A federal appeals court has ruled that a practice of reducing the hours and the base salary of exempt employees during a slow season may be permitted. The employees would still be paid a predetermined amount unless the salaries were changed so often that the employees in essence were paid an hourly wage.

Facts. Wal-Mart employed over 6,000 pharmacists in some 2,000 pharmacies. Nearly 4,000 of the pharmacists were employed full-time. Full-time pharmacists were paid a salary and were assigned a number of base hours--usually 90 hours for 2 weeks--and were paid a specified minimum salary each pay period. They were also paid for any time worked that was more than the base hours. The hourly rate for the additional hours was calculated by dividing the minimum salary by the number of base hours.

During summer months when prescription business slowed down, Wal-Mart apparently had a policy of reducing the total number of hours worked by pharmacy employees. The hours of nonexempt hourly employees including relief pharmacists, part-time pharmacists, and hourly paid associates were reduced.

The employees who brought this lawsuit claimed that the base hours of full-time pharmacists were also reduced, accompanied by a proportional reduction in their minimum salary. They sued on behalf of themselves and similarly situated employees claiming this practice meant that they were not paid a "predetermined amount," which was inconsistent with being paid on a salary basis as defined in U.S. Department of Labor (DOL) regulations. They were thus nonexempt employees and were owed overtime at time-and-a-half for all hours they had worked in excess of 40 in any workweek. A district court agreed with the employees, and Wal-Mart appealed.

Ruling. The appeals court looked at a series of DOL opinion letters to determine what the term "predetermined amount" in the regulation meant. The employees argued that the exemptions from the salary-basis test should be construed narrowly, placing the burden on the employer to prove that a practice met the test. The court said, however, that this rule covered judicial interpretation of statutes and regulations, not how DOL interpreted its own regulations.

The court looked at three separate DOL opinion letters given to employers who, when facing economic slowdowns, inquired whether reducing the work schedule of their exempt employees with a corresponding reduction in pay would make them nonexempt. The court concluded that the letters confirmed its reading of the requirement that exempt employees receive at least a "predetermined amount" as salary does not preclude an employer from making occasional prospective salary reductions before the affected pay period in response to business needs.

On the other hand, the court noted that exempt status can be defeated by a pervasive manipulation of payments that makes a "sham" of what purports to be a salary. For example, an employer that had a regular practice each Friday of informing its professional staff of the work schedule for the following week, and of making prospective adjustments in compensation to reflect any changes, would so qualify. Such a practice would make the employee's salary the functional equivalent of an hourly wage.

The court concluded that as a general rule, an employer may prospectively make adjustments in salary with a like adjustment in scheduled hours to accommodate its business needs. If, however, the salary changes are so frequent as to make the salary the functional equivalent of an hourly wage, it would treat the "salary" as a sham and deny the employer the Fair Labor Standards Act (FLSA) overtime exemption. The case now goes back to the district court to apply this rule to the facts of the case. Archuleta v. Wal-Mart Stores, Inc., U.S. Court of Appeals for the 10th Circuit, No. 03-1432 (2/1/05).