United States: Costly Deductions

By way of background, in order for an employee to be exempt under the federal FLSA, three (3) general requirements ordinarily apply:

First, the employee must be paid a minimum salary of at least $455 per week.

Second, the employee’s salary must be paid on a salary basis without deductions inconsistent with that basis.

Third, the employee’s primary duties must be exempt in nature (administrative, professional, executive etc).

This article addresses the 2^nd requirement only: an exempt employee’s salary may not be subject to deductions inconsistent with the salary basis requirement.

If an employer has an actual practice of making deductions inconsistent with the salary basis requirement, then the employer may forfeit the exemption not only for the employee subject to the deduction but also for all other employees who report to the same manager responsible for the deduction. The potential for class actions is clear so read carefully!

As a general rule, an exempt employee must be paid his or her full salary for any work week in which he or she performs any work for the employer. Conversely, an exempt employee does not need to receive any salary for any work week in which he or she performs no work for the employer. There are, however, some exceptions to the general rules set forth above.

Where an employee is absent for personal reasons unrelated to illness or disability, the regulations allow an employer to dock an exempt employee’s pay in full-day increments only. It is critical that the deductions be in full-day and not partial-day increments (unless covered by the FMLA, discussed below).

The prohibition on making deductions in partial-day increments applies even if the partial day of absence is pursuant to a state law which provides employees with unpaid leave for less than a full day. For example, a number of states provide unpaid leave in order for employees to vote (New York), to attend school conferences (California) or to handle problems associated with domestic violence (Illinois).

Under state law, the employer usually is not obligated to pay the employee for the time off. However, under federal law, if the employee is exempt, the employer cannot dock the employee’s absence unless the absence is for a full day.

The law with regard to absences due to illness/disability is essentially the same as the law with regard to personal days. Generally, an employer can make deductions for absences in full-day increments but not in partial-day increments (unless covered by the FMLA, discussed below).

There is, however, one critical distinction. The employer can make deductions for absences due to illness or disability in full-day increments only if the employer has a policy, plan or practice of compensating employees for absences due to illness or disability (before the employee becomes eligible for benefits or after the employee has exhausted his or her benefits.) If there is no such policy, plan or practice, then the employee must be paid for all of his or her "sick days" in any work week in which he or she performs any work for the employer.

Some absences due to the employee’s illness or disability or for personal reasons relating to the illness of a parent, spouse or child also will be covered by the federal FMLA. In these circumstances, an exempt employee does not need to be paid for such absences and his or her pay can be subject to deductions in less than full-day increments.

However, it is important to note that the exception authorizing partial day deductions applies only if the absence is covered by the federal FMLA. It would not apply to family or medical leave under state law or the employer’s leave policy independent of any law unless the leave is also covered by the federal FMLA.

Under the FMLA regulations, an employer must designate in writing leave as FMLA leave. This designation is critical not only to avoid potential problems under the FMLA but also to protect the exemption under the FLSA.

While it is clear that an employer cannot dock an exempt employee’s pay for absences of less than a full day (unless the employee’s absence is covered by the FMLA), what is less clear is whether an employer can dock an exempt employee’s benefits bank in increments of less than a full day. In other words, if an employee takes 4 hours off to attend his daughter’s soccer game, can you require or allow him to use 4 hours of accrued paid time off benefits?

The regulations are silent on this issue. However, in the preamble, citing old DOL Wage and Hour Opinion letters, the DOL generally has taken the position that an employer can dock an exempt employee’s benefit bank in less than full day increments, provided that the employee receives his or her full pay for the day.

The problem is that the DOL’s comments in the preamble are not legally binding. They are simply the DOL’s enforcement position. Moreover, a few courts have come out the other way.

Accordingly, while an employer should have a strong defense to the extent it relies on the DOL’s enforcement position, the defense is not ironclad.

The regulations provide that, if an exempt employee is on jury, witness or temporary military leave, his or her pay may be reduced only to the extent of jury, witness or military fees received. This specific regulation is also subject to the more general rule that an exempt employee need not be paid his or her salary for any work week in which he or she performs no work for the employer.

When you combine these two regulations together, an exempt employee must be paid his or her full salary for any work week in which he or she is on jury, witness or temporary military leave and performs any work for the employer, minus only jury, witness or military fees. In other words, deductions for these specific leaves cannot be in full-day increments but rather must be in full work-week increments.

For this reason, many employer policies which provide for only two (2) weeks’ pay may inadvertently subject an exempt employee’s pay to an impermissible deduction. An example illustrates the point.

Assume that on Tuesday of Week 1 an exempt employee begins her military leave. Assume that she returns to work on Thursday of Week 3. She will run out of military pay under the employer’s policy on Monday of Week 3. However, because she works Thursday in Week 3, she must be paid her full salary for Week 3, minus only military fees.

As noted above, the duty to pay applies only in those work weeks in which the employee has done any work for the employer. However, with e-mail, voice mail etc., many exempt employees will do some work for their employer each work week while on leave, even if outside of regular working hours, so that the payment requirements here may be substantial.

The regulations provide that an exempt employee must be paid his or her full salary in any work week in which he or she is ready, willing and able to work. There are a number of ways in which employers may inadvertently violate this requirement. Three (3) examples follow.

First, an employer may shut down due to inclement weather or some other circumstance beyond its control. The employer must pay the exempt employee for the day if the employee has done any work for the employer during that work week.

Second, some employers have seasonal shut downs. The employer must pay exempt employees for the seasonal shut down, unless the shut down is for an entire work week. However, even if the shut down is for an entire work week, the employer must pay an exempt employee his or her salary if he or she does any work for the employer during that work week.

Third, most employers shut down on some holidays. To the extent an exempt employee is not eligible for pay for the holiday, the deduction is probably inconsistent with the salary basis requirement. For example, if the employer has a waiting period before an employee becomes eligible for holiday pay, it should apply only to non-exempt employees.

The regulations also provide that an exempt employee’s pay cannot be subject to deductions as a result of the quality or quantity of work. However, an employer can provide additional compensation beyond the minimum salary without violating the salary basis requirement due to favorable quality or quantity. For example, an employer can provide an exempt employee with bonuses, commissions, extra days of pay and even extra hours of pay without violating the salary basis requirement, so long as he or she is guaranteed at least $455 per week without regard to quality or quantity of work.

Under the old rules, exempt employees could be suspended without pay in full work week increments only, subject to only one narrow exception for violations of major safety infractions. The new regulations add a second, broader exception: an exempt employee can be suspended without pay in full day increments for violations of workplace conduct rules if pursuant to written policies applicable to all employees.

However, the new exception is not as broad as it first may appear. The exception applies only if the suspension is for a violation of a "workplace conduct" policy. According to the DOL’s commentary in the preamble, workplace conduct should be interpreted narrowly to exclude performance and attendance problems.

Moreover, the suspension must be pursuant to a written policy applicable to all employees. Although not entirely clear, it appears that the policy pursuant to which the employee is being suspended must indicate one possible sanction for violation is an unpaid suspension.

Accordingly, employers who want to be able to suspend exempt employees without pay need to review their conduct policies, determine the violations of which could result in unpaid suspensions and amend those policies to reference expressly this possibility. An alternative possibility which might satisfy the regulation would be to amend only the disciplinary policy and state that unpaid suspensions may apply to violations of certain conduct policies, listing those to which the penalty may apply.

Exempt employees do not have to be paid their full salary in their initial and terminal weeks of employment. To the contrary, the regulations allow the employer to prorate their salary. The permitted pro-ration can be by days or hours.

As noted at the outset, if an employer has an actual practice of making deductions inconsistent with the salary basis requirement, the employer may forfeit the exemption not only for the employee subject to the deduction but also for all other employees who report to the same manager responsible for the deduction. That's the bad news.

The good news is that the regulations also include a safe harbor. Specifically, the exemption will not be forfeited if:

1. The employer has a clearly communicated policy prohibiting improper deductions. The regulations do not specifically require that the policy be in writing, but if it’s not in writing, there will be disputes over whether it was clearly communicated to the employee before the impermissible deduction was taken.
2. The employer’s policy includes a complaint mechanism. As with harassment, the goal is to make the complaint procedure user friendly so that the employee’s failure to use it is unreasonable. Include multiple points of access and appropriate assurances of non-retaliation.
3. The employer reimburses employees for improper deductions (upon discovery or complaint). The sooner the reimbursement takes place, the stronger the evidence of the employer’s good faith.
4. The employer commits to and makes a good faith effort to comply in the future. While the law does not specifically require periodic audits, such audits will help to demonstrate the employer’s good faith to ensure compliance going forward.
5. The employer does not willfully violate the policy by continuing to make improper deductions after receiving an employee complaint. I’m sorry may work the first time but needs to be coupled with corrective action to avoid repeating the improper deductions.

Unless you are looking to make your favorite plaintiffs’ lawyer rich, employers are well advised to take advantage of the regulatory safe harbor in terms of a written policy and its actual practice.