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JACKSON v. KENTUCKY

June 21, 1995

Lee A. Jackson, Norma J. Boyd and Marvin Hood, on behalf of themselves and other employees similarly situated, Jaqueline Adbullah, Geraldine Ash, John Ashley, Jennifer Back, Mary Bailey, Darrell Bailey, Julia Beck, Todd Belcher, Janet Bewley, Anna Blevins, Joseph Boswell, Peter Bowles, Camellia Brown, Mary Bruner, Jane Bryan, Roger Bryant, Oliver Buckner, Charles Burton, Tim Burton, Linda Cash, Robert Caspar, Nancy Caudill, Janice Clark, Frederick Claus, Carolyn Cobb, Thomas Collins, Audry Combs, Robert Cook, James Covington, Tom Dehaven, William Downs, Donald Dudgeon, Sara Dunlap, David Edwards, Jerry Estill, Valerie Estill, Jacqueline Everett, Julian Fankhanel, Jana Fannin, Brian Fingerson, Ruth Friedheim, Brian Gonnelly, Luanne Haag, Wade Halsey, Theodore Hamilton, Lora Hammonds, Donald Harris, Bruce Harris, Betty Harwood, Judy Hawes, Raymond Hayes, Jr., Robert Heeg, Jr., William Holmes, Barbara Hord, James Hord, Nancy Horrar, Alice Howard, Geoge Hubbard, Danny Hume, Connie Johnson, Betty Johnson, John Jordan, Jr., Karen Kaufman-Johnson, Anthony King, David Kleier, Brenda Lawrence, Cora Leporin, Catharine Lester, Jane Long, Michael Lykins, Richard Mahoney, Milton Malone, Mark Mattingly, Bettye Mayes, Norma McCormick, Dario McDarby, Edwin McGuire, Cheryl McMillon, Martha McNeal, Carl Millanti, Dianne Miller, Cynthia Miller, James Miniard, Joseph Minor, Donald Mitchell, Rosalind Mitchell, Edward Mulvihill, Judine Murphy, Susan Nash, Douglas Neal, Jr., William Nusz, Jr., Robert Oliver, Michael Overstreet, Roger Pike, Jane Pleasant, Mari Pulliam, Doris Pyles, Charles Ransdell, Ronny Robertson, Bernard Sandman, Stephen Short, Gail Sisson, Thelda Smith, Virginia Smith, Barbara A. Snow, Carlos Spicer, Carrie Stallard, Robert Steckley, Marvin Stegmann, Harold Stephens, Rose Stith, Billie Stockton, Steven Stratford, Mark Sutton, Mary Thompson, Alyce Thompson, Harold Tokle, Larry Totten, William Turner, Peggy Turner, Andrew Turpin, Janet Vaughn, Marylyn Vaught, Pamela Veach, Ellen Wade, Gerald Waldrip, Leslie Webb, Phyllis Whitaker, Bernice White, Roy White, Jr., Robert Wilson, Michael Wright, Sylvia Wright, PLAINTIFFS
v.
Commonwealth of Kentucky, DEFENDANT; Patricia Blevins, Beverly Bottoms, and William Cantrell, on behalf of themselves and other employees similarly situated, Angela Clemmons, Leroy Demoran, Jr., Sarah Hardin, Dartanya Hill, Donald Holbrook, Kenneth Howe, Kevin Hunter, Peggy Martin, Carolyn Osborne, Gene Roach, Brenda Rollins, Julia Smith, Randall Smith, Brenda Stamps, Patricia Tinsley, Victoria Doucette, PLAINTIFFS v. Commonwealth of Kentucky, DEFENDANT; Bessie Carol Young, Terry E. Yeary, Gary Lynn Woods, Tommy D. Adkins, Nancy S. Alexander, Amy E. Anderson, George B. Baker, III, Carolyn K. Baldwin, Lloyd Keith Bastin, Suzanne B. Beasy, Rachelle Birdsell, Henri E. Bleier, Carol J. Bliss, Peggy L. Boone, Pamela J. Burkich, Cheryl Burnett, Andrea W. Burns, Melvin T. Campbell, Donna J. Canchola, Ann D. Carroll, Lorna Cassady, Barry D. Conley, Betty N. Coots, Michael Cornwall, Martha Dickerson, Benny Easterling, Betty V. Elkins, Sheila B. Faust, Nicky L. Forrester, Susan P. Hack, Wayne Hambright, Debbie Hammond, Jan M. Hampton, Angel W. Harlin, Mary Joseph Higgins, Scott D. Horton, Sherry E. Jaggers, Connie Jamison, Peggy B. Johnson, Elisabeth P. Kral, Sylvia A. Letourneur, Stella Lineburg, Rudy D. Little, Norma G. Louis, Mervill R. Mann, Thomas Eugene Marsteller, Zola B. Mayes, Carol McClure, Mary Ann McDowell, Marjorie P. McEuen, John Kenneth McIlwain, Kimberly J. Milburn, C. Patrick Minogue, Patsy B. Morrison, Norman T. Oneal, Patricia Parrish, Michael S. Pendley, Anna B. Potter, Marcus Scott Purdom, Judy Rose, Ronald Samons, Susan D. Samuel, Robert F. Schmitt, Jr., Mary Jo Sharp, Rebecca Shryock, Esther M. Shultz, Diane Simmons, Lisa M. Skaggs, Beatrice L. Slominsky, Judith A. Spooner, Virginia Sturgeon, Nancy C. Tapscott, Eunice B. Taylor, James F. Thompson, N. Jean Wahrenburg, Velina R. Walker, Michelle E. Ward, Charles A. Waters, June M. Waters, Anne S. Westerfield, James L. White, Kathryn Whitlock, Eugene R. Wiles, Carl D. Wilson, Nancy B. Wilson, PLAINTIFFS v. Commonwealth of Kentucky, DEFENDANT; Jerry D. Allen, Gary M. Beach, Jane T. Bryan, Bradford S. Bailey, Jonathan L. Borie, Jennifer L. Bradley, Philip A. Bryan, Vernon R. Canary, Terry W. Conley, Richard T. Crask, Henry Dunn, Roger Eldridge, John A. Fitch, Christopher H. Goettel, Ken C. Grant, Sherri F. Hahn, Judith L. Hecker, Katrinka J. Jennings, Brenda M. Marshall, Lenville C. Martin, Stephen P. McGaughey, Anthony K. Morris, Patrick T. Quinlan, John P. Revels, William T. Rich, Johnnie E. Ross, John E. Ryan, Jr., Mary L. Speaks, Gayle A. Sutherland, Cathy M. Wise, PLAINTIFFS v. Commonwealth of Kentucky, DEFENDANT



The opinion of the court was delivered by: J. GREGORY WEHRMAN

 I. INTRODUCTION

 The individual plaintiffs in this consolidated case are employees of the Commonwealth of Kentucky. The plaintiffs allege that the Commonwealth misclassified them as "exempt" employees under the Fair Labor Standards Act ("FLSA") and claim that the Commonwealth owes them overtime pay for hours they worked in excess of 40 per week during the three year period preceding the filing of their complaints. Under the FLSA, non-exempt employees must be paid a minimum wage as well as "overtime" at a rate of one and one-half times their regular wage for hours in excess of 40 per week. Exempt employees are not required to be paid overtime. *fn1"

 The FLSA contains exemptions for "executive, administrative, or professional" employees but does not define those terms. Instead, Congress delegated the authority to define those terms through rulemaking to the Department of Labor ("DOL"). The DOL has defined the relevant terms in part through the creation of a rule which is called the salary test. Currently pending before the court are the parties' cross-motions for partial summary judgment concerning the issue of whether the salary test set forth in 29 C.F.R. § 541.118 should be applied to public employers like the Commonwealth.

 DOL regulations have required since 1954 that employees who fall under what is commonly known as the white collar exemption to the FLSA be paid "on a salary or fee basis." 29 C.F.R. § 541.118 states that an employee will be considered to be paid "on a salary basis" if he or she is paid the same predetermined amount each pay period which "is not subject to reduction because of variations in the quality or quantity of the work performed" subject to limited exceptions.

 The parties agree that none of the limited exceptions to the salary test permit deductions to a worker's pay for minor disciplinary infractions. *fn2" However, deductions may be made for whole days or weeks pursuant to vacation and sick leave policies. See § 541.118(a). Until 1991, if an employer made deductions to an employee's pay for partial -day absences, the employee was considered to be non-exempt.

 Since 1960 the Commonwealth like many states has had in place statutory provisions providing that its employees may, as a means of discipline, be "dismissed, demoted, suspended, or otherwise penalized." Kentucky's regulatory scheme permits deductions to an employee's pay as a method of discipline for infractions which are clearly not major safety violations, and likewise permits deductions for partial-day absences. Kentucky's statutes and corresponding regulations do not distinguish between exempt and nonexempt employees. See KRS § 18A.095, 18A.075, 18A.0751; 101 KAR 1:345. Thus, if the salary test applies to the Commonwealth as a public employer, it has arguably violated the FLSA by classifying as "exempt" employees whose pay is subject to deductions for disciplinary infractions which are not infractions of safety rules of major significance. *fn3" In addition, the Commonwealth has classified as "exempt" employees whose pay is subject to partial-day absences, which violated the salary test prior to its 1991 amendment.

 To avoid this result, Kentucky advances two arguments: 1) the salary test is inapplicable to state and local government employees because it is contrary to the intent of Congress; and 2) the failure of the DOL to amend the test to eliminate the application of the disciplinary prong to public employers is arbitrary and capricious.

 II. HISTORICAL BACKGROUND

 The FLSA's application to public employers has had a checkered history. In 1960 when Kentucky's disciplinary provisions were promulgated, the FLSA did not apply to the public sector. Congress initially extended coverage to public employees in 1974, but in 1976, the Supreme Court held in National League of Cities v. Usery 426 U.S. 833, 49 L. Ed. 2d 245, 96 S. Ct. 2465 (1976) that Congress could not apply the FLSA to public sector employees. The Supreme Court subsequently overruled Usery in Garcia v. San Antonio Metro. Trans. Authority, 469 U.S. 528, 83 L. Ed. 2d 1016, 105 S. Ct. 1005 (1985). In Garcia, the Supreme Court specifically held that treating public employers the same as private employers did not violate the Tenth Amendment. In response to Garcia, Congress amended the FLSA later in 1985 to provide some relief to public employers during a temporary adjustment period.

 The 1985 amendments did not address the DOL's salary test, but in 1987 the DOL issued an "Enforcement Policy" noting the difficulty which state and local governmental employers had experienced with the aspect of the salary test which prohibited any deduction from pay for absences on an hourly basis. The DOL noted that virtually all public employers had policies which prevented the expenditure of public funds for time not actually worked by employees and not covered by annual, sick, or other paid leave - in other words, for leave without pay. The policy stated that DOL would not preclude public employers from making such deductions from otherwise "exempt" employees while revisions to the regulations for public employers were being considered. In addition to the proposed revisions to the salary test, the policy noted that a commenter had proposed eliminating the salary test entirely for public employers.

 In response to concerns by state and local public employers that their liabilities would be devastating to otherwise exempt employees who had rarely or never had any deductions made to their salaries, DOL ultimately amended a portion of the salary test for public employers. As of September 6, 1991, *fn4" 29 C.F.R. § 541.5d specifically provided that public employees would not be disqualified from being categorized under the white collar exemption if their pay was subject to deductions "pursuant to principles of public accountability" which required deductions for leave time taken after accrued paid leave was exhausted.

 III. APPLICATION OF THE SALARY TEST TO PUBLIC EMPLOYERS

 Kentucky argues in this case that the same principles of public accountability which require public employers to make partial-day deductions under long-established pay-leave systems also require public employers to make disciplinary-related deductions under long-established disciplinary systems. Although the promulgation of § 541.5d amended the salary test to permit public employers to make partial-day deductions, Kentucky argues that the DOL's failure to make a similar amendment to permit public employers to make disciplinary deductions is arbitrary and capricious. Because it asserts that the disciplinary prong of the salary test cannot be applied to public employers in a way consistent with the intent of Congress, Kentucky concludes that no portion of the salary test can be applied to public employers, even after the promulgation of § 541.5d.

 In essence, Kentucky complains not about the action of the DOL in promulgating the salary basis regulations, but about the inaction of the DOL in failing to amend the regulations to limit the application of the test to private employers. The standard for determining whether the DOL's inaction was arbitrary and capricious was set forth in Chevron, U.S.A. v. Natural Resources Defense Council, 467 U.S. 837, 842-43, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). In Chevron, the Supreme Court held that if the intent of Congress is clearly expressed, a court must give effect to it. However, if the statute is silent or ambiguous on the issue presented, "the question of the court is whether the agency's answer is based on a permissible construction of the statute."

 
Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences. In contrast, an agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's view of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices -- resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the administration of the statute in light of everyday realities.
 
When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges -- who have no constituency -- have a duty to respect legitimate policy choices by those who do.

 467 U.S. at 865-866. The Sixth Circuit has interpreted Chevron as requiring adherence to the agency's interpretation "absent a finding that the agency's interpretation is untenable." Gould v. Shalala, 30 F.3d 714, 719 (6th Cir. 1994).

 In this case, I agree with the defendant that the application of the salary test to public employers as it existed prior to the 1991 promulgation of § 541.5d is contrary to the intent of Congress and arbitrary and capricious. However, Kentucky's current challenge to the salary test focuses on the wisdom of DOL's policy in failing to eliminate the salary test entirely for public employers rather than in simply amending the test through § 541.5d. Although I agree with the defendant that the application of the amended salary test remains problematic for public employers, I cannot conclude that it is so wholly unreasonable a choice by DOL that it remains arbitrary and capricious. Therefore, as of September 19, 1991, federal courts must respect the choice of the DOL and apply the amended salary test to public employers.

 Although the issue presented in this case is one of first impression in the Sixth Circuit, *fn5" it has been been recently decided by the Seventh Circuit, which reversed a district court decision heavily relied on by the defendant. In Mueller v. Thompson, 858 F. Supp. 885 (W.D. Wis. 1994), rev'd 54 F.3d 438,... 1995 U.S. App. LEXIS 10880, 1995 WESTLAW 293120, 2 Wage & Hour Cas. 2d (BNA) 1217 (7th Cir. 1995), the district court held that the salary test in 541.118(a) could not be applied to state and local government employees except as amended by § 541.5d because it conflicts with congressional intent. Apart from the district court decision in Mueller, which has now been reversed, no other court has held in any published decision that the salary test following the 1991 amendment is inapplicable to public employers. *fn6"

 I follow the Seventh Circuit and hold that the disciplinary prong of the salary test is applicable to public employers following the 1991 amendment. To hold otherwise would be to violate Chevron's mandate that courts express deference to agency discretion, to ignore relevant portions of the administrative record, and to improperly expand the scope of "public accountability" to employer disciplinary systems. See also Feaser v. City of New York, 2 Wage & Hour Cas. 2d (BNA) 892 (S.D.N.Y. 1994)(declining to follow Mueller because "nothing indicates that the salary basis test has lost its vitality or that it should not be applied to the public employers in this [Second] circuit."

 A. The Salary Test Prior to September 6, 1991

 Before discussing the issue of whether the salary test currently applies to public employers, I turn first to the issue of whether the salary test can be applied to public employers prior to its amendment in 1991 by the Department of Labor. Assuming that the salary test is not wholly invalid as applied to public employers, plaintiffs argue that they are entitled to partial summary judgment at the very least on the ground that the Commonwealth impermissibly subjected their pay to deductions for partial-day absences prior to 1991.

 As indicated above, the salary test was promulgated by the DOL at a time when the FLSA did not extend to public sector employment. The FLSA became applicable to state and local governments in 1985, following the Supreme Court's opinion in Garcia.

 After Garcia, governmental employers became increasingly concerned about the application of the existing salary test. On the one hand, the salary test prohibited deductions from an exempt employee's pay for partial-day deductions. On the other hand, virtually all governmental leave systems established long before the FLSA became applicable to public sector employment prohibited state and local employers from using tax dollars to pay employees for time not worked, obviously without regard to whether the employees were "exempt" or "non-exempt" under the FLSA.

 The concern of public employers grew following Abshire v. County of Kern, 908 F.2d 483 (9th Cir. 1990), cert. denied, 498 U.S. 1068, 112 L. Ed. 2d 848, 111 S. Ct. 785 (1991), in which the Ninth Circuit held that a public employer was not in compliance with the salary test if it was possible for an exempt employee to have an impermissible deduction from his or her pay (leave without pay once accrued leave was exhausted), even if the policy had not actually been applied to any exempt employee. Thus, under Abshire, public employers were effectively prevented from taking advantage of the white collar exemption to the FLSA because their leave systems, as prescribed by state or local governments, permitted deductions to employees' pay for partial day absences following the exhaustion of accrued leave time. The Department of Labor responded to employer concerns by using an expedited rulemaking process to effect changes in the salary test for public employers.

 Through its rulemaking process, the DOL promulgated 29 C.F.R. § 541.5d, which currently permits an employer to make deductions

 
according to a pay system established by statute, ordinance, or regulation, or by a policy or practice established pursuant to principles of public accountability, under which the employee accrues personal leave and sick leave and which requires the public agency employee's pay to be reduced or such employee to be placed on leave without pay. . ..

 under specified conditions. Thus, the promulgation of § 541.5d permitted public employers to maintain their existing leave systems and still take advantage of the FLSA's white collar exemption so long as other prerequisites of the salary test were met.

 One important issue the promulgation of § 541.5d left unresolved was its retroactivity. Public employees continued to bring suit against their state and local governmental employers for alleged violations of the FLSA between 1985, when Garcia was decided, and 1991, when § 541.5d was promulgated. In fact, the plaintiffs in this litigation rely in part on the argument that they are entitled to summary judgment for pre-1991 violations.

 Recently, a number of federal courts examining the legislative history of the FLSA and the evolution of the salary test have concluded that the test as it existed prior to the promulgation of § 541.5d cannot be applied to public employers, because to do so would be contrary to the intent of Congress. See e.g. Mueller, 858 F. Supp. at 896, rev'd on other grounds, 2 Wage & Hour Cas. 2d (BNA) 1217; Service Employees Int'l Union, Local 102 ("SEIU") v. County of San Diego, 35 F.3d 483 (9th Cir. 1994); Stewart v. City and County of San Francisco, 834 F. Supp. 1233 (N.D. Cal. 1993). I agree with the reasoning expressed in this line of cases, and find particularly persuasive the Ninth Circuit's opinion in Service Employees Int'l Union, Local 102 ("SEIU") v. County of San Diego.

 In SEIU, the court examined the legislative history of amendments to the FLSA and noted that in 1974 when Congress first expressed an intent to make the FLSA applicable to the public sector, it expressed an intent that the FLSA apply to "nonsupervisory employees." H.R. Rep. No. 913, 993d Cong., 2d Sess. (1974), reprinted in 1974 U.S.C.C.A.N. 2811, 2837 (emphasis added). Thus, the SEIU court reasoned, Congress must have intended the white collar exemption to apply to the public sector. SEIU, 35 F.3d 483 at 487. Congress remained silent as to whether the salary test promulgated by the Department of Labor to define that exemption applied to the public sector, so under Chevron, the question for the courts is whether the agency's application of the test is based on a permissible construction of the FLSA. 35 F.3d at 487.

 As previously discussed, virtually all public employers had existing pay systems based on principles of public accountability at the time the FLSA became applicable to them. The existence of the provision of the salary test which prohibited partial day deductions made pursuant to such leave systems effectively precluded public employers from satisfying the salary test.

 
The significance of this is that the test deprived public entities of the white collar exemption created by Congress. Thus, the 1954 salary test clearly conflicted with congressional intent that public sector employers be able to claim the administrative and executive exception.

 SEIU, 35 F.3d at 488-89.

 In holding that applying the pre-1991 salary test to public employers was contrary to the intent of Congress, the Ninth Circuit also relied on the fact that in promulgating § 541.5d, the Department of Labor itself conceded that its salary test was "out of harmony with the intent of [the FLSA]." 57 Fed.Reg. 37,672 (1992).

 
The DOL initially intended the 1992 amendment to the salary test to apply retroactively, see 57 Fed. Reg. 37,678, but the DOL withdrew the regulation because it concluded that such a change would have constituted invalid retroactive rulemaking under Bowen v. Georgetown University Hospital, 488 U.S. 204, 208, 102 L. Ed. 2d 493, 109 S. Ct. 468 (1988). We believe the DOL's interest in applying the new salary test retroactively is indicative of its firm conviction that its earlier iteration of the salary test conflicted with congressional intent. We share this conviction.

 35 F.3d at 489. I concur with the Ninth Circuit's analysis and conclusion that the salary test as it existed prior to September 6, 1991 was invalid in its entirety as applied to the public sector. See also Stewart, 834 F. Supp. at 1238.

 The Commonwealth of Kentucky would have this court take the additional step of declaring that the salary test as it currently exists is equally contrary to the intent of Congress and invalid as applied to the public sector. The defendant notes that its existing regulatory disciplinary system technically is incompatible with the requirement implicit in § 541.118(a)(5) that an exempt employee's pay not be subject to deductions for any disciplinary infraction other than a "major safety violation." The defendant argues that the DOL's enactment of § 541.5d without simultaneously altering the disciplinary portion of the salary test for public employers was arbitrary and capricious. I cannot agree. As suggested by the Ninth Circuit in SEIU, I conclude that the promulgation of § 541.5d "properly amends the salary test as applied to the public sector, so that the salary test now takes into account long-standing and reasonable state and local ordinances predicated on public accountability." SEIU, 35 F.3d at 489. In short, I find that the balance struck by the DOL in amending the partial-leave deduction rule for public employers but in otherwise leaving the salary test intact for those employers is a reasonable one which is not contrary to the intent of Congress.

 Drawing from the district court opinion in Mueller,7 the defendant argues that the disciplinary provision of the salary test set out in § 541.118(a)(5) is incompatible with congressional intent for essentially the same reasons as other courts have found the partial-day deduction portion of the test inapplicable to public employers. The defendant argues that the Department of Labor has not formally ...


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