The opinion of the court was delivered by: SOTOMAYOR
SONIA SOTOMAYOR, U.S.D.J.
In this collective action brought under the Fair Labor Standards Act of 1938 (FLSA), 29 U.S.C. §§ 201 et seq., the Court has before it two motions. The first, an order to show cause filed by plaintiffs, seeks the Court's approval for distribution of class notice and opt-in consent forms to potential plaintiffs. By implication, this motion asks the Court to decide whether plaintiffs' action may be maintained as a collective action under the FLSA. The second motion, brought by defendant, seeks judgment on the pleadings or, in the alternative, summary judgment.
For reasons discussed below, plaintiffs' motion is granted and defendant's motion is denied without prejudice to bringing a motion for summary judgment after the close of discovery.
The FLSA requires covered employers to pay their employees overtime wages, at the rate of time and a half, for hours in excess of 40 hours worked in a single week. 29 U.S.C. § 207. Exempt, however, from the Act's overtime requirements are employees who are "employed in a bona fide executive, administrative, or professional capacity . . . (as such terms are defined and delimited from time to time by regulations of the Secretary [of Labor])." 29 U.S.C. § 213(a)(1). Because the FLSA is a remedial act, this exemption must be narrowly construed and the employer bears the burden of showing that a claimed exemption applied to its employees. See Martin v. Malcolm Pirnie, Inc., 949 F.2d 611, 614 (2d Cir. 1992) (citing Corning Glass Works v. Brennan, 417 U.S. 188, 196-97 (1974), and Mitchell v. Lublin, McGaughy & Assocs., 358 U.S. 207, 211, 3 L. Ed. 2d 243, 79 S. Ct. 260 (1959)).
Defendant, Sbarro Inc. ("Sbarro"), operates a nationwide chain of Italian-style restaurants. Plaintiffs Kenneth Hoffmann ("Hoffmann") and Gloria Curtis ("Curtis") are the former general manager and co-manager, respectively, of the same Sbarro's restaurant in Memphis, Tennessee. Plaintiff Steve Bowers ("Bowers"), who "opted in" as a plaintiff on September 11, 1997, is a former general manager of two Sbarro restaurant locations -- one in Mississippi, and one in Tennessee. Plaintiffs filed their Complaint on June 18, 1997, seeking to bring a collective action under the FLSA on behalf of all current and former Sbarro restaurant managers (except assistant managers) since 1993 for unpaid overtime compensation. Plaintiffs allege that Sbarro misclassified its restaurant managers as exempt "executive" employees, thereby circumventing the Act's overtime requirements, when in fact defendant's company-wide policies and practices violated the terms of the exemption.
Specifically, plaintiffs charge that defendant violated the salary-basis test by requiring restaurant managers to reimburse the company for cash shortages, inventory shortages or other losses occurring under their supervision. Plaintiffs allege that they were required as a condition of their employment to sign a form agreement (called the "Agreement to Reimburse Losses") authorizing defendant to deduct from their wages the amount of any cash shortage or loss. Plaintiffs further allege that defendant implemented its reimbursement policy either by docking managers' paychecks or by requiring managers to make out-of-pocket reimbursements to the company. As a result of defendant's actions, plaintiffs claim that all restaurant managers employed by defendant during the last three years were in fact subject to reductions in their compensation and, therefore, are entitled to unpaid overtime, liquidated damages and attorney's fees and costs.
Defendant denies having committed any wrongdoing under the FLSA. However, defendant concedes that, prior to the filing of plaintiffs' Complaint, it had a cash control policy in place which required managers to reimburse the company for losses. Defendant also concedes that it required all restaurant managers to sign the Agreement to Reimburse Losses. In that regard, defendant has submitted to the Court "true and correct" copies of the "Sbarro Cash Control Policy" (Exhibit ("Exh.") D to Defendant's Notice of Motion for Judgment on the Pleadings (hereafter "Def. Notice of Motion")) and copies of the Agreement to Reimburse Losses signed by Hoffmann and Curtis (Exhs. B and C to Def. Notice of Motion). Moreover, defendant admitted to the Court during oral argument held on October 8, 1997, that pursuant to these policies, some restaurant managers (although defendant did not specify how many) in fact experienced salary deductions. (Transcipt of October 8, 1997 hearing ("Oct. 8 Tr.") at 2-3.)
The Sbarro Cash Control Policy explicitly directs itself to "management employees" and contains two sections: one on the duties of restaurant management and one on the duties of area directors.
The section addressed to restaurant management sets forth the manager's duties for money-related activities, such as supervising cash registers, making deposits and handling cash. It further provides that "all restaurant management will sign an agreement to reimburse losses as a condition of their employment." Finally, the last section of the policy document, entitled "Disciplinary Procedure" states that:
Failure to follow the cash control policy outlined above is considered a severe breach of conduct and the General Manager and other management of the restaurant will be subject to disciplinary action up to and including termination or employment depending on the frequency and severity of the loss. . . . The willingness of the General Manager or other assigned managers to reimburse the company for losses will be considered in the disciplinary action taken.
(Exh. D to Def. Notice in Motion.) Nothing in the policy document is addressed to non-managerial employees.
(b) The Agreement to Reimburse Losses
The Agreement to Reimburse Losses, which defendant admits it included in all managers' hiring packets, states, in part:
I hereby authorize the Company to withhold from any wages, salary, bonus, vacation pay, and any other compensation due me for my services, and any other funds due me from the company or its affiliates, the total amount of such losses in installments as determined by the Company until said amount of such losses is paid in full.
(Exh. C to Def. Notice of Motion.) The Agreement also authorizes defendant to assign the manager's wages or other compensation to cover losses.
Defendant contends that it required all of its restaurant employees, both salaried and non-salaried, to sign the Agreement to Reimburse Losses. In particular, defendant stresses that assistant managers -- who are non-salaried and non-exempt -- were likewise required to sign the Agreement.
(c) Defendant's Allegations that It Rescinded the Policy
Defendant alleges that it has rescinded its cash control policy. As set forth in the affidavit of Jim O'Shea, defendant's Vice President of Human Resources, defendant asserts that following receipt of the Complaint in this action, it revised its cash control policy and announced a policy change in a memorandum dated July 22, 1997. (Affidavit of Jim O'Shea in Opposition to Plaintiffs' Request for Issuance of Expedited Notice (hereafter, "O'Shea Aff.").) The memorandum states, in relevant part:
To the extent any prior agreements, policies or practices may have authorized reimbursement of losses, they are no longer in effect. The Company will not deduct cash shortages or other monetary losses from an employee's salary, wages, vacation pay, bonus or other compensation.
(Exh. A to O'Shea Aff.) Defendant further contends that, as part of its policy revision, it reviewed its records to determine which current and former exempt managerial employees may have had their compensation reduced because of cash shortages or other losses. Defendant contends it then reimbursed those employees for the amount of their losses, plus accrued interest at 9%, by sending them reimbursement checks on July 29, 1997, with accompanying correspondence stating that questions should be directed to Jim O'Shea. (O'Shea Aff. at P 5.) Defendant claims that, by taking these actions, it availed itself of the "window of correction" under 29 C.F.R. § 541.118(a)(6).
Little discovery has been taken in the action to date, other than the deposition by defendant of Hoffmann and Curtis. Significantly, at deposition, Hoffmann and Curtis both admitted that no money had ever been deducted money from their actual paychecks to cover cash shortages or other losses (Hoffmann Tr. at 75; Curtis Tr. at 65-66).
However, they testified that they frequently covered cash shortages by making out-of-pocket reimbursements to the company. (Hoffmann Tr. at 76; Curtis Tr. at 64-65).
II. Motion for Judgment on the Pleadings
The Court will address defendant's motion for judgment on the pleadings first. Obviously, if the Court deems this action ripe for dismissal, it would be futile to send class notice to other potential plaintiffs, and plaintiffs' motion would be moot.
A motion for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c) is treated the same as a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. Sheppard v. Beerman, 18 F.3d 147, 150 (2d Cir 1994). A district court's function is to assess the legal feasibility of the complaint. Kopec v. Coughlin, 922 F.2d 152, 155 (2d Cir. 1991). The issue "is not whether a plaintiff will ultimately prevail but whether a claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 40 L. Ed. 2d 90, 94 S. Ct. 1683 (1974). Allegations contained in the complaint must be construed favorably to the plaintiff. Walker v. City of New York, 974 F.2d 293, 298 (2d Cir. 1992). Dismissal is warranted only where "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Ricciuti v. NYC Transit Auth., 941 F.2d 119, 123 (2d Cir. 1991) (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957)).
In considering a Rule 12(b)(6) motion, a court must look to: (1) the facts stated on the face of the complaint; (2) documents appended to the complaint; (3) documents incorporated in the complaint by reference; and (4) matters of which judicial notice may be taken. Hertz Corp. v. City of New York, 1 F.3d 121, 125 (2d Cir. 1993) (citing Allen v. WestPoint - Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991). See also Samuels v. Air Transport Local 504, 992 F.2d 12, 15 (2d Cir. 1993) (same).
Furthermore, Rule 12(c) provides that:
if, on a motion for judgment on the pleadings, matters outside the pleadings are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.
Fed. R. Civ. P. 12(c). The pleadings in this case consist of plaintiffs' Complaint, defendant's Answer, and the Agreement to Reimburse Losses, which is incorporated into the pleadings by reference.
B. Background on the Law Governing Plaintiffs' Claims for Relief
As noted above, exempt status from the FLSA's overtime provisions requires that employees be paid on a "salary basis," which in turn requires that their "compensation" not be "subject to reduction because of variations in the quality or quantity of the work performed." 29 C.F.R. § 541.118(a). In Auer v. Robbins, U.S. , 137 L. Ed. 2d 79, 117 S. Ct. 905 (1997), the Supreme Court recently announced the proper standard for determining whether an employee's compensation is "subject to reduction" and therefore in violation of the salary-basis test: The test is violated and exempt status should be denied "when employees are covered by a policy that permits disciplinary or other deductions in pay 'as a practical matter.'"
117 S. Ct. at 911. That standard is met, Auer provides, if a plaintiff can show either of two things: (i) "an actual practice of making such deductions"; or (ii) "an employment policy that creates a 'significant likelihood' of such deductions." Id. To find a "significant likelihood" of deductions, Auer further provides that there must be evidence of "a clear and particularized policy -- one which 'effectively communicates' that deductions will be made in specified circumstances."
Id. Thus, under the Auer test, to state a claim for relief, plaintiffs must make a prima facie case that their compensation was "subject to reduction" either because defendant had an actual practice of making improper deductions, or because they were subject to a policy that created a significant likelihood of such deductions.
Defendant argues that plaintiffs fail to state a claim under the first prong of Auer, i.e. that plaintiffs were subject to an "actual practice" of deductions, because (1) both Hoffmann and Curtis testified at deposition that their own paychecks were never docked, and (2) plaintiffs' alleged out-of-pocket reimbursements can not be considered reductions in "compensation" for purposes of determining exempt status under the salary-basis test and, therefore, are irrelevant. As to the second prong of Auer, i.e. that plaintiffs were subject to a policy that created a "significant likelihood" of deductions, defendant argues that plaintiffs fail to state a claim because the Sbarro Cash Control Policy and Agreement to Reimburse Losses applied to both hourly paid, non-exempt employees and to salaried exempt employees, and did not clearly and unambiguously indicate that deductions would (or would likely) be made from exempt employees' salaries. Finally, defendant contends that judgment on the pleadings is further warranted based on defendant's affirmative defense under the "window of correction" provision set forth in the FLSA regulations at 29 C.F.R. § 541.118(a)(6). That regulation provides, in part, that "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." 29 C.F.R. § 541.118(a)(6). Defendant contends that plaintiffs' claims are legally barred under this provision because, even if defendant had made improper wage deductions, such deductions were made "for reasons other than lack of work," and defendant cured any impropriety by renouncing the offending policies and reimbursing those employees who, according to defendant's records, had been subject to pay deductions.
As a threshold matter, defendant's motion is inappropriately brought under Rule 12(c). In seeking judgment on the pleadings, defendant relies on numerous submissions outside the pleadings, including plaintiffs' deposition testimony, Jim O'Shea's affidavit, the Sbarro Cash Control Policy, and other documents that are not part of the pleadings.
If the Court considers these submissions, it must convert defendant's motion into one for summary judgment and give plaintiffs an opportunity to respond. See Fed. R. Civ. P. 12(c). The Court will not do so, however, because a summary judgment motion at this juncture is premature. Little discovery has been taken thus far in the proceeding, and numerous genuine issues of material fact persist. See, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986) (summary judgment will be granted only where there are no genuine issues of material fact). Defendant's own admission that "some" employees' wages were docked pursuant to its cash control policy (Oct. 8 Tr. at 2), supports plaintiffs' claims and underscores the need for discovery concerning the origin, scope and extent of defendant's cash control policies and practices At this early stage in the proceeding, the Court has before it no evidence of how many employees were subject to reductions in their compensation to cover cash shortages, the circumstances under which such deductions occurred, or over what period of time such deductions occurred. Without this information, it would be impossible for the Court to determine whether, under the Auer standard, defendant had an "actual practice" of allegedly improper deductions, as well as whether Hoffmann, Curtis and other potential plaintiffs were subject to a "significant likelihood" of deductions.
Similarly, discovery is required to determine whether and to what extent defendant's policies applied both to salaried and non-salaried employees.
The Court also rejects defendant's argument that, no matter what violations it may have committed, it is entitled to avail itself of the window of correction and can thereby bar plaintiffs' claims by preemptively reimbursing any potentially improper deductions. At issue is the proper construction of § 541.118(a)(6), which provides in full:
The effect of making a deduction which is not permitted under these interpretations [of the "salary basis" test] 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.
Admittedly, the text of the regulation is ambiguous in this respect; it addresses the permissible correction only of "a deduction" that is improper. It does not, however, specify whether this curative measure is available in cases of multiple or recurring improper deductions or a longstanding policy permitting such deductions. Moreover, courts in the past have disagreed on this point. Some courts have interpreted the last sentence broadly, holding that the "window of correction" is available even in cases where employers had longstanding policies and practices of making improper deductions from employees' pay. See Kuchinskas v. Broward County, 840 F. Supp. 1548 (S.D.Fla. 1993) (defendant entitled to window of corrections despite settled policy permitting improper deductions), aff'd, 86 F.3d 1168 (1996), cert. denied, 137 L. Ed. 2d 215, 117 S. Ct. 1080 (1997); Simmons v. City of Forth Worth, 805 F. Supp. 419, 424-25 (N.D.Tx. 1992) (window of correction applicable although city-wide policy in effect over four years resulted in over 20% of the city's exempt employees suffering improper deductions).
Other courts, however, including the Second Circuit, have interpreted the "window of correction" exception more narrowly, holding that it is applicable only in cases of one-time or inadvertent deductions. See Martin v. Malcolm Pirnie, Inc., 949 F.2d 611, 616 (2d Cir. 1991) ("The exception in subsection (6) applies to one-time or inadvertent deductions, not to a settled policy of subjecting the pay of employees to reduction") (quoting Knecht v. City of Redwood City, 683 F. Supp. 1307, 1311 (N.D.Cal. 1987). See also Close v. State of New York, 1996 U.S. Dist. LEXIS 1748, *28, 1996 WL 67979, at *9 (N.D.N.Y. 1996) (relying on Martin, declaring that window of correction applies only "to occasional and inadvertent deductions"), vacated on other grounds, 1996 U.S. Dist. LEXIS 12330, 1996 WL 481550 (N.D.N.Y. Aug. 19, 1996), judgment reinstated, 125 F.3d 31, 1997 U.S. App. LEXIS 23081, 1997 WL 540848 (2d Cir. Sept. 4, 1997). Accord Abshire v. County of Kern, 908 F.2d 483, 489 (9th Cir. 1990) (window of correction unavailable to employer whose express policy permits improper deductions).
Significantly, this split was not resolved by Auer because the Supreme Court was not asked to decide whether the window of correction could apply in cases of recurrent or multiple violations. Rather, the facts in Auer presented the easy case: the Court found that only one improper deduction had been made in "unusual circumstances" in the case of one employee. 117 S. Ct. at 912. Therefore, under any analysis, the defendant in Auer was entitled to avail itself of the window of correction. But while the Supreme Court did not reach the more difficult issue of what to do in cases of multiple, recurring violations, the Secretary of Labor, in its Amicus Brief in Auer, explained in no uncertain terms that it does not view the window of correction as available in such circumstances:
(Amicus Brief of the United States at 15, Exh. E to Plaintiffs' Reply Brief in Support of Order to Show Cause) (emphasis added).
As Auer made exceedingly clear, the Secretary's interpretation of his or her own regulations is entitled to extreme deference. 117 S. Ct. at 911. "Because the salary-basis test is a creature of the Secretary's own regulations, his [or her] interpretation of it is, under our jurisprudence, controlling unless 'plainly erroneous or inconsistent with the regulation.'" Id. (quoting Robertson v. Methow Valley Citizens Council, 490 U.S. 332, 359, 104 L. Ed. 2d 351, 109 S. Ct. 1835 (1989). Under that deferential standard, the Auer Court gave the force of law to the Secretary's interpretation of when an employee's compensation is "subject to reduction." 117 S. Ct. at 911. The Court also deferred to the Secretary's interpretation in holding that the window of correction does not require an employer to repay improper deductions immediately. Id. at 912.
Here, there is no reason why this Court should not likewise defer to that portion of the Secretary's interpretation providing that the window of correction is unavailable to employers that have engaged in a "pattern" of improper deductions. This interpretation is not plainly erroneous, nor is it inconsistent with the language of the regulation. Rather, it resolves an ambiguity therein. The Secretary's interpretation also easily comports with the FLSA's mandate that exemption from overtime requirements be granted only to employers that demonstrate a " bona fide intent" to treat their employees as exempt. 29 U.S.C. § 213(a)(1). This Court finds that the Secretary's interpretation, providing that the window of correction is unavailable to employers that have engaged in a "pattern" of improper deductions, rationally expresses the view that such employers lacked a " bona fide intent" to treat their employees as exempt. See Auer, 117 S. Ct. at 909 (where "Congress has not 'directly spoken to the precise question at issue,' we must sustain the Secretary's approach so long as it is 'based on a permissible construction of the statute'") (quoting Chevron U.S.A. Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S. 837, 842-843, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984)). Accordingly, whether or not defendant in this case will be entitled to avail itself of the window of correction will depend on whether the facts show that defendant engaged in a "pattern" of improper deductions.