UNPUBLISHED

UNITED STATES COURT OF APPEALS

FOR THE FOURTH CIRCUIT

LEON A. MUSTON,
Plaintiff-Appellee,

v.                                                                   No. 97-1084

MKI SYSTEMS, INCORPORATED,
Defendant-Appellant.

Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
T. S. Ellis, III, District Judge; Albert V. Bryan Jr.,
Senior District Judge; W. Curtis Sewell, Magistrate Judge.
(CA-96-299-A)

Argued: July 18, 1997

Decided: September 5, 1997

Before ERVIN, Circuit Judge, and BUTZNER and
PHILLIPS, Senior Circuit Judges.

_________________________________________________________________

Vacated and remanded by unpublished opinion. Senior Judge Phillips
wrote the opinion, in which Judge Ervin and Senior Judge Butzner
joined.

_________________________________________________________________

COUNSEL

ARGUED: Thomas Robert Folk, HAZEL & THOMAS, P.C., Falls
Church, Virginia, for Appellant. Sydney E. Rab, RICE & STALL-
KNECHT, P.C., Woodbridge, Virginia, for Appellee.

_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).

_________________________________________________________________

OPINION

PHILLIPS, Senior Circuit Judge:

Leon A. Muston brought this action against his former employer,
MKI Systems, Inc. (MKI), alleging pay and overtime violations under
the Fair Labor Standards Act (FLSA). The district court (Ellis, J.) in
a published opinion, Muston v. MKI Sys., Inc. , 951 F. Supp. 603 (E.D.
Va. 1997), held that because MKI's policy manual plainly and unam-
biguously permitted improper pay deductions, Muston was thereby
entitled, as a non-exempt employee, to recover unpaid overtime.
Because the Supreme Court's subsequent decision in Auer v. Robbins,
117 S. Ct. 905 (1997), mandated a different standard than that applied
by the district court for determining when employees are "subject to"
impermissible deductions, hence to non-exempt status, we vacate the
judgment of the district court and remand for reconsideration of Mus-
ton's claim under the new Auer standard.

I.

From July 1992 until May 3, 1994, Muston was employed by MKI,
a small government contractor, as a Senior Systems Analyst. During
his employment at MKI, Muston was required to record his work
hours. This record-keeping was required by the federal government
because MKI was performing cost-plus government contracts. Other-
wise, Muston was paid a preset salary for every pay period, regardless
of the quantity of his work, with one exception. This exception
occurred in January 1994, when, for personal reasons, Muston took
five days of leave without pay at his own request.

The MKI policy manual's language, as phrased at the relevant
times, by its plain terms allowed MKI to deduct pay from any MKI
employee for working less than the full amount of hours in a pay
period. However, MKI never docked Muston's salary, and claims it
never docked any other salaried employee's salary for absences,

                    2
except for prolonged absences of a day or more. Muston received his
regular salary when he worked less than 40 hours a week, except for
the five days of leave he voluntarily took.

Muston filed this complaint under the Fair Labor Standards Act,
claiming that because of this policy, he was not an exempt employee,
and was therefore entitled to unpaid overtime compensation. Follow-
ing discovery, Muston moved for partial summary judgment. His
motion contended that aspects of MKI's written policy manual made
Muston "subject to" deductions not permitted by the Department of
Labor's salary basis rule at 29 C.F.R. § 541.118. MKI opposed the
motion, contending that MKI's policy and practice had been not to
make any impermissible deductions, and that, in fact, MKI had not
made any impermissible deductions from the salary of Muston or any
of its salaried employees. Following oral argument on Muston's
motion, MKI made a cross-motion for partial summary judgment. The
district court entered an order granting summary judgment to Muston
and denying partial summary judgment to MKI on the issue of Mus-
ton's coverage under the FLSA overtime provisions. The court denied
summary judgment to both parties on the issue of liquidated damages,
leaving for trial whether Muston was entitled to $397.37 in overtime
pay or whether he was entitled to this amount plus an additional
$397.37 as liquidated damages.

To avoid trial expenses, the parties stipulated that the district court
could enter judgment in favor of Muston in the amount of $794.74,
provided that this did not waive the parties right to appeal. The dis-
trict court entered such a judgment which included the stipulation as
an attachment, and this appeal by MKI followed. 1

II.

To satisfy the FLSA'S "salary basis" requirement, and thereby be
exempt from the FLSA's overtime compensation provisions, an
employee must receive as compensation a pre-determined amount
_________________________________________________________________
1 One week after MKI filed its original notice of appeal, the district
court filed a memorandum opinion, which, sua sponte, reversed its ear-
lier ruling on liquidated damages, and granted summary judgment to
MKI on the issue. MKI then filed an amended notice of appeal.

                    3
constituting all or part of his compensation, "which amount is not
subject to reduction because of variations in the quality or quantity of
the work performed." 29 C.F.R. § 541.118(a). Furthermore, subject to
specific exceptions, "the employee must receive his full salary for any
week in which he performs any work without regard to the number
of days or hours worked." Id.

The dispositive issue before the district court was therefore simple:
was Muston's compensation in the form of salary"subject to reduc-
tion because of variations in the . . . quantity of work performed"
under MKI's written policy manual? Section 2001 of that Manual
provided at the critical time in issue that:

          Each hourly employee is paid for the total hours reported on
          his/her time sheet. Each salaried employee is paid his/her
          semimonthly salary provided the total hours reported on
          his/her time sheet equal at least the total amount of hours in
          the full pay period. When an employee works less than the
          full amount of hours during a particular pay period, due to
          initial employment, termination, or as a result of taking
          leave without pay, pay will be calculated based on the per-
          centage of working hours that an employee actually worked
          in that pay period.

JA 18 (emphasis added).

Following the filing of this action, MKI had amended this policy
statement to provide expressly that salaried employees' pay would
only be docked for absences exceeding a full work day. And, in the
district court MKI contended that this had always been actual prac-
tice, the old policy statement of a contrary possibility having been
simply an inadvertent misstatement. Muston countered that because
the policy manual categorically stated that deductions would occur,
this necessarily meant that he was "subject to" the deductions. Fur-
thermore, he pointed out that there had been no discovery on the mat-
ter so that the record did not reveal whether the actual practice with
respect to other employees had been as MKI asserted.

The district court, in the absence of Fourth Circuit authority, and
facing a then-existing split among other circuits, adopted and applied

                    4
the then current majority view which favored Muston. Under that
view, the existence of an employer's prerogative to dock pay for
absences not exceeding a full day's work period, even if the preroga-
tive was unexercised, made salaried employees to whom it applied
entitled to the overtime-pay protections of the FLSA pursuant to 29
C.F.R. § 541.118(a). See, e.g., Abshire v. County of Kern, 908 F.2d
483 (9th Cir. 1990); Kinney v. District of Columbia, 994 F.2d 6 (D.C.
Cir. 1993); Michigan Ass'n of Governmental Employees v. Michigan
Dep't of Corrections, 992 F.2d 82, 86 (6th Cir. 1993); Klein v. Rush-
Presbyterian-St. Luke's Med. Ctr., 990 F.2d 279 (7th Cir. 1993);
Martin v. Malcolm Pirnie, Inc., 949 F.2d 611 (2d Cir. 1991);
Carpenter v. City and County of Denver, 82 F.3d 353, 359 (10th Cir.
1996), vacated, 117 S. Ct. 1078 (1997). The minority view, by con-
trast, allowed any actual practice of non-docking with respect to
allowable deductions to trump the language of the policy. See Atlanta
Prof'l Firefighters Union Local 134 v. City of Atlanta, 920 F.2d 800,
805 (11th Cir. 1991); McDonnell v. City of Omaha , 999 F.2d 293,
296-97 (8th Cir. 1993).

The crux of the district court's reasoning was its interpretation of
the "subject to" requirement of 29 C.F.R.§ 541.118:

          Courts considering the issue have split on whether the actual
          application of an employer's policy is controlling where the
          practice contradicts the policy language. The majority of cir-
          cuits considering this question have held that whether the
          employee is "subject to" an impermissible deduction, the
          exemption is lost, regardless of whether an impermissible
          deduction is ever made. In Abshire, the seminal case for this
          view, the Ninth Circuit found the employer's argument that
          no deductions had actually been made "both misleading and
          irrelevant"; the dispositive factor in that court's view was
          whether the policy made an employee's pay "subject to"
          deduction. Abshire, 908 F.2d at 487. The minority view, by
          contrast, allows the actual practice with respect to deduc-
          tions to trump the language of the policy.

          ....

          . . . . Thus, the better approach to the question presented, and
          the approach adopted here, is that an employer loses the

                     5
          ability to claim an FLSA exemption for any employees who
          are "subject to" impermissible deductions, even if the
          employer has not yet made any such deductions. In other
          words, a court looks first to the policy's plain language. If
          that language is unambiguous and allows impermissible
          deductions, then the inquiry is complete, and the white col-
          lar exemptions are lost. Only if the language of the policy
          is ambiguous, will the employer's actual practice with
          respect to deductions be considered to give meaning to the
          terms of an ambiguous policy. See, e.g., Michigan Dep't of
          Corrections, 992 F.3d at 86.

Muston, 951 F. Supp. at 608-09. Since the plain language of the MKI
Policy permitted improper deductions, the court concluded that by
those terms the Policy violated the FLSA.

          In pellucidly clear language, § 2001 states that salaried
          employees who take leave without pay will have their pay
          calculated "based on the percentage of working hours the
          employee actually worked in that pay period." Given this
          plain language, it necessarily follows that in certain circum-
          stances, an employee's pay can be reduced for periods of
          leave without pay that involve fractional days. This is con-
          trary to the definition of salaried employee in FLSA's
          implementing regulations.

Id. at 607-08. In other words, "an employee's level of compensation
is not guaranteed; rather, by the plain terms of the policy language it
is `subject to reduction' for any hours the employee is absent on
unpaid leave." Id. at 607.2

On this basis, the court ruled that Muston was a non-exempt
employee entitled to overtime pay protections of the FLSA.
_________________________________________________________________
2 There is no dispute that MKI might, without consequence, reduce pay
for time not worked in the initial and terminal weeks of employment.
The dispute over MKI's policy is whether the policy subjected Muston
to fractional, or partial, day pay deductions, which are those alone which
invoke § 541.118(a)'s provisions.

                     6
III.

Following the district court's decision, the Supreme Court
announced its decision in Auer v. Robbins, 117 S. Ct. 905 (1997). In
that decision, the Auer Court directly held on the matter here at issue
that the controlling interpretation of the relevant regulation was that
advanced by the Department of Labor in an amicus brief. Id. at 909;
see also id. at 912 (fact that interpretation comes in form of a legal
brief does not make it unworthy of deference). Under that interpreta-
tion, which is at odds with that applied by the district court, salaried
employees such as Muston fall outside the salary-basis exemption if
they "are covered by a policy that permits disciplinary or other deduc-
tions in pay `as a practical matter.'" Id. at 911 (quoting Secretary's
amicus brief).3 This "as a practical matter" standard is met in either
of two circumstances: (1) when the employer has an actual practice
of making such deductions, or (2) when the employment policy at
issue "creates a `significant likelihood' of such deductions." Id.; see
also Stanley v. City of Tracy, ___ F.3d ___, No. 95-16242, 1997 WL
397581 (9th Cir. July 16, 1997) (applying Auer test); Childers v. City
of Eugene, ___ F.3d ___, No. 96-35443, 1997 WL 393081 (9th Cir.
July 15, 1997) (same); Ahern v. County of Nassau , ___ F.3d ___, No.
96-7742, 1997 WL 365376 (2d Cir. July 3, 1997) (same); Balgowan
v. New Jersey, 115 F.3d 214, 219 (3d Cir. 1997) (same); Carpenter
v. City and County of Denver, 115 F.3d 765 (10th Cir. 1997) (same).

A finding of "significant likelihood" of deductions in the absence
of any actual deductions "requires a clear and particularized policy--
one which `effectively communicates' that deductions will be made
in specified circumstances." Auer, 117 S. Ct. at 911. This means that
even if a policy on its face applies to both exempt and non-exempt
employees alike, it does not necessarily "effectively communicate"
that the deductions in question will apply to the exempt employees.
Id. at 911-12. As explained in Auer, a policy that nominally covers
all employees
_________________________________________________________________
3 Although Muston urges us to read this test as being limited to disci-
plinary deductions, we decline to do so. The Court made clear, as did the
amicus brief of the Department of Labor, that the interpretation applies
to "other deductions" as well. Id. at 911.

                    7
          does not "effectively communicate" that pay deductions are
          an anticipated form of punishment for [salaried] employees
          . . . since it is perfectly possible to give full effect to every
          aspect of the manual without drawing any inference of that
          sort. If the statement of available penalties applied solely to
          [salaried employees], matters would be different; but since
          it applies both to [salaried employees] and to employees
          who are unquestionably not paid on a salary basis, the
          expressed availability of . . . deductions may have reference
          only to the latter. No clear inference can be drawn as to the
          likelihood of a sanction's being applied to [salaried]
          employees such as petitioners.

Id. at 911-12. In other words, a written policy which is nominally
applicable to all employees, both salaried and non-salaried, and
authorizes deductions which would be proper only for non-salaried
employees, does not, without more, communicate as a practical matter
that such deductions will be made for employees who otherwise sat-
isfy the salary test.

In adopting the Department of Labor's interpretation, the Court
indicated that the "significant likelihood" test avoided "the imposition
of massive and unanticipated overtime liability . . . in situations in
which a vague or broadly worded policy is nominally applicable to a
whole range of personnel but is not `significantly likely' to be
invoked against salaried employees." Id. at 911. Under this interpreta-
tion, the existence of isolated, stray factors does not meet the burden
of establishing a "significant likelihood." For example, a "significant
likelihood" cannot be established by a one-time deduction under
unusual circumstances. Id. at 911-12.

MKI urges that on the basis of Auer's obvious rejection of the test
applied by the district court, we should simply reverse that court's
judgment. That would not be proper. Application of Auer's "as a prac-
tical matter" test requires a factual inquiry not yet undertaken and that
is properly the work of the district court on the remand we will order.

IV.

Alternatively, MKI contends that we should reverse the district
court's judgment on the basis that even if its former policy failed

                     8
Auer's "as a practical matter" test, it had, by amending that policy
effectively invoked the saving provisions of the"window of opportu-
nity" conferred by 29 C.F.R. § 541.118(a)(6), which provides that

          [W]here 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.

The district court rejected this argument when advanced in that
court as an alternative by MKI. The issue may or may not arise again
upon the remand we will order for reconsideration of the principle
issue under Auer. That decision also dealt, in ways that could be rele-
vant to this case, with the proper interpretation and application of this
"window of opportunity" provision. In view of our remand for recon-
sideration of the principal issue, we believe it prudent also to leave
to the district court the question whether Auer also requires any
reconsideration of the "window of opportunity issue," should it again
be reached.

V.

For these reasons, we vacate the judgment of the district court and
remand the action for reconsideration on further proceedings in light
of Auer and of this opinion.

SO ORDERED

                     9
