WALLING, Administrator of Wage and Hour Division, U.S. Dept. of Labor, v. RICHMOND SCREW ANCHOR CO., Inc.

No. 186.Circuit Court of Appeals, Second Circuit.
March 8, 1946. Writ of Certiorari Denied June 10, 1946. See 66 S.Ct. 1383.

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Appeal from the District Court of the United States for the Eastern District of New York.

Action by L. Metcalfe Walling, Administrator of the Wage and Hour Division, United States Department of Labor, against Richmond Screw Anchor Company, Inc., to enjoin violations of the Fair Labor Standards Act. From a summary judgment for plaintiff, 59 F. Supp. 291, defendant appeals.


Defendant moved for summary judgment and plaintiff made a cross-motion for the same relief. The district court denied defendant’s motion and entered summary judgment against it. The court found that defendant had violated § 7 of the Fair Labor Standards Act, 29 U.S.C.A. § 201 et seq., by failing to pay overtime as there required, and enjoined defendant from further violations of that section.

Defendant, engaged in the business of manufacturing building construction materials, such as form-ties, screw anchors, timber clamps, locks and ty-frames, employs in such production approximately 65 employees who are admittedly covered by the Act.

On April 3, 1942, defendant’s board of directors adopted a resolution providing that all of the company’s employees, with the exception of the finishers in the so-called snap-ty department, should be paid a monthly bonus, in war stamps, of 10 per cent of their weekly base salaries for the previous month, commencing in June 1942. Because it was felt that the finishers in the snap-ty department were “not producing standard hourly production” they were placed “on an incentive bonus plan paying up to 20 percent of their base pay.” Under the separate arrangement for finishers, a bonus of five percent of their base weekly wages for the first 40 hours was paid if they failed to produce what was established by the firm as “standard” production, 10 percent if they were “close to standard performance” and up to 20 percent if they “went beyond the standard performance.”

All of the firm’s employees received base weekly salaries covering the first 40 hours of work in the workweek. When an employee worked in excess of 40 hours in the week, his base weekly salary was divided by 40 and he was paid one and one-half the resultant rate for each hour worked in excess of 40. Bonuses were based on a percentage of the straight time earnings, that is, the salary for a 40-hour workweek without taking into account the overtime earnings “because the bonus was on base pay.” The bonus payments were not included in computing an employee’s regular rate of pay.

From June 1942 to October 1942, bonus payments were made in the form of war stamps. In October 1942 a modification in the form of payment was made; the defendant depositing the earned bonus in industrial savings accounts in a local bank. The defendant transmitted to the bank, approximately once a month, a check “together with a list showing how the bonuses should be credited individually.” From time to time, when amounts in the individual accounts were sufficient, employees went to the bank and received war bonds. During the time when the deposits were insufficient to purchase bonds, employees could make deposits or withdrawals in these accounts, at will. A further modification was made in September 1943 in that the defendant no longer deposited bonus earnings in the individual accounts of employees, but, instead, deposited all the bonuses earned in a joint account carried in the name of two of its officers. A record of the bonus amounts earned weekly by individual employees was kept by the firm and when it appeared that an employee had earned sufficient money to purchase a

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war bond, the defendant delivered a bond to him.

When an employee was discharged or voluntarily left the firm’s employ, the bonus amounts credited to him were in the form of war stamps or bonds. The defendant always considered the bonus payments as wages for the purposes of computing the social security, unemployment insurance, withholding and victory tax, and in determining the firm’s premiums on workmen’s compensation insurance policies. In computing income tax, they deducted bonus payments as expenses; similarly, statements given to the employees — to aid them in preparing their income tax returns — of the wages earned by them during the year, included the bonus payments in question.

Defendant’s president testified, in a deposition, as follows: In the “summer of 1943” he had met with the employees to discuss alleged violations of the Act; he there “asked them if it was their understanding that” the bonus was “contractual” or a “gift,” and “no one questioned” the suggestion. He “specifically asked if any employee understood that our bonus was part of their pay” and “there was no reply.” Thirty-two of the employees, at defendant’s request, each signed an affidavit, in August, 1943, reading as follows: “When the bonus plan was started, I understood that the bonus plan was neither a part of my wages nor a raise in wages over what I had received before then. The bonus was started by the Richmond Screw Anchor Co., Inc., so as to make it possible for me to acquire war saving stamps and war bonds. I always understood that my employer had a right to terminate this bonus if and when the Company Directors saw fit to cancel. I have not and do not now regard this bonus as a part of my salary, and I know that the company has a right not to give it to me now or next week or the following week or at any future date, if they desire. I am making this affidavit at the request of Richmond Screw Anchor Co., Inc. to clear up a misunderstanding which seems to have arisen between them and the Wage and Hour Division of the United States Department of Labor about the nature of the bonus.”

In a letter, dated May 14, 1943, from defendant to the Administrator, defendant stated:

“There are three other provisions to this bonus arrangement:

“1. The bonus shall cease if and when the company finances indicate an unhealthy condition. This is to be decided by the Board of Directors.

“2. In one (1) department there is a sliding bonus arrangement. Each employee in that department is to receive 10% of base for standard performance. As an incentive an extra 5% or 10% bonus is paid for production.

“3. No employee is to receive a bonus or part thereof until he has been in our employ for three (3) months. After that time, he is given a 10% base pay bonus for his third month and thereafter.”

In a published interpretative statement as to bonus payments, the Administrator has said in part:

“There are two general categories in which bonus plans fall:

“A. In bonus plans of the first category, the payment and the amount of the bonus are solely in the discretion of the employer. The sum, if any, is determined by him. The employee has no contract right, express or implied, to any amount. This type of bonus is illustrated by the employer who pays his employees a share of the profits of his business or a lump sum at Christmas time without having previously promised, agreed or arranged to pay such bonus. In such case, the employer determines that a bonus is to be paid and also sets the amount to be paid.

“Bonus payments of this type will not be considered a part of the regular rate at which an employee is employed, and need not be included in computing his regular hourly rate of pay and overtime compensation.

“B. In bonus plans of the second category the employer promises, agrees or arranges to pay a bonus. The amount to be paid may be fixed or may be ascertainable by the application of a formula. An example of this type of plan is a production bonus based on the excess over a minimum quota which the individual, the group, or the plant, produces in a period of time. Closely akin is a bonus which is paid for performing work in less than an established standard time and also a bonus which is paid when certain types of merchandise are sold through an employee’s efforts. Other kinds of bonuses falling within this group are bonuses distributed in a certain amount or on the basis of a

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fixed percentage of the profits of the employer or of his gross or net income. There are many variations and refinements of plans within this category. For example, the amount of the payment may vary according to the length of service of the employee, his production or compensation; the earnings, production or compensation of the group of employees with which he works; the sales or net or gross income of the employer, or it may be contingent upon his continuing in the employ of the employer until the time the payment is to be made.

“Bonus payments of this type will be considered a part of the regular rate at which an employee is employed, and must be included in computing his regular hourly rate of pay and overtime compensation.

“Many employers have been troubled by retroactive allocation of a `bonus’ where it was distributed less frequently than at the regular pay periods. This difficulty can easily be avoided. No additional overtime compensation need be computed and paid on a bonus, the amount of which is in fact arrived at by taking a predetermined percentage of the total earnings of the individual employees (both straight time and overtime), exclusive of the `bonus.’ Where the amount paid to each employee is actually based on a percentage of his total earnings, the `bonus’ itself includes the payment of both straight time and overtime.

“The degree of frequency with which a bonus is paid is a factor which the Divisions have always considered in determining whether it should be included in the `regular’ or `basic’ rates of pay for overtime purposes. As an enforcement policy to be followed in the absence of authoritative rulings by the courts, the Divisions will in the future not insist on the inclusion of any bonus (except where there is obvious evasion of the overtime requirements) which is paid at greater intervals than quarterly in computations of the `regular’ or `basic’ rate of pay for overtime purposes, even though the bonus would otherwise be of a type requiring such inclusion. Such considerations as the recognized bookkeeping difficulty confronting employers in allocating a bonus paid less often than once each quarter to the hours in which the bonus was earned, the time-consuming burden placed upon the inspection staff when confronted with the task of making such allocations and the benefit to employees of having a current knowledge of the hourly rate upon which their overtime will be calculated motivate this administrative policy.”

The district judge said, in part, in his opinion [59 F. Supp. 291, 292]: “At the outset it is possible, I think, to dispose of the defendant’s contentions (1) that the bonus is a mere gift or gratuity, and (2) that there is no binding obligation on the part of the defendant to pay this bonus. It seems to me that both of these contentions are answered by the plain fact that the bonus was part of the employees’ actual and regular compensation. For some two and one-half years these employees have received these amounts, or been credited with them, regardless of how much or little they produced. In a letter to the Wage and Hour Division of the United States Department of Labor, dated May 14, 1943, the defendant acknowledged that the bonus payments would cease only when the company’s finances indicated `an unhealthy condition.’ Moreover, it stated that every employee became entitled to the bonus payment after he had been in service for three months. The resolution of the Board of Directors probably does not rise to the dignity of a contract. Moreover, it is possible that in some types of litigation where legal technicalities must be observed in all their strictness, the bonus payments could properly be called gifts or gratuities. But I do not believe that such an approach to the problem is permissible under the act. Of course, the object of the statute was to spread employment, and one of the means which Congress thought might bring about this end was to make it costly for employers to compel employees to work overtime. At least this is my understanding of the analysis of the purposes of the act which Mr. Justice Reed makes in Overnight Motor Co. v. Missel, 316 U.S. 572, 577, 62 S.Ct. 1216, 86 L.Ed. 1682. If I am right in this, then the purpose of the act could be defeated by any employer who (1) could compensate his employees regularly at some rate satisfactory to them (in this case the `regular salary’ plus bonus), and (2) at the same time, make overtime cheaper for himself by basing it upon a weekly pay smaller than what the employee is actually and regularly receiving (in this case the `regular’ salary, without the bonus). At least, this is certainly the end result of the system employed by the defendant.

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The employees are actually and regularly receiving 10% more
than what is called the `regular rate’ which is used as a basis for overtime. And if such a system can be held permissible and lawful because the additional weekly compensation has some of the legal incidents of a gift, rather than those of a payment under a contract, then the purposes of the act can always be defeated in a very simple way. I think the sensible test of what is regular compensation is not to be discovered by analysis of the strict legal relationship between the employer and the employee concerning any elements of compensation actually and regularly paid. I think that regardless of what that legal relationship may be, the test is whether the compensation regularly and actually reaches the employee, no matter how indirect the process may be, independently of whether under some other circumstances it could be called a gratuity, and independently of the possibility that at some time this compensation may shrink for one reason or another. * * * I do not for one moment believe that the defendant intended, by its bonus system, to circumvent the Fair Labor Standards Act. I hold merely that overtime must be paid on the basis of the regular compensation actually received by the employee, regardless of what the components of that actual compensation are called, and no matter how desirable and beneficial, or even praiseworthy it may be, to divide the regular and actual compensation into components, artificial for purpose of the statute, though perhaps real enough for other purposes.”

William S. Tyson, of Washington, D.C. (Bessie Margolin, of Washington, D.C., Irving Rozen, of New York City, and Joseph M. Stone, of Washington, D.C., of counsel), for United States Department of Labor.

E. John Ernst, Jr., of New York City (George C. Wildermuth, of Brooklyn, N.Y., and Julius L. Goldstein, of New York City, of counsel), for Richmond Screw Anchor Co., Inc.

Before L. HAND, CHASE, and FRANK, Circuit Judges.

FRANK, Circuit Judge.

1. It does not follow that, merely because each side moves for a summary judgment, there is no issue of material fact. For, although a defendant may, on his own motion, assert that, accepting his legal theory, the facts are undisputed, he may be able and should always be allowed to show that, if plaintiff’s legal theory be adopted, a genuine dispute as to a material fact exists.[1] As judgment here was on plaintiff’s motion, we must therefore decide whether, adopting its legal theory, there was no such dispute. We are satisfied there was none.

2. We take it as admitted that the company was not legally obligated to pay the bonuses, that the employees knew the payments were not contractual, and that the company would have discontinued them “if and when the company finances indicated an unhealthy condition.” But the undenied, crucial fact here is that in fact they were regularly paid. Although the employees knew they could not legally compel the company to make those payments, no one can doubt that the employees assumed that, in the normal course of events, the employees would receive them. That seems to us to be enough to constitute them part of “the regular rate at which” the men were employed. Walling v. Harnischfeger Corp., 325 U.S. 427, 65 S.Ct. 1246, 1250; Walling v. Youngerman-Reynolds Hardwood Company, 325 U.S. 419, 65 S.Ct. 1242, 1250; Walling v. Helmerich Payne, 323 U.S. 37, 65 S.Ct. 11.[2] To be sure, the Supreme Court has not yet considered a bonus arrangement involving no contractual obligation; but, interpreting those decisions as best we can,[3] their implication, coupled with the language of § 7(a)(3), seems to us to require the conclusion we have reached.[4] We agree with the

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district judge that the “good faith” of the employer is immaterial.[5]

In arriving at that conclusion we have given appropriate weight to the administrator’s official interpretation.[6] This interpretation spoke not only of a bonus which the employer “promises” or “agrees” to pay, but also of one which he “arranges” to pay. If, said the Administrator, the employer pays a bonus “without having previously * * * arranged” to do so, then it does not count, but it does count if he “arranges” to grant a bonus with regularity and if the amount thereof “may be ascertained by the application of a formula.” That interpretation, which is not unreasonable,[7] fits this case.


[1] So, too, may the plaintiff show on defendant’s motion.
[2] Cf. Walling v. Stone, 7 Cir., 131 F.2d 461, 464; Carleton Screw Products Co. v. Fleming, 8 Cir., 126 F.2d 537, 541.
[3] As to our moon-like reflecting function in interpreting Supreme Court decisions, see Choate v. Commissioner, 2 Cir., 129 F.2d 684, 686; Fleming v. Post, 2 Cir., 146 F.2d 441, 443, 158 A.L.R. 1384; see also Perkins v. Endicott Johnson Corp., 2 Cir., 128 F.2d 208, 218; Picard v. United Aircraft Corp., 2 Cir., 128 F.2d 632, 636; Zalkind v. Scheiman, 2 Cir., 139 F.2d 895, 903; 50 Yale L.J. (1941) 1448.
[4] We agree with the statement in Walling v. Uhlmann Grain Co., 7 Cir., 151 F.2d 381, 383 that the Supreme Court has restricted Walling v. A.H. Belo, 316 U.S. 624, 62 S.Ct. 1223, 86 L.Ed. 1716, to cases involving “an identical state of facts.”
[5] Cf. Walling v. Youngerman-Reynolds Hardwood Co., supra, 325 U.S. 425, 65 S.Ct. 1242, 1250.
[6] Overnight Motor Co. v. Missel, 316 U.S. 572, 580, 581, 62 S.Ct. 1216, at page 1221, 86 L.Ed. 1682 note 17; Walling v. Helmerich Payne, 323 U.S. 37 at pages 42, 43, 65 S.Ct. 11, at page 14, note 5; Skidmore v. Swift Co., 323 U.S. 134, 137, 138, 139, 140, 65 S.Ct. 161; Jewell Ridge Coal Corp. v. Local No. 6167, United Mine Workers of America, 325 U.S. 161, 169, 65 S.Ct. 1063; Social Security Board v. Nierotko, 66 S.Ct. 637; Fishgold v. Sullivan Drydock Repair Corp., 2 Cir., 154 F.2d 785.
[7] Cf. Duquesne Warehouse Co. v. Railroad Retirement Board, 2 Cir., 148 F.2d 473, 479, 481, 487-488.