.118(a)(6). Id. at 465. Whetsel and the

Secretary argue that this latter statement is

dicta and in any case was made without the

benefit of the Secretary’s views, while NPS

claims that it is a binding alternative holding.

NPS also notes certain other decisions that, like

DiGiore, have appeared to hold that an employer

who engages in a policy or practice of

impermissible deductions can still use the window

of correction, though none of these opinions

considered the Secretary’s interpretation. See,

e.g., Davis v. City of Hollywood, 120 F.3d 1178,

1179-81 (11th Cir. 1997); Balgowan v. New Jersey,

115 F.3d 214, 219 (3d Cir. 1997).

While the difference between alternative

holdings and dicta may not always be clear, see

United States v. Crawley, 837 F.2d 291, 292-93

(7th Cir. 1988), the factors in this case point

to the conclusion that the statement in DiGiore

was an alternative holding. The passage was not

a stray rumination on what the law would be in a

hypothetical case. Rather, it was based on the

actual facts before the court and was a

sufficient ground standing alone to reach the

court’s decision. Also, the issue of whether a

practice or policy could be corrected was

apparently briefed before the DiGiore court/1

and no reason exists to believe that the

statement was less carefully reasoned than it

might otherwise have been. Finally, unlike the

situation in Crawley, id. at 292, the statement

in DiGiore does not conflict with other well-

settled precedents. Admittedly, the statement was

not strictly necessary to the disposition of the

case because the holding that no practice or

policy existed was sufficient, but this is true

of all alternative holdings and yet these are

still entitled to precedential weight. Neiman v.

Rudolf Wolff & Co., 619 F.2d 1189, 1193 n.4 (7th

Cir. 1980).

Of course, even holdings can be altered. The

DiGiore opinion does not mention the Secretary’s

view on the issue of when sec. 541.118(a)(6) is

available. This suggests that the court might not

have had that argument before it,/2 which is a

sufficient reason for reconsidering this part of

DiGiore and deferring to the Secretary’s

construction. Deference to administrative

interpretations of regulations serves goals such

as allocating policy questions to the political

branches rather than the judiciary, permitting

agencies to use their more detailed technical

expertise, and letting the regulations be adapted

to complex or changing circumstances. See Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512

(1994); Pauley, 501 U.S. at 696-97; Martin v.

Occupational Safety & Health Review Comm’n, 499

U.S. 144, 151 (1991). Therefore, we have decided

to overrule DiGiore to the extent that opinion

alternatively holds that a practice of

impermissible deductions can be remedied via the

window of correction./3 The rest of DiGiore,

including whether and when multiple deductions

constitute a practice, 172 F.3d at 464-65,

remains intact.

In summary, we hold that when an employer has a

practice or policy of improper deductions as

defined in Auer, the window of correction

provided in 29 C.F.R. sec. 541.118(a)(6) is not

available. In so doing, we join the other federal

appellate courts that have been presented with

the Secretary’s views on this issue. See Yourman,

229 F.3d at 128; Klem, 208 F.3d at 1093. But see

Anthony v. Iowa, No. 223 / 99-0515, 2001 WL

125169, at *3 (Iowa Feb. 14, 2001)

(characterizing Klem as representing a minority

view and holding that the plain language of sec.

541.118(a)(6) demonstrates that the window can be

used whenever improper deductions were made for

reasons other than lack of work, including to

cure a practice or policy of improper

disciplinary suspensions).

C. Remand

Both parties (though not the Secretary) ask

this court either to decide the case or provide

further guidance on the issue of what constitutes

a practice or policy of improper deductions for

the purposes of the salary basis test. While

understanding the parties’ desire, such actions

would be inappropriate at this juncture. In part

because the district court did not consider the

practice and policy questions, the factual record

is not sufficiently developed for us to render a

decision. Instead, we are remanding to the

district court for further proceedings, which is

the usual course where the incorrect legal test

has been applied and the record does not clearly

support judgment for one of the parties.

Pullman-Standard v. Swint, 456 U.S. 273, 291-92

(1982); Nelson v. Monroe Reg’l Med. Ctr., 925

F.2d 1555, 1567 (7th Cir. 1991). We express no

views on the practice and policy questions, and

the district court on remand is free to entertain

renewed summary judgment motions on these issues.

III. Conclusion

In accordance with the views of the Secretary,

we hold that 29 C.F.R. sec. 541.118(a)(6) cannot

be used to remedy a practice or policy of

improper deductions, as those terms are defined

in Auer. The district court’s analysis of this

case was understandably truncated when it relied

on an alternative holding of DiGiore, which we

overrule, to avoid deciding whether NPS’s actions

amounted to a policy or practice. Because such an

analysis is necessary to the disposition of the

case, we are returning this dispute to the

district court to settle the practice and policy

questions on summary judgment or after trial. For

the reasons stated herein, we Reverse and Remand for

further proceedings consistent with this opinion.

/1 The issue of whether a practice could be

corrected was raised in the district court in the

DiGiore case, 987 F. Supp. 1045, 1055-56 (N.D.

Ill. 1997), and the defendants presumably would

have presented this potentially successful

argument when facing this court. However, as

noted below, the plaintiffs in that case might

not have directed their arguments to this issue.

/2 NPS argues that the DiGiore panel did in fact

consider the Secretary’s argument because the

Secretary’s theory was explained in the district

court’s opinion, 987 F. Supp. at 1055-56.

However, our opinion in DiGiore is devoid of any

discussion of the Secretary’s views or whether

deference should be afforded to the Secretary’s

construction of the regulation. This suggests

that the plaintiffs in DiGiore might have focused

on other issues at the appellate level, such as

the district court’s principal holding that no

actual practice or policy existed.

/3 In accordance with Circuit Rule 40(e), this

opinion has been circulated among all judges of

this court in regular active service. No judge

favored a rehearing en banc on the question of

overruling the alternative holding of DiGiore.