In the
United States Court of Appeals
For the Seventh Circuit

No. 00-2798

Vicky Whetsel,

Plaintiff-Appellant,

v.

Network Property Services, LLC,

Defendant-Appellee.



Appeal from the United States District Court
for the Southern District of Indiana, Indianapolis Division.
No. IP 99-0674-C-F/D--Kennard P. Foster, Magistrate Judge.


Argued February 23, 2001--Decided March 29, 2001



      Before Flaum, Chief Judge, and Ripple and Williams,
Circuit Judges.

      Flaum, Chief Judge. Vicky Whetsel appeals the
district court’s grant of summary judgment in
favor of Network Property Services, LLC ("NPS")
on her claim under the Fair Labor Standards Act
("FLSA"). The court determined that regardless of
whether Whetsel was subject to a practice or
policy of improper deductions, NPS properly took
advantage of the regulatory window of correction.
Whetsel, joined by the Secretary of Labor
("Secretary") as amicus curiae, argues that the
window is not available where the employer
maintains a practice or policy of docking
employees’ pay. For the reasons stated herein, we
reverse and remand.

I.   Background

      Whetsel was an employee of NPS from January 3,
1996 to January 27, 1999. NPS considered her
employment to be exempt from the FLSA, and so she
was not paid overtime regardless of the number of
hours she worked. During the relevant time
period, NPS employed a total of sixteen salaried
employees that it claimed were exempt from the
overtime provisions of the FLSA.

      Whetsel filed her complaint against NPS on May
11, 1999, seeking unpaid overtime, liquidated
damages, and attorney’s fees. She claimed that
NPS had an unwritten policy based on "benefit
hours" which subjected her to the possibility of
deductions in her pay for partial day absences.
Under this policy, Whetsel claimed that NPS’s
employees were required to use benefit hours from
a bank of time to cover absences of less than a
day or else their pay would be docked. She also
stated that NPS had in fact made at least eight
partial day deductions to the salaries of four of
its supposedly exempt employees, which amounted
to a practice of docking. Because of the alleged
practice and policy, Whetsel claimed her
employment had not been covered by an exemption
from the FLSA and thus she was owed for the
overtime she had worked while at NPS.

      NPS responded that Whetsel had been employed in
an executive capacity and thus was not entitled
to overtime pay. NPS further claimed that it
regularly permitted salaried employees to take
partial day absences after exhausting their
allotted benefit hours without any reduction in
pay, and did not have any policy of reducing
salaried employees’ pay for absences of under one
day. The company noted that Whetsel herself
repeatedly had been absent for less than a day
for various reasons without ever having her pay
reduced. NPS also claimed that the eight partial
day deductions were irregular occurrences caused
by unusual circumstances in each case.

      On January 20, 2000, NPS circulated a
memorandum to all of its employees stating that
on "isolated occasions" in the past it had made
partial day deductions to the salaries of exempt
employees and that it had reimbursed those
employees. The memorandum further stated that
NPS’s policy, both in the past and currently, is
not to make deductions from the salaries of
exempt employees for partial day absences
regardless of whether the employee has any
benefit time available. On the same day, NPS
circulated another memorandum stating that any
exempt employee who was leaving the company’s
employ would not have his or her pay reduced
because of a negative balance in his or her
available benefit hours account at the time
employment was terminated.

      On February 25, 2000, NPS moved for summary
judgment, arguing that it did not have a practice
or policy of improper deductions and that it had
taken advantage of the regulatory window of
correction through its January 20 memoranda and
repayment to the four affected salaried
employees. The district court, relying on DiGiore
v. Ryan, 172 F.3d 454, 465 (7th Cir. 1999),
stated that it did not need to determine whether
NPS maintained such a practice or policy because,
even if the company had done so, any violation of
the FLSA was remedied through the window of
correction. On this basis, the district court
granted summary judgment to NPS. Whetsel, aided
by the Secretary, appeals.

II. Discussion
A. Structure of the FLSA and Regulations

      The relevant legal background of the FLSA
provisions and the Secretary’s regulations on
exemptions is set forth in DiGiore, 172 F.3d at
460-61, and so will not be repeated in depth
here. NPS argues that it was exempt from the FLSA
with respect to Whetsel’s employment because she
was an executive employee under 29 U.S.C. sec.
213(a)(1) and 29 C.F.R. sec. 541.1. Of the three
requirements for an employee to qualify for the
executive exemption, the parties agree that
Whetsel’s employment satisfied the supervisory
and managerial aspects, and so the only issue is
whether she was paid on a salary basis as
required by 29 C.F.R. sec.sec. 541.1(f),
541.118(a).

      Section 541.118(a) states that an employee is
paid on a salary basis if he or she receives "a
predetermined amount . . . of [ ] compensation,
which amount is not subject to reduction because
of variations in the quality or quantity of the
work performed." "This requirement, commonly
referred to as the ’no-docking rule’ prohibits
employers from deducting an employee’s pay based
on partial day absences" and certain other
forbidden reasons. DiGiore, 172 F.3d at 461. The
"subject to" phrase in this regulation was
interpreted in Auer v. Robbins, 519 U.S. 452,
461-62 (1997), where the Supreme Court held that
an employee’s compensation could be subject to
reduction even if deductions were not taken from
his or her salary. The "subject to" standard is
met whenever the employer maintains (1) an actual
practice of impermissible deductions or (2) a
policy that creates a significant likelihood of
deductions, so long as the policy is "clear and
particularized" so as to "’effectively
communicate[ ]’ that deductions will be made in
specified circumstances." Id.; see also DiGiore,
172 F.3d at 462-63. Whetsel admits that her own
pay was never reduced for partial day absences,
but argues that NPS maintained both a policy and
a practice of impermissible deductions that made
her subject to having her salary docked.

B.   Window of Correction

      Section 541.118(a)(6), which establishes a
window for correcting violations of the salary
basis test, states:

The effect of making a deduction which is not
permitted under these interpretations 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.

      The Secretary argues that this provision can
aid an employer only if it first establishes that
it objectively intended to pay its employees on
a salary basis. Maintaining a policy or practice
of improper deductions as defined in Auer shows
that the employer lacked such an intention, and
thus cannot use the window of correction. The
Secretary claims that her construction of the
regulation is entitled to controlling deference
under the interpretive principles affirmed in
Auer, 519 U.S. at 461. She further notes that two
other circuits have adopted this interpretation
in Yourman v. Giuliani, 229 F.3d 124, 128 (2d
Cir. 2000) and Klem v. County of Santa Clara, 208
F.3d 1085, 1093 (9th Cir. 2000). Finally, the
Secretary argues that any language in DiGiore
that is contrary to her position is dicta and was
made without the benefit of her considered views.
Thus, the Secretary claims that the district
court erred by applying the window without
determining whether NPS had a policy or practice
of docking.
      NPS responds that the plain language of sec.
541.118(a)(6) states that the window is available
to correct a practice or policy of impermissible
deductions resulting from absences which are
primarily within the control of the employee. NPS
emphasizes the language of the second sentence
and the beginning of the fourth sentence in
supporting its argument. NPS also contends that
this circuit answered the issue of the
availability of the window of correction in an
alternate holding of DiGiore, 172 F.3d at 465,
which controls the outcome of this case.

      Setting aside for the moment the potential
effect of DiGiore as precedent, we defer to the
Secretary’s interpretation of the FLSA
regulations unless her construction is "plainly
erroneous or inconsistent with the regulation."
Auer, 519 U.S. at 461 (internal quotation marks
omitted); see also Bowles v. Seminole Rock & Sand
Co., 325 U.S. 410, 414 (1945). The Supreme Court
has recently emphasized that such deference is
warranted only where the language at issue is
ambiguous. Christensen v. Harris County, 529 U.S.
576, 588 (2000). If the regulation is ambiguous,
then we defer to any reasonable construction by
the Secretary, even though this interpretation
might "not be the best or most natural one by
grammatical or other standards." Pauley v.
BethEnergy Mines, Inc., 501 U.S. 680, 702 (1991).


      1.   Ambiguity.

      We conclude that the regulation is ambiguous
regarding whether the window is available to
correct a policy or practice of docking. We rely
on the fact that the regulation does not
explicitly state that it is available to correct
a policy or pattern of deductions, thus leaving
open the question of whether it applies to those
circumstances. By comparison, in recent cases
where the Supreme Court has rejected an agency’s
construction of its own regulation, the Court has
done so only where the proffered interpretation
contradicts explicit language in the regulation.
See Christensen, 529 U.S. at 587-88 (rejecting
agency’s attempt to read word "may" as mandatory
rather than permissive); Norfolk S. Ry. Co. v.
Shanklin, 529 U.S. 344, 356 (2000) (rejecting
agency’s argument that regulation that applied to
"any" federally funded railroad crossing project
affected only a subset of such projects).

      NPS’s argument for the clarity of the statute
is based primarily on the second sentence, which
precludes the possibility to correct only where
deductions for lack of work are "generally made."
The term "generally made" conveys a policy or
practice of making deductions. NPS also relies on
the fourth sentence, which states that if its
conditions are complied with the exemption will
be maintained if the deductions were
"inadvertent, or for reasons other than lack of
work" (emphasis added). This sentence might also
be read as implying that deductions cannot be
corrected only where the deduction was made
deliberately and for lack of work. NPS contends
that because the regulatory language singles out
only practices or policies of deductions for lack
of work for incorrigibility, the regulation
implicitly indicates that any other kind of
policy or practice can be corrected. While NPS’s
argument might have merit in other contexts, the
canon of expressio unius est exclusio alterius
has reduced force in the context of interpreting
agency administered regulations and will not
necessarily prevent the regulation from being
considered ambiguous. See Pauley, 501 U.S. at
703; Cheney R.R. Co. v. ICC, 902 F.2d 66, 68-69
(D.C. Cir. 1990) (stating that expressio unius is
"an especially feeble helper in an administrative
setting" and that such reasoning "can rarely if
ever" demonstrate unambiguity so as to prevent
deference to an agency’s interpretation).

      We also note that the issue facing this court
has not been settled by Auer. Near the end of
that opinion in a discussion of remedying a one-
time reduction in pay, the Court held that the
"plain language of the regulation sets out
’inadverten[ce]’ and ’made for reasons other than
lack of work’ as alternative grounds permitting
corrective action." 519 U.S. at 463 (alteration
in original). This language could be read as
supporting NPS’s argument that the window is
available for any deductions made for a reason
other than lack of work, including a policy or
practice of such deductions, but this would be a
misunderstanding of the context in which the
Court’s statement appears. The Court had already
determined that the employer’s actions in that
case did not amount to a practice or policy. Id.
at 461-62. The section of Auer quoted above
considered only whether a single impermissible
deduction had to be unintentional to permit
correction, and the Court held that it did not as
long as it was made for reasons other than lack
of work. Because this section of Auer was
discussing only a single deduction, the Court did
not confront the question of whether the window
was available to ameliorate a practice or policy
of deductions. See Klem, 208 F.3d at 1093-94.


      2.   Reasonableness.

      Having determined that the regulation is
ambiguous, we further hold that the Secretary’s
interpretation of the regulation is reasonable.
The Secretary’s construction, which focuses on
objective intention, finds support in the second
sentence of sec. 541.118(a)(6), whose language
indicates that intention is the key to when the
window is available. Similarly, the fourth
sentence, which discusses when "the exemption
will not be considered to have been lost"
provides some modicum of support for the
Secretary’s interpretation. See Klem, 208 F.3d at
1093. Use of the word "lost" suggests that an
employer must first establish that it was
entitled to the exemption, which requires inter
alia that the employer demonstrate it was paying
its employees on a salary basis. According to the
Secretary, this requires that the employer evince
an objective intention to use a salary basis in
compensating its employees. But where the
employer maintained a policy or practice of
improper deductions, the employer had no
objective intention to pay on a salary basis, and
thus had no exemption which could be "lost." Id.

      We emphasize that the question is not which
interpretation of sec. 541.118(a)(6) is best or
most natural, but only whether the Secretary’s
construction is reasonable. See Pauley, 501 U.S.
at 702; Klem, 208 F.3d at 1092-93. While one may
argue that the Secretary’s interpretation is
strained, it sufficiently comports with the
language of the regulation so as not to be
declared unreasonable or plainly erroneous.


      3.   Precedent.

      Returning to the question we set aside earlier
in this opinion, we must determine what effect
DiGiore has on the issue before us. In that
opinion, we first concluded that the employer did
not have a policy or practice of impermissible
deductions. 172 F.3d at 463-65. We then stated
that even if the employer’s five improper
deductions constituted a practice, the defendant
employer would not be liable under the FLSA
because it had complied with the last sentence of
sec. 541.118(a)(6). Id. at 465. Whetsel and the
Secretary argue that this latter statement is
dicta and in any case was made without the
benefit of the Secretary’s views, while NPS
claims that it is a binding alternative holding.
NPS also notes certain other decisions that, like
DiGiore, have appeared to hold that an employer
who engages in a policy or practice of
impermissible deductions can still use the window
of correction, though none of these opinions
considered the Secretary’s interpretation. See,
e.g., Davis v. City of Hollywood, 120 F.3d 1178,
1179-81 (11th Cir. 1997); Balgowan v. New Jersey,
115 F.3d 214, 219 (3d Cir. 1997).

      While the difference between alternative
holdings and dicta may not always be clear, see
United States v. Crawley, 837 F.2d 291, 292-93
(7th Cir. 1988), the factors in this case point
to the conclusion that the statement in DiGiore
was an alternative holding. The passage was not
a stray rumination on what the law would be in a
hypothetical case. Rather, it was based on the
actual facts before the court and was a
sufficient ground standing alone to reach the
court’s decision. Also, the issue of whether a
practice or policy could be corrected was
apparently briefed before the DiGiore court/1
and no reason exists to believe that the
statement was less carefully reasoned than it
might otherwise have been. Finally, unlike the
situation in Crawley, id. at 292, the statement
in DiGiore does not conflict with other well-
settled precedents. Admittedly, the statement was
not strictly necessary to the disposition of the
case because the holding that no practice or
policy existed was sufficient, but this is true
of all alternative holdings and yet these are
still entitled to precedential weight. Neiman v.
Rudolf Wolff & Co., 619 F.2d 1189, 1193 n.4 (7th
Cir. 1980).

      Of course, even holdings can be altered. The
DiGiore opinion does not mention the Secretary’s
view on the issue of when sec. 541.118(a)(6) is
available. This suggests that the court might not
have had that argument before it,/2 which is a
sufficient reason for reconsidering this part of
DiGiore and deferring to the Secretary’s
construction. Deference to administrative
interpretations of regulations serves goals such
as allocating policy questions to the political
branches rather than the judiciary, permitting
agencies to use their more detailed technical
expertise, and letting the regulations be adapted
to complex or changing circumstances. See Thomas
Jefferson Univ. v. Shalala, 512 U.S. 504, 512
(1994); Pauley, 501 U.S. at 696-97; Martin v.
Occupational Safety & Health Review Comm’n, 499
U.S. 144, 151 (1991). Therefore, we have decided
to overrule DiGiore to the extent that opinion
alternatively holds that a practice of
impermissible deductions can be remedied via the
window of correction./3 The rest of DiGiore,
including whether and when multiple deductions
constitute a practice, 172 F.3d at 464-65,
remains intact.

      In summary, we hold that when an employer has a
practice or policy of improper deductions as
defined in Auer, the window of correction
provided in 29 C.F.R. sec. 541.118(a)(6) is not
available. In so doing, we join the other federal
appellate courts that have been presented with
the Secretary’s views on this issue. See Yourman,
229 F.3d at 128; Klem, 208 F.3d at 1093. But see
Anthony v. Iowa, No. 223 / 99-0515, 2001 WL
125169, at *3 (Iowa Feb. 14, 2001)
(characterizing Klem as representing a minority
view and holding that the plain language of sec.
541.118(a)(6) demonstrates that the window can be
used whenever improper deductions were made for
reasons other than lack of work, including to
cure a practice or policy of improper
disciplinary suspensions).

C.   Remand

      Both parties (though not the Secretary) ask
this court either to decide the case or provide
further guidance on the issue of what constitutes
a practice or policy of improper deductions for
the purposes of the salary basis test. While
understanding the parties’ desire, such actions
would be inappropriate at this juncture. In part
because the district court did not consider the
practice and policy questions, the factual record
is not sufficiently developed for us to render a
decision. Instead, we are remanding to the
district court for further proceedings, which is
the usual course where the incorrect legal test
has been applied and the record does not clearly
support judgment for one of the parties.
Pullman-Standard v. Swint, 456 U.S. 273, 291-92
(1982); Nelson v. Monroe Reg’l Med. Ctr., 925
F.2d 1555, 1567 (7th Cir. 1991). We express no
views on the practice and policy questions, and
the district court on remand is free to entertain
renewed summary judgment motions on these issues.

III.   Conclusion

      In accordance with the views of the Secretary,
we hold that 29 C.F.R. sec. 541.118(a)(6) cannot
be used to remedy a practice or policy of
improper deductions, as those terms are defined
in Auer. The district court’s analysis of this
case was understandably truncated when it relied
on an alternative holding of DiGiore, which we
overrule, to avoid deciding whether NPS’s actions
amounted to a policy or practice. Because such an
analysis is necessary to the disposition of the
case, we are returning this dispute to the
district court to settle the practice and policy
questions on summary judgment or after trial. For
the reasons stated herein, we Reverse and Remand for
further proceedings consistent with this opinion.


/1 The issue of whether a practice could be
corrected was raised in the district court in the
DiGiore case, 987 F. Supp. 1045, 1055-56 (N.D.
Ill. 1997), and the defendants presumably would
have presented this potentially successful
argument when facing this court. However, as
noted below, the plaintiffs in that case might
not have directed their arguments to this issue.


/2 NPS argues that the DiGiore panel did in fact
consider the Secretary’s argument because the
Secretary’s theory was explained in the district
court’s opinion, 987 F. Supp. at 1055-56.
However, our opinion in DiGiore is devoid of any
discussion of the Secretary’s views or whether
deference should be afforded to the Secretary’s
construction of the regulation. This suggests
that the plaintiffs in DiGiore might have focused
on other issues at the appellate level, such as
the district court’s principal holding that no
actual practice or policy existed.

/3 In accordance with Circuit Rule 40(e), this
opinion has been circulated among all judges of
this court in regular active service. No judge
favored a rehearing en banc on the question of
overruling the alternative holding of DiGiore.
