On March 9, 2015, in Ellis v. J.R.'s County Stores, Inc., the Tenth Circuit held that an isolated, one-time improper deduction from an exempt employee's salary does not destroy the salary basis for exempt status. In doing so, the court affirmed summary judgment for the employer on the employee's FLSA claim for overtime pay. The court found that the district court properly concluded that the employer did not have a policy or actual practice of making improper deductions and that the employer properly used the FLSA's "window of correction" when it promptly reimbursed the employee for the improper deduction. (Ellis v. J.R.'s County Stores, Inc., No. 13-1346, (Mar. 9, 2015)).

J.R. County Stores, Inc. operates a chain of convenience stores. Sandra Ellis worked as a store manager and was paid a weekly salary of $600.00 (eventually increased to $625.00) under the employer's store manager pay plan. The plan required Ellis to work a minimum of 50 hours each week, and she sometimes worked close to 60. Ellis was classified as an exempt executive who was not entitled to overtime pay.

In April 2012, the company deducted $31.20 from Ellis's weekly salary for a week in which she worked approximately 40 hours. This was the only time during her employment that the employer deducted money from her salary, although there had been various other weeks in which she worked less than the expected 50 hours. Several days after the one-time deduction, Ellis resigned and sent a letter to the employer claiming that the deduction defeated her exempt status and that she was due overtime pay for the prior three years. After first denying the substance of Ellis's claim, the employer sent Ellis a check for $332.88 and a letter explaining the basis for the check amount.

Under the FLSA regulations, exempt status can be defeated if the employer has a policy or actual practice of making improper deductions (for example, deducting money if the employee did not always work full days during a workweek, or if the employee worked fewer hours than the employer required) (29 CFR § 541.603(a)). The regulations provide a multi-factor test for evaluating whether the employer has a policy or practice of improper deductions, including examining the number of times improper deductions were made (29 CFR § 541.603(a)). The FLSA regulations also provide a window-of-correction defense when improper deductions are made in certain circumstances. In those cases, employers that promptly correct the error can avoid losing the exemption (29 CFR § 541.603(c)).

In July 2012, Ellis filed her FLSA claim in federal district court, arguing that the one-time deduction to her salary meant that she was not an exempt employee and was due overtime pay. Ellis asserted her claim on behalf of herself and other store managers.

In July 2013, the district court granted the employer summary judgment, finding that the employer's intent was to pay Ellis a salary, that the one-time deduction to her salary did not belie that intent, nor did the deduction violate the salary basis test. The district court further ruled that the employer's prompt reimbursement meant the employer could rely on the window-of-correction defense. The court dismissed Ellis's suit with prejudice and Ellis appealed.

The Tenth Circuit affirmed summary judgment for the employer, holding that:

The Tenth Circuit noted that:

The Tenth Circuit's decision in Ellis illustrates the importance of the FLSA's window-of-correction defense. The window of correction offers employers the opportunity to preserve an employee's exempt status if the employer promptly reimburses its improper deduction from the employee's salary. Also, employers in the Tenth Circuit will appreciate the court's conclusion that the phrase "isolated or inadvertent" in the FLSA regulations means that an isolated, improper deduction does not necessarily need to be innocent or inadvertent for the employer to take advantage of the window of correction.