United States: DOL Provides "Safe Harbor" From Loss Of "White Collar" Exemptions Under The FLSA

The U.S. Department of Labor recently revised its regulations relating to the so-called "white collar" exemptions from the minimum wage and overtime requirements of the Fair Labor Standards Act ("FLSA"), including the exemptions for bona fide executive, administrative, and professional employees. Under the new regulations (and the former regulations they replaced), exempt executive employees and, in most cases, exempt administrative and professional employees must be paid on a salary basis, and the Department of Labor strictly limits the deductions that an employer may make from an exempt employee’s salary. Improper deductions from an otherwise exempt employee’s salary will cause the exemption to be lost (and entitle the employee to pursue a claim for unpaid overtime) unless the employee is promptly reimbursed for the improper deductions.

To minimize the risk of an employer inadvertently losing the exempt status of an employee or group of employees, the new regulations include a "safe harbor" provision that, if followed, will preserve the exempt status of salaried employees when the employer improperly makes deductions from their pay. The regulations are clear that if an employer has an actual practice of making improper deductions, the exemption will be lost. However, an employer who demonstrates good-faith efforts to comply with the regulations may not lose the exemption. These efforts include the following:

• Clearly communicating a policy regarding the salary-basis requirements;

• Reimbursing employees for improper deductions from their salary, and

• Making a good-faith commitment to comply with the salary-basis requirements in the future.

White collar exemptions may not be lost if the employer has a clearly communicated policy that, at a minimum, explains the salary-basis requirements of the FLSA, states the company’s policy regarding compliance with these requirements, prohibits managers and supervisors from making improper pay deductions, and provides a complaint mechanism for employees who believe that an improper deduction has been made. The Department of Labor has issued a model salary-basis policy that employers may use as an example of what constitutes compliance under the regulations. The DOL’s sample policy may be found at http://www.dol.gov/esa/regs/compliance/whd/fairpay/modelPolicy_PF.htm. Some modifications to this model policy may be appropriate for particular employment situations, such as when applicable state laws are more restrictive with respect to permissible deductions than the FLSA.

The regulations provide that the "best evidence" of a clearly communicated policy is a written policy that is distributed to employees prior to the improper pay deductions by, for example, distributing it to new hires, including it in an employee handbook, or publishing it on the Company’s Intranet. A spokesperson for the Department of Labor has commented that the DOL will not require the policy to be in writing. However, given the statement in the regulations regarding the "best evidence" of the policy, employers would be wise to put the policy in writing and to disseminate it widely.

Once an employer receives a complaint from an employee regarding improper deductions, the employer must reimburse the employee and other similarly affected employees for any deductions that it improperly withheld. Failure to reimburse employees will result in loss of the exemption during the time period in which the improper deductions were made for all employees in the same job classification working for the same managers responsible for the improper deductions. The regulations do not include a time limit for an employee to complain about an improper deduction or for an employer to investigate the complaint and make the appropriate reimbursements, but employers are well-advised to handle such matters promptly.

An employer can preserve the exemptions by demonstrating its good-faith commitment to comply with the regulations and its salary-basis policy in the future. If an employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints, the exemption will be lost, but only during the time period in which the improper deductions were made, and only for employees in the same job classification working for the same managers responsible for the improper deductions.

The new regulations narrow the consequences of making improper deductions from employees’ salaries. The prior regulations’ "window of correction" provision preserved the exemption when an employer (1) reimbursed an employee for improper deductions that were made inadvertently or for reasons other than lack of work and (2) promised to comply in the future. When an employer failed to satisfy the old "window of correction" provision, the exemption would be lost for all employees in the "class" or "category" of employees affected by the deduction. Under the new safe-harbor provisions, the exemption is lost only for the employees under the manager responsible for making the improper deduction. In addition, the exemption would be lost for all workweeks under the old provision, rather than only for the time period in which the improper deduction was made, as provided by the new regulations.

Employers should revise their existing pay policies consistent with the new DOL regulations to take advantage of the new safe-harbor provisions. Despite the safe-harbor provisions, the regulations make clear that employers who have an actual practice of making improper deductions will lose the exemption. Thus, even when employers adopt a policy that purports to comply with the regulations, they should carefully examine their current practices to ensure that those practices result in good-faith compliance with the regulations.

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