                       RECOMMENDED FOR FULL-TEXT PUBLICATION
                            Pursuant to Sixth Circuit Rule 206
                                   File Name: 12a0047p.06

               UNITED STATES COURT OF APPEALS
                               FOR THE SIXTH CIRCUIT
                                 _________________


                                                X
                                                 -
 JOHN ORTON,
                                                 -
                              Plaintiff-Appellant,
                                                 -
                                                 -
                                                     No. 10-2044
          v.
                                                 ,
                                                  >
                                                 -
                                                 -
 JOHNNY’S LUNCH FRANCHISE, LLC;

                       Defendants-Appellees. -
 ANTHONY J. CALAMUNCI,
                                                 -
                                                N
                  Appeal from the United States District Court
                 for the Eastern District of Michigan at Detroit.
             No. 10-11013—Gerald E. Rosen, Chief District Judge.
                                Argued: January 10, 2012
                         Decided and Filed: February 21, 2012
      Before: MERRITT and MOORE, Circuit Judges; MAYS, District Judge.*

                                   _________________

                                        COUNSEL
ARGUED: David M. Blanchard, NACHT, ROUMEL, SALVATORE, BLANCHARD
& WALKER, P.C., Ann Arbor, Michigan, for Appellant. Anthony J. Calamunci,
ROETZEL & ANDRESS, LPA, Toledo, Ohio, for Appellees. ON BRIEF: David M.
Blanchard, NACHT, ROUMEL, SALVATORE, BLANCHARD & WALKER, P.C.,
Ann Arbor, Michigan, for Appellant. Anthony J. Calamunci, ROETZEL & ANDRESS,
LPA, Toledo, Ohio, for Appellees.
    MOORE, J., delivered the opinion of the court, in which MAYS, D. J., joined.
MERRITT, J. (p. 12), delivered a separate concurring opinion.




        *
        The Honorable Samuel H. Mays, United States District Judge for the Western District of
Tennessee, sitting by designation.


                                              1
No. 10-2044        Orton v. Johnny’s Lunch Franchise et al.                     Page 2




                                _________________

                                     OPINION
                                _________________

       KAREN NELSON MOORE, Circuit Judge. John Orton appeals from the district
court’s dismissal of his claims against Johnny’s Lunch Franchise, LLC, and Anthony
Calamunci for unpaid wages and expenses from August 2008 to December 2008. Orton
sued under the Fair Labor Standards Act (“FLSA”), 29 U.S.C. §§ 201, et seq., and
various state laws. The district court granted the defendants’ motion to dismiss the
FLSA claim on the ground that Orton was an exempt salaried employee and
subsequently dismissed the remaining state-law claims. Because we hold that Orton has
adequately pleaded a claim under the FLSA, we REVERSE and REMAND for further
proceedings.

                                I. BACKGROUND

       John Orton’s complaint alleges that he began working for Johnny’s Lunch
Franchise (“JLF”) in September 2007 as Vice President of Real Estate and Site
Selection. His annual base salary was set at $125,000. From September 2007 until
August 2008, JLF paid Orton his wages according to plan, although throughout 2008
Orton alleges JLF had trouble making payroll. In August 2008, Orton alleges that JLF
ceased paying him any wages even though he did not cease working. On December 1,
2008, Orton along with the entire executive staff was formally laid off. Orton sued his
alleged employers JLF and Anthony Calamunci (“Calamunci”) in April 2010 for
damages stemming from the period he claims he worked but was not paid between
August and December 2008.

       The defendants moved to dismiss on the basis of Federal Rules of Civil
Procedure 12(b)(2), (3), and (6). Initially, the defendants sought dismissal of only
Calamunci for failure to state a claim under Rule 12(b)(6), arguing that Calamunci was
No. 10-2044              Orton v. Johnny’s Lunch Franchise et al.                                 Page 3


not an “employer” within the meaning of § 203(d) of the FLSA.1 Calamunci concluded
this argument by noting that Orton “admits he was an exempt employee with a [sic]
annual salary of $125,000. . . . Therefore, [Orton] is ‘exempt’ from overtime
compensation under the [FLSA].” R. 7 (Defs.’ Mot. to Dismiss at 4). Calamunci cited
no cases or law to make this argument, nor did he argue that this alone warranted
dismissal of the entire FLSA claim. Orton, however, responded as if the defendants had
moved jointly under Rule 12(b)(6) and addressed both the argument that Calamunci was
not an employer and the suggestion that Orton was exempt. Orton explained how
Calamunci qualifies as an employer under § 203(d) when one applies the law of this
Circuit2 and argued that the defendants failed to meet their burden of establishing that
Orton was exempt during the period they denied him his wages. In their reply, the
defendants focused almost entirely on the argument that Orton was an exempt salaried
employee under the FLSA and that the complaint could therefore be dismissed in its
entirety against both defendants. They argued “[i]n the alternative” that Calamunci was
not an employer. Prior to a ruling, Orton sought leave to file a second amended
complaint to add further allegations that would more clearly refute the affirmative
defense of exemption and establish Calamunci’s status as an employer.

         On July 20, 2010, the district court issued its opinion granting the defendants’
motion to dismiss. Orton v. Johnny’s Lunch Franchise, LLC, No. 10-11013, 2010 WL
2854303 (E.D. Mich. July 20, 2010). The district court treated the Rule 12(b)(6) motion
as jointly sought by the defendants and held that Orton had failed to state a claim against
either defendant under the FLSA because “[b]y his own admission, [Orton] is exempt
from protection under FLSA.” Id. at *4. Focusing on the plaintiff’s admission that he
was owed an annual base salary, the district court concluded: “Nothing in the record
indicates that this base salary was subject to reduction because of variations in the
quality or quantity of the work performed. Rather, Mr. Orton’s allegations suggest only


         1
           The only arguments advanced by JLF in the motion, which was made jointly with Calamunci,
were that dismissal was appropriate under Rules 12(b)(2) and (3) for lack of personal jurisdiction and lack
of venue. Those arguments have since been dropped by the defendants and are not before us on appeal.
         2
             Calamunci had erroneously cited solely Third Circuit law as controlling.
No. 10-2044         Orton v. Johnny’s Lunch Franchise et al.                          Page 4


that Defendants stopped paying him this promised salary because of cash flow issues.”
Id. at *5. The withholding of compensation for several months, if true, would be
insufficient according to the district court to convert a position from salary to hourly.
Id. The district court did not mention who had the burden of establishing Orton’s status
as exempt.

        Having concluded that the FLSA claim was not viable, the district court did not
address the arguments with respect to Calamunci’s status as an employer and dismissed
the state-law claims without prejudice because it decided it “lack[ed] a basis to exercise
subject matter jurisdiction” over the state-law claims. Id. at *6. The district court denied
Orton’s motion for leave to file a second amended complaint as moot. Id. Orton timely
appealed the district court’s judgment.

                                    II. FLSA CLAIM

        We review de novo a district court’s decision to dismiss a complaint for failure
to state a claim under Federal Rule of Civil Procedure 12(b)(6). Hensley Mfg., Inc. v.
ProPride, Inc., 579 F.3d 603, 608-09 (6th Cir. 2009). In reviewing a motion to dismiss,
we must accept non-conclusory allegations of fact in the complaint as true and determine
if the plaintiff has stated a plausible claim for relief. Ashcroft v. Iqbal, 556 U.S. 662, 129
S. Ct. 1937, 1949-50 (2009).

A. Overview of FLSA Exemptions

        The FLSA requires employers to pay minimum wages to certain employees.
29 U.S.C. § 206. Employers must also pay overtime to employees who work more than
forty hours a week. 29 U.S.C. § 207. Some employees, however, are “exempt” from
these requirements under 29 U.S.C. § 213. Relevant to this case, § 213(a)(1) exempts
workers employed in a “bona fide executive, administrative, or professional capacity,”
as defined by the Secretary of Labor. For each of these three functions, the Secretary of
Labor has promulgated rules regarding when an employee qualifies as exempt. See
29 C.F.R. § 541.100 (executive employees); 29 C.F.R. § 541.200 (administrative
employees); 29 C.F.R. § 541.300 (professional employees). Each rule requires the
No. 10-2044            Orton v. Johnny’s Lunch Franchise et al.                                   Page 5


defendant to satisfy three “tests” to qualify: (1) a duties test; (2) a salary-level test; and
(3) a salary-basis test. See 29 C.F.R. § 541.700 (duties test); 29 C.F.R. § 541.600
(salary-level test); 29 C.F.R. § 541.602 (salary-basis test); see also Baden-Winterwood
v. Life Time Fitness, Inc., 566 F.3d 618, 626-27 (6th Cir. 2009).

         An employer may raise a plaintiff’s status as an exempt employee as an
affirmative defense to claims brought under the FLSA.                         Thomas v. Speedway
SuperAmerica, LLC, 506 F.3d 496, 501 (6th Cir. 2007). Exemptions, however, “‘are to
be narrowly construed against the employers seeking to assert them.’” Id. (quoting
Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960)). The employer bears the
burden of establishing the affirmative defense by a preponderance of the evidence, and
the employer satisfies this burden only by providing “clear and affirmative evidence that
the employee meets every requirement of an exemption.” Id. (internal quotation marks
omitted).

         The district court determined that “the parties appear to concede that Mr. Orton’s
job is administrative in nature,” Orton, 2010 WL 2854303, at *4,3 and then concluded
that Orton was an exempt salaried employee under all three tests based on the allegations
in his complaint. The district court granted the defendants’ motion to dismiss, holding
that exempt salaried employees have no claim under the FLSA for back wages. Because
Orton does not challenge the district court’s holdings with respect to the salary-level test
or the duties test, we review only the district court’s conclusions on the salary-basis test.

B. Salary-Basis Test

         The relevant regulation defining the salary-basis test was updated in 2004 and
now states the following:




         3
          It is unclear where the parties make this concession, or how the single sentence in Orton’s
complaint summarizing his primary responsibilities would be sufficient for the defendants to meet their
burden of establishing that Orton was employed in an administrative capacity, as the district court held he
was. Id. at *6. We do not address this issue on appeal, however, because Orton has not raised it. At oral
argument, Orton conceded that he was employed in at least one of the three relevant capacities:
administrative, executive, or professional.
No. 10-2044        Orton v. Johnny’s Lunch Franchise et al.                       Page 6


       General Rule. An employee will be considered to be paid on a “salary
       basis” within the meaning of these regulations 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 the work performed. Subject to
       the exceptions provided in paragraph (b) of this section, an exempt
       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.

29 C.F.R. § 541.602(a) (2004). The old version stated, in relevant part: “An employee
will be considered to be paid ‘on a salary basis’ within the meaning of the regulations
if under his employment agreement he regularly receives each pay period . . . .” 29
C.F.R. § 541.118(a) (1973) (emphasis added).

       We addressed at length the impact of the 2004 changes on the salary-basis test
in Baden-Winterwood, 566 F.3d at 627-28. The new regulation now “focus[es] on pay
received,” rather than the terms of the employment agreement, but the regulation still
requires that a defendant show that the plaintiff was paid: “(1) a predetermined amount,
which (2) was not subject to reduction (3) based on quality or quantity of work
performed.” Id. at 627. The list of deductions that are excepted from this requirement
are provided in subsection (b), and include deductions in pay based on absences for
personal reasons or sickness in certain circumstances. 29 C.F.R. § 541.602(b).

       The new regulations also clarified the effect of an improper deduction on an
employee’s status as exempt. 29 C.F.R. § 541.603. An improper deduction alone will
not necessarily render an employee non-exempt: “An employer who makes improper
deductions from salary shall lose the exemption if the facts demonstrate that the
employer did not intend to pay employees on a salary basis.” 29 C.F.R. § 541.603(a)
(2004). An employer’s intent to make improper deductions is demonstrated by “[a]n
No. 10-2044           Orton v. Johnny’s Lunch Franchise et al.                                  Page 7


actual practice of making improper deductions.” Id.4 However, “[i]mproper deductions
that are either isolated or inadvertent will not result in loss of the exemption for any
employees subject to such improper deductions, if the employer reimburses the
employees for such improper deductions.” 29 C.F.R. § 541.603(c).

         The district court held that the “Defendants’ failure to pay Mr. Orton for several
months [did not] convert[] his job from a salary-based position to an hourly-based
position.” Orton, 2010 WL 2854303, at *5. Relying primarily on an Eleventh Circuit
case, the district court stated that “administrative employees are exempt from coverage
within the meaning of the FLSA based on the salary that they were owed under their
employment agreements and not based on the on [sic] compensation that they actually
received.” Id. (citing Nicholson v. World Bus. Network, Inc., 105 F.3d 1361, 1365 (11th
Cir.), cert. denied, 522 U.S. 949 (1997)). The district court’s holding is incorrect for two
reasons, both of which warrant reversal.

         First, the district court’s holding rests on an outdated rule of law. The new
(2004) regulations, which all parties correctly agree are applicable in this case, establish
that employment agreements are no longer the relevant starting point for whether an
employee is paid on a salary basis. Baden-Winterwood, 566 F.3d at 627. The question
is therefore not what Orton was owed under his employment agreement; rather, the
question is what compensation Orton actually received.

         Second, the district court neglected to place the burden of establishing the
exemption on the defendants, failing even to acknowledge that the exemption is an
affirmative defense. The district court instead focused solely on the sufficiency of
Orton’s complaint and the not-yet-created record in this case: “Nothing in the record
indicates that this base salary was subject to reduction because of variations in the
quality or quantity of the work performed. Rather, Mr. Orton’s allegations suggest only



         4
          These revisions were partly in response to the Supreme Court’s holding in Auer v. Robbins, 519
U.S. 452 (1997), which held that the exemption should be denied if the employer either had an actual
practice of making deductions based on quantity or quality of work, or had a policy that created a
significant likelihood of such deductions. See Baden-Winterwood, 566 F.3d at 627-28 (discussing Auer).
The changes eliminated the “significant likelihood” test. Id. at 628.
No. 10-2044            Orton v. Johnny’s Lunch Franchise et al.                                   Page 8


that Defendants stopped paying him this promised salary because of cash flow issues.”
Orton, 2010 WL 2854303, at * 5 (emphasis added). On a motion to dismiss, there is no
fact “record,” only the plaintiff’s allegations. Here, Orton clearly alleged that from
August 2008 to December 2008 his salary was reduced to zero. The only mention as to
the potential cause of the deduction in Orton’s complaint is that the “Defendants had
trouble making payroll and paying expenses.” R. 4 (Am. Compl. at ¶ 12). Whether
Orton’s allegations “suggest” one reason for the deduction in salary is irrelevant; his
allegations do not preclude multiple reasons for the deduction, and it was the defendants’
burden—not the plaintiff’s—to establish that the reason for the deduction was proper.
See Vance v. Terrazas, 444 U.S. 252, 270 n.11 (1980) (citing 5 CHARLES ALAN WRIGHT
& ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 1276 (1969)). Orton’s
allegations are insufficient to establish as a matter of law that the deduction in his pay
was proper under either § 541.602(a) or one of the exceptions in § 541.602(b).

         Furthermore, even if Orton had explicitly pleaded that the sole reason for the
deduction was because JLF was experiencing a decline in cash flow, this alone would
tell us nothing about whether the deduction was proper under the FLSA. For example,
a company experiencing cash-flow issues cannot claim the exemption if the company
prevents an otherwise salaried employee from coming in three days a week and then
pays him less accordingly. Such a deduction in pay would undeniably be due to an
absence occasioned by the employer, see 29 C.F.R. § 541.602(a), even though the
employer decided to take the action due to cash flow problems. The regulation makes
no exception for deductions in pay just because they were motivated by cash flow
shortages.5




         5
          That is not to say a company with cash flow issues is left with no recourse. Nothing in the FLSA
prevents such an employer from renegotiating in good faith a new, lower salary with one of its otherwise
salaried employees. The salary-basis test does not require that the predetermined amount stay constant
during the course of the employment relationship. Of course, if the predetermined salary goes below a
certain amount, the employer may be unable to satisfy the salary-level test, which explicitly addresses the
amount an employee must be compensated to remain exempt. See 29 C.F.R. § 541.600(a) (“To qualify
as an exempt executive, administrative or professional employee under section 13(a)(1) of the Act, an
employee must be compensated on a salary basis at a rate of not less than $455 per week . . . .”).
No. 10-2044           Orton v. Johnny’s Lunch Franchise et al.                                   Page 9


         JLF and Calamunci also seek to distinguish between an employee whose pay was
reduced partially and one whose pay was reduced entirely. At first glance, this argument
has some support in pre-2004 case law. See, e.g., Nicholson v. World Bus. Network, Inc.,
105 F.3d 1361, 1365 (11th Cir. 1997) (rejecting FLSA claim for salaried employees who
were not paid in accordance with their contract); Donovan v. Agnew, 712 F.2d 1509,
1517 (1st Cir. 1983) (holding salaried employees not entitled to minimum wages despite
failure of employer to pay their contractual wages during last two weeks of company’s
operation); Reich v. Midwest Body Corp., 843 F. Supp. 1249, 1250-51 (N.D. Ill. 1994)
(holding salaried employee remained exempt despite failure of employer to pay wages
for the final three weeks); Kawatra v. Gardiner, 765 S.W.2d 771, 774-75 (Tenn. Ct.
App. 1988) (failure to pay salaried employee’s wages did not remove exemption because
language in contract trumped amount of funds employee actually received).6 The focus
in all of these cases, however, was on the terms of the employment agreement.
Therefore, to the extent these cases are at all instructive regarding the new regulations,
they support the general principle that the reasons for the reductions in pay are
dispositive, not the amount.

         The burden should have been placed on the defendants to show that Orton
“receive[d] . . . [a] predetermined amount.” 29 C.F.R. § 541.602(a). If he did not, the
defendants must have shown by a preponderance of the evidence that their failure to pay
him the predetermined amount was proper either under § 541.602(a) or under one of the
delineated exceptions in subsection (b). We therefore reverse the district court’s
dismissal of Orton’s FLSA claim and remand for further proceedings.




         6
          But see Takacs v. Hahn Auto. Corp., 246 F.3d 776, 781 (6th Cir.) (actual practice of suspending
managers without pay for improper reasons rendered them not exempt), cert. denied, 534 U.S.889 (2001);
Avery v. City of Talladega, 24 F.3d 1337, 1341-42 (11th Cir. 1994) (three-day suspension without pay for
improper reasons “destroyed” employee’s salaried status and entitled employee to overtime).
No. 10-2044        Orton v. Johnny’s Lunch Franchise et al.                       Page 10


           III. LEAVE TO FILE SECOND AMENDED COMPLAINT

       Orton sought leave to amend his complaint for a second time to add allegations
that would address the affirmative defenses, to plead more accurately Calamunci’s role
as an employer, and to add a new defendant in light of the sale of JLF. The district court
did not consider the motion, deeming it moot. Orton, 2010 WL 2854303, at *6. We
review the denial of a motion for leave to amend for abuse of discretion, except when
the denial was due to futility, in which case we review de novo. Inge v. Rock Fin. Corp.,
281 F.3d 613, 625 (6th Cir. 2002). Here, however, the motion for leave to amend was
not addressed on the merits; rather, the district court deemed it moot upon the dismissal
of the complaint on other grounds. Because we vacate the grounds on which dismissal
was predicated, Orton’s motion must be considered on the merits on remand. See UAW
Local 594 v. Int’l Union, UAW, 956 F.2d 1330, 1339 (6th Cir. 1992). We therefore
vacate the district court’s order with respect to the motion for leave to file the second
amended complaint.

                             IV. STATE-LAW CLAIMS

       After dismissing Orton’s FLSA claim, the district court incorrectly held that it
no longer had supplemental jurisdiction over Orton’s related state-law claims. The
district court had original subject matter jurisdiction over Orton’s FLSA claim pursuant
to 28 U.S.C. § 1331; it therefore had supplemental jurisdiction over Orton’s related state-
law claims under 28 U.S.C. § 1367. Such supplemental jurisdiction does not disappear
when the federal claim that gave rise to original jurisdiction in the first place is
dismissed. Carlsbad Tech., Inc. v. HIF Bio, Inc., 556 U.S. 635, 129 S. Ct. 1862, 1866-67
(2009). Following such a dismissal, the district court in its discretion may properly
choose whether to exercise § 1367(a) jurisdiction over the supplemental state-law
claims; however, such a decision is “purely discretionary.” Id. We therefore reverse the
district court’s dismissal of Orton’s state-law claims for jurisdictional reasons.
No. 10-2044      Orton v. Johnny’s Lunch Franchise et al.                  Page 11


                               V. CONCLUSION

       For the aforementioned reasons, we REVERSE the district court’s dismissal of
the plaintiff’s complaint and REMAND for further proceedings consistent with this
opinion.
No. 10-2044        Orton v. Johnny’s Lunch Franchise et al.                     Page 12


                             ______________________

                                CONCURRENCE
                             ______________________

       MERRITT, Circuit Judge, concurring.          I agree with the court that the
“exemption” issue should be decided after the defendant describes the issue in an
affirmative defense and after further proceedings. That was not done here. The district
court decided the case only on a motion to dismiss under Rule 12(b)(6). We do not
know what the facts are. It may be that the parties entered into a new agreement based
on the company’s cash position. We do not know. I would not speculate on how the
exempt status statutory language and regulations should be interpreted for various fact
patterns. Nor would I indicate a view of what the result would be if the company ran out
of cash and so informed its executive employees who decided to stay on the job to see
if the company could get over its problems.
