employers understand that exempt employees have to be paid a regular
salary. But, did you know that this requirement also limits
deductions from exempt employees' pay and may even require you to
provide them with paid holidays? Find out the answers to thirteen
common questions about the salary basis test. Also download
policies to update your library.
after the Fair Labor Standards Act (FLSA) exemption regulations took
effect, many employers are still getting hit
with lawsuits claiming that exempt employees are not paid properly.
(Exempt employees are those who, because of the nature of their job
duties and the fact they generally are paid on a salary basis, are
not subject to FLSA minimum wage and overtime requirements.) While
a lot of these cases focus on whether employees are really
performing exempt job duties, many also show that employers are
having trouble with the "salary basis" test.
Many common practices, such as requiring employees to work for a
certain number of hours a day or not giving paid sick days or
holidays, may affect the salary basis determination and the exempt
classification. Your HR Matters Editors have analyzed the FLSA
statute, the exempt regulations, and court cases to answer thirteen
common questions concerning the salary basis requirement.
WHAT DOES IT MEAN TO BE PAID ON A SALARY BASIS?
To be exempt
from the FLSA, and not entitled to overtime, an employee must meet
certain job duty requirements, often involving managerial skills or
the use of independent judgment and discretion, and be paid on a
"salary basis." The FLSA regulations provide for six broadly used
classifications of exemptions, including:
(1) Administrative employees,
(2) Executive employees,
(3) Professional employees,
(4) Outside sales employees,
(5) Highly skilled computer-related employees, and
(6) Highly compensated employees.
Salary basis is defined as the payment on a weekly or less frequent
basis of a predetermined amount that constitutes all or part of
compensation, without reductions for variations in the quality or
quantity of the work performed. Under this definition, exempt
employees generally must receive their full salary, of at least $455
a week, for any week in which they perform work, without regard to
the number of days or hours worked. However, payment usually is not
required if the employee does not perform any work during the entire
week. (See question 3, below.)
Some exempt salary deductions may be made, but only in limited
circumstances. (See questions 2 through 10, below.) It also should
be noted, however, that the FLSA regulations indicate that doctors,
lawyers, and teachers (typically categorized as professional exempt
employees) do not have to be paid on a salary basis to be considered
WE HAVE TO GIVE PAID VACATION DAYS, SICK DAYS, AND HOLIDAYS TO
Paid time off
generally is considered a benefit given at the employer's
discretion. However, if you make deductions from an exempt
employee's salary for unpaid time off, you should be sure that the
deductions do not violate the salary basis test, or you may lose the
exemption. The type and amount of time off determine whether you
can make the deductions.
Vacation. According to the FLSA regulations, you may make a pay
deduction when an employee is absent for a full day for personal
reasons. Thus, if you do not provide paid vacation or personal
days, you may deduct the day off from the employee's salary.
Similarly, if you give paid vacation days and the employee has used
them all, you may deduct any additional full-day personal time off.
leave. You also may make deductions for a full day's absence due to
illness or injury if you have a bona fide plan, policy, or practice
that provides compensation for loss of salary as a result of
sickness or disability. A policy that allows employees to accrue
paid sick leave is an example. Similarly, a paid time off (PTO)
plan qualifies as a bona fide sick leave policy as long as an
employee can use the PTO time for sick days. This deduction is
permissible even if the exempt employee has not yet qualified for
the plan or has exhausted the plan's sick leave allowance.
according to the regulations, if you do not have a paid sick leave
plan, you may not deduct the day from the employee's salary if the
employee has worked any day that week. An exception to this rule is
sick leave taken under the Family and Medical Leave Act (FMLA). The
FMLA allows deductions from an exempt employee's salary for leave
required by the FMLA, including leave for partial day absences (see
question 7, below).
Holidays. The FLSA regulations do not specifically allow
deductions for unpaid holidays. Therefore, you should not make
deductions from an exempt employee's pay for holidays that are not
WE HAVE TO PAY EXEMPT EMPLOYEES WHEN WORK IS NOT AVAILABLE?
Yes. You may
not make deductions from an exempt employee's salary for absences
caused by the employer or by the operating requirements of the
business. Thus, if the exempt employee is ready, willing, and able
to work, you must pay for the time when work is not available.
however, that since the salary basis is determined on a weekly
basis, if your organization shuts down for full weeks, exempt
employees do not have to be paid. So, although you would have to
pay exempt employees if you shut down for two days during a week, if
you shut down for the entire week, the exempt employees would not
have to be paid.
WHAT IF WE SHORTEN OUR WORKWEEKS AND REDUCE EXEMPT EMPLOYEES' PAY
AS A RESULT?
you adopt a reduced workweek schedule, you can adjust exempt
employees' salaries commensurately. While the salary basis rule
requires payment of the exempt employee's full salary in workweeks
where work is performed, you can implement a reduced workweek
schedule and lower salaries accordingly, as long as exempt employees
are still paid at least the requisite $455 a week.
surface, this reduction may look like an impermissible salary
deduction because of operating requirements of the business since
the employee is ready, willing, and able to work. However, the
Department of Labor (DOL), the federal agency that enforces the FLSA,
has approved this practice in a series of opinion letters and courts
have also upheld it as long as employees are provided notice of the
reduction and salary adjustments are not made so frequently as to
appear that the employer is trying to avoid paying the salary
properly. The idea is that a deduction is not being taken from the
employee's salary. Rather, his salary has been set to match the
You also can
reduce exempt employees' pay even without shortening the workweek,
as long as there is no contractual obligation to pay a certain
amount. So, for example, if you wanted to reduce all employees' pay
by 5% because of economic circumstances, you can do the same for
exempt employees as long as they still make at least the $455
minimum weekly salary.
WHAT ABOUT PAY DURING JURY DUTY AND MILITARY LEAVE?
employee is absent for part of a week because of jury duty,
attendance as a witness, or temporary military leave, you must pay
for the full week. Deductions for partial week absences caused by
these situations are not permitted. You may offset any military pay
or monetary payments received as jury or witness fees for a
particular week against the employee's salary for that same week.
Remember, however, that you do not have to pay if the employee is
absent for the entire week and does not perform any work during that
WE HAVE TO PAY EXEMPT EMPLOYEES ON DAYS THEY CANNOT WORK BECAUSE OF
regulations do not specifically allow employers to reduce an exempt
employee's pay for time off related to inclement weather. The DOL
has indicated in two opinion letters that if the employer is open
for business and an exempt employee does not come to work that day,
you may require the employee to use a paid vacation day.
Alternatively, if the employee does not have any paid time, you may
dock the employee for a full-day absence. In its letters, the DOL
reasoned that the absence is a personal day since the employee
chooses not to come to work.
your organization is closed because of inclement weather, you cannot
make deductions for full-day absences since the absences would be
occasioned by the employer.
WE MAKE DEDUCTIONS FROM AN EXEMPT EMPLOYEE'S SALARY FOR PARTIAL DAY
Generally, the regulations indicate that if you make deductions from
an exempt employee's pay for absences of less than a day, you are
considered to be treating the employee as an hourly worker, instead
of as an exempt employee paid on a salary basis. Thus, you could be
liable for any overtime worked by the employee, as well as for all
other exempt employees subject to your policy allowing deductions
for partial day absences. (As discussed in question 2, above, you
may make deductions for certain full day absences.)
employers have attempted to avoid the partial day docking issue by
requiring exempt employees to use paid leave for these absences.
The DOL traditionally has permitted this arrangement since the
employee does not experience an actual reduction in salary. And, in
the comments to the 2004 regulations, the agency specifically
acknowledges that employers may make deductions from exempt employee
leave accounts without jeopardizing the employee's exempt status.
(Of course, if the employee does not have any accrued paid time, you
cannot deduct a partial day from his salary.)
A number of
courts have sided with the DOL's position on this issue. However, a
few courts have disagreed and have determined that this practice
does, in fact, treat an exempt employee like an hourly, nonexempt
employee and, therefore, causes loss of the exemption.
Because of the split in the courts, you should consult legal counsel
before acting on this matter if you are a private sector employer.
(Special rules apply to exempt public sector employees allowing them
to be considered exempt even if their pay is reduced for partial day
absences.) As a practical matter, though, you may find that exempt
employees resent being required to use paid leave for partial day
absences, particularly if they regularly work more than 40 hours per
week. Under this policy, they are not entitled to additional pay
when they put in long hours, but are required to use vacation or
sick leave if they need a few hours off.
Finally, as discussed in question 2, above, the FMLA allows
employers to require the use of accrued paid leave for partial day
absences for any hours taken as intermittent or reduced FMLA leave,
without affecting the employee's exempt status.
WE MAKE DEDUCTIONS FOR DISCIPLINARY REASONS, SUCH AS A SUSPENSION?
suspend an exempt employee without pay for one or more full days in
limited circumstances involving infractions of certain workplace
conduct rules. (Prior to the 2004 revisions to the regulations,
employers could suspend an exempt employee without pay only for a
full week.) To qualify for the deduction, you must have a written
policy alerting exempt employees that they may be subject to an
unpaid disciplinary suspension that is applied to all employees.
Note, too, that comments to the final rule point out that the term
"workplace conduct" covers only inappropriate conduct, which
includes harassment, violence, drug or alcohol violations, and
violations of state or federal laws. The term does not cover
performance or attendance issues.
you may make deductions for penalties imposed for infractions of
"safety rules of major significance." These deductions can be in
full or partial day increments. Covered infractions include rules
relating to the prevention of serious danger to the worksite or to
other employees, such as no smoking rules in explosives plants, oil
refineries, and coal mines.
AN EXEMPT EMPLOYEE WORKS ONLY PART OF THE FIRST OR LAST WEEK OF
EMPLOYMENT, DO WE HAVE TO PAY THE FULL WEEK?
No. You are
not required to pay the full salary in the initial or terminal week
of employment if the employee only works a portion of the week. You
may pay a proportionate part of the salary.
MAY WE REQUIRE AN EXEMPT EMPLOYEE TO MAKE UP TIME MISSED?
Arguably, if the employee has not completed his job duties for
the week, you can require him to finish these job duties and set a
time frame for completion. This approach is preferable to requiring
the employee to work extra hours or on the weekend in order just to
"make up" a certain number of hours in a week. If you ask an exempt
employee to work a specific number of hours, without tying the time
to job duties that need to be completed, you may appear to be
treating him like a nonexempt hourly employee and, thus, jeopardize
the exempt status.
MAY WE REQUIRE EXEMPT EMPLOYEES TO WORK 40 HOURS A WEEK OR TO BE AT
WORK DURING SET TIMES?
require exempt employees to work a specific number of hours or
arrive at a specific time, you may appear to be treating them like
nonexempt employees and thus, may, jeopardize their exempt status.
Instead of focusing on the number of hours an employee works or the
starting and ending time, you are better advised to focus on the
employee's job requirements and output.
MAY WE PAY EXEMPT EMPLOYEES EXTRA COMPENSATION?
you may pay extra compensation to exempt employees without
jeopardizing the exemption or violating the salary basis
requirement. The exemption regulations clarify the circumstances
under which you may make these additional payments. Specifically,
if the exempt employee is guaranteed a minimum weekly payment of at
least $455, you also may pay a commission on sales or a percentage
of profits or sales, or even additional compensation based on hours
worked beyond the normal workweek. This additional compensation can
be paid on any basis, including a flat sum, bonus payment,
straight-time hourly amount, time and one-half, or any other basis,
including paid time off.
MAY WE KEEP TRACK OF THE NUMBER OF HOURS EXEMPT EMPLOYEES WORK?
Yes, as long as this requirement does not affect their pay. The
DOL preamble to the exemption regulations specifically states that
employers may require exempt employees to record and track hours
without affecting their exempt status.
you require exempt employees to account for their work time on an
hourly basis, you may jeopardize their status if the accounting has
the effect of treating them like hourly workers. For example, if
the employee's salary fluctuates based on the number of hours
worked, the employee most likely will not be considered exempt.
You may keep
track of hours worked for other purposes unrelated to the employee's
pay, such as to account for work time to be billed to clients or for
performance under a federal contract. You also may record daily
For exempt employee definitions and salary basis test, see
WORK, Chapter 207, notes 24 to 32. FLSA regulations defining "salary
basis," 29 C.F.R. §541.602, is available on the DOL Web site at
status policies here.
employee is currently a salaried/exempt employee, can her status
be changed to hourly/non-exempt? Similarly, if an employee is
currently categorized as hourly/nonexempt, can her status
be changed to salaried/exempt?
HR Answers: As a general rule, you can change the status of an exempt employee simply by paying them on an hourly basis. Employees generally must meet two criteria to be exempt under the Fair Labor Standards Act: (1) their job duties must meet the requirements for one of the exemptions (such as executive, administrative, or professional), and (2) they must be paid on a salary basis. As soon as you begin paying an employee whose job duties meet an exemption’s requirements on an hourly basis, you no longer meet the salary basis test, and lose the exemption.
Thus, too, if you are currently paying an employee on an hourly basis, that employee is nonexempt. That person’s status can be changed to exempt if you pay a salary of at least $455 a week and the person’s job duties meet one of the exemptions’ requirements. It bears repeating, however, salary alone does not create the exemption. The job duties also must fit the exemption criteria. For your reference, our comprehensive reference
system, the HR
Matters Tools & Resource Center provides more information on the exemptions and the salary basis test in Hours of Work, Chapter 207, notes 25 to 33.
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