The U.S. District Court for the District of Maryland recently ruled that a group of retail pharmacists was exempt from the overtime compensation requirement under federal and state laws even though their salaries were subject to deductions for full day absences required under the employer’s unpaid leave policy. Kulish et al. v. Rite Aid Corporation, 2012 WL 6532414 (D. Md. Dec. 13, 2012).

Facts

Rite Aid, a national retail drugstore chain, operates thousands of pharmacy locations around the country, including locations in Maryland. Rite Aid employs two kinds of pharmacists: those it compensates based on an annual salary rate, and those it employs on an as-needed basis, to whom it pays an hourly wage. Generally, Rite Aid staffs each pharmacy location in Maryland with two salaried pharmacists, designated and treated by Rite Aid as “exempt” under the Fair Labor Standards Act (FLSA) in written notifications, pay stubs, and other documents. The stores also employ a “Pharmacy Manager” and a “Staff Pharmacist.”

The plaintiffs, Thomas Kulish, Olufemi Kolawole and Christina Dike, were former Rite Aid pharmacists. The pharmacies at which the plaintiffs worked were open for 154 hours every two-week “pay period,” from 9 a.m. to 9 p.m. on weekdays, from 9 a.m. to 6 p.m. on Saturdays, and from 10 a.m. to 6 p.m. on Sundays. Rite Aid scheduled its pharmacists to work a base of 77 hours during each two week pay period. On any given day, however, Rite Aid assigned only one pharmacist to work a full shift (i.e., from open until close) at each pharmacy location. Consequently, plaintiffs and their pharmacist colleagues would split all of the full-day shifts throughout the pay period, so that each pharmacist assigned to the store regularly worked 77 hours every two weeks. In addition, plaintiffs’ responsibilities occasionally required them to work outside of their normal shift hours, to take inventory, to provide customer assistance, to participate in conference calls with supervisors or management, to attend performance reviews, and to conduct public outreach.

Rite Aid offers its salaried pharmacists a “guaranteed” annual salary, payable in 26 biweekly pay periods. As Pharmacy Managers, Kulish and Kolawole received an annual salary of $119,119, or $4,581.50 for each biweekly period. As a Staff Pharmacist, Dike received an annual salary of $113,613.50, or $4,369.75 for each biweekly pay period. For accounting purposes, Rite Aid assigns each pharmacist an equivalent hourly rate based on their annual salary, which is used to calculate any overtime worked by a pharmacist, such as when a pharmacist fills in for a sick employee. Thus, plaintiffs’ “paystubs” would reflect the hours worked and an amount representing their hourly rate.

No deductions are made to a pharmacist’s biweekly salary for arriving late to a shift, whether for personal reasons or because of traffic or other problems. Nor is a pharmacist’s salary reduced as a result of store closures due to inclement weather, emergencies, breaks during shifts, illness, or personal or family emergencies. And, as a general rule, for pay periods during which a pharmacist does not work the full 77–hour base, Rite Aid uses a “bump to base” system to ensure payment of the base salary level. The “bump to base” system is automatic, and is applied without regard to the reason for which a pharmacist does not meet the base schedule. Thus, even where a pharmacist misses part of a shift or arrives late to work, the “bump to base” system ensures payment of a pharmacist’s base salary for that pay period.

In addition to sick leave and paid leave, Rite Aid offers unpaid personal leave time (unpaid leave). Unpaid leave may be used by a pharmacist who has exhausted accrued paid leave, such as when a pharmacist from overseas needs an extended period of time to travel home, and does not have sufficient paid leave to cover the length of the trip.

Unpaid leave is offered only in full-day increments, even if an employee only needs a few hours of leave. Rite Aid’s corporate designee stated “any unpaid time-off has to be a full shift.” And, a pharmacist using a full day of unpaid leave will incur a full day’s deduction from pay. When a pharmacist takes unpaid leave, the payroll system reduces the pharmacist’s gross pay in an amount proportional to the hours not worked during the pay period. In that circumstance, the “bump to base” feature does not compensate for hours missed due to unpaid leave. Thus, a full day of unpaid leave is reflected by a deduction for a full-day shift, calculated at the pharmacist’s hourly rate. At several points during their tenure as Rite Aid pharmacists, each of the plaintiffs experienced reductions in their bi-weekly paychecks to below their base salary level.

The plaintiffs, for themselves and on behalf of all other similarly situated employees, filed suit against Rite Aid for unpaid overtime compensation under the FLSA and the Maryland Wage and Hour Law (MWHL). After discovery, Rite Aid filed a motion for summary judgment.

The Court’s Decision

The parties did not dispute that the pharmacists had exempt professional duties as defined in the FLSA regulations published by the U.S. Department of Labor (DOL). However, they did dispute whether the pharmacists were truly paid on a salary basis, a requirement of the exemption.

According to the court, the salary basis test is meant “to distinguish ‘true’ executive, administrative, or professional employees from non-exempt employees, i.e., employees who may be disciplined by ‘piecemeal deductions from ... pay.’” The salary requirement is premised on the notion that such employees “have discretion to manage their time” and “are not paid by the hour or task, but for the general value of services performed.” In other words, payment on a salary basis is a “mark of [the] status of an exempt employee.”

DOL regulations provide, as a “(g)eneral rule,” as follows:  

An employee will be considered to be paid 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, which amount is not subject to reduction because of variations in the quality or quantity of work performed. Subject to the exceptions provided in paragraph (b) of this section, an employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Exempt employees need not be paid for any workweek in which they perform no work. An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.

Paragraph (b) delineates specific exceptions to the “prohibition against deductions from pay in the salary basis requirement,” including that “(d)eductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability.” The regulation provides the following example:

If an employee is absent for two full days to handle personal affairs, the employee’s salaried status will not be affected if deductions are made from the salary for two full-day absences. However, if an exempt employee is absent for one and a half days for personal reasons, the employer can deduct only for the one full-day absence.

The evidence showed, and plaintiffs did not dispute, that Rite Aid pharmacists “regularly receive[ ] each pay period ... a predetermined amount constituting all or part of the employee’s compensation ... not subject to reduction because of variations in the quality or quantity of work performed.” Except for a few isolated instances, for every two-week pay period, Rite Aid paid its salaried pharmacists who worked their scheduled shifts a pro-rated amount of their annual salary. As indicated, through the “bump to base” system, Rite Aid did not make any deductions for late arrivals, breaks, or parts of a missed shift, thereby ensuring that the pharmacists’ guaranteed salary was not subject to weekly fluctuations or otherwise the “functional equivalent of an hourly wage.”

Pharmacists who worked extra shifts were paid an hourly rate based on their annual salary. The court noted that such a straight-time method is expressly approved by DOL regulations, and does not defeat satisfaction of the salary basis test. In particular, the applicable regulation states: “An employer may provide an employee with additional compensation without losing the exemption or violating the salary basis requirement.... Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half, or any other basis)....”

According to the plaintiffs, Rite Aid engaged in an “illegal pay scheme” through the use of its unpaid leave policy, to avoid paying a full day’s salary to an employee who needs only a few hours of unpaid leave. Plaintiffs maintained that these employees are deprived of “the option of working the remainder of the day in order to earn the wages they would otherwise be entitled to receive.” Because pharmacists may only take full days of unpaid leave, plaintiffs contend that, insofar as the policy mandates absences longer than desired by an employee who wants to use less than a full day of unpaid leave, such absences are “occasioned by the employer or by the operating requirements of the business,” and therefore constitute de facto deductions for absences of less than a full day of work. Plaintiffs insisted that Rite Aid’s policy of requiring pharmacists to take unpaid leave in full day increments disqualifies those pharmacists from exempt status under the FSLA.

The court was not persuaded by the plaintiffs’ arguments. First, it reasoned that a pharmacist’s decision to use unpaid leave is not “occasioned by” Rite Aid, under the plain language of the regulation or its purpose, as illustrated by DOL opinion letters. Second, the court observed that a deduction for a full-day absence is expressly permitted by the governing regulations. According to the court, “acceptance of plaintiffs’ argument would effectively discourage employers from offering any unpaid leave policy to salaried professionals, which would be an illogical result under the FLSA.” (emphasis in original).

The court also noted that under the regulations, without jeopardizing exempt status, an employee may be docked for a full day absence when the employee has no remaining vacation or personal time left to allocate towards the time missed from work. It then reasoned as follows:  

If the plain language of the regulation permits policies offering unpaid leave in full-day increments, it is difficult to understand how an employer can violate the salary basis test by doing precisely what the DOL regulations expressly authorize. A deduction for absences of one or more full days is the functional equivalent of a full-day unpaid leave policy.

According to the court, the plaintiffs read the FLSA “to require an employer to permit any absence of less than a full day, without experiencing any deduction, regardless of whether the employee has accrued leave.” In effect, that would mean an employer would be obligated to allow unlimited paid leave to its exempt salaried professionals. But, as Rite Aid pointed out, “the FLSA does not govern an employer’s decision to offer leave policies, paid or unpaid.”

Based on the foregoing, the court granted Rite Aid’s motion and dismissed the case.

Conclusions

The Rite Aid case offers a viable unpaid leave policy option for employers who are frustrated by exempt employees who take partial day absences and get paid for the full day. It must be noted, however, that courts in other jurisdictions could rule differently. Still, in most cases, and subject to some limitations, employers who have paid leave policies may make deductions from the leave banks of exempt employees (as opposed to their salary) for partial day absences.