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13 Answers to Your "Salary Basis" Questions


Most 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 free HR policies to update your library.

Five years 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.

1.     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 exempt.

2.     DO WE HAVE TO GIVE PAID VACATION DAYS, SICK DAYS, AND HOLIDAYS TO EXEMPT EMPLOYEES?

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. 

-     Sick 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. 

However, 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 worked.

3.     DO 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.

Note, 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.

4.     WHAT IF WE SHORTEN OUR WORKWEEKS AND REDUCE EXEMPT EMPLOYEES' PAY AS A RESULT?

 If 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.

On the 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 shortened workweek.

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.

5.      WHAT ABOUT PAY DURING JURY DUTY AND MILITARY LEAVE?

If an 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 time.

6.      DO WE HAVE TO PAY EXEMPT EMPLOYEES ON DAYS THEY CANNOT WORK BECAUSE OF INCLEMENT WEATHER?

The FLSA 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.

However, if 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.

7.     MAY WE MAKE DEDUCTIONS FROM AN EXEMPT EMPLOYEE'S SALARY FOR PARTIAL DAY ABSENCES?

No.  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.)

Many 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.

8.     MAY WE MAKE DEDUCTIONS FOR DISCIPLINARY REASONS, SUCH AS A SUSPENSION?

You may 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.

In addition, 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.

9.     IF 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.

10.     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.

11.     MAY WE REQUIRE EXEMPT EMPLOYEES TO WORK 40 HOURS A WEEK OR TO BE AT WORK DURING SET TIMES?

If you 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.

12.     MAY WE PAY EXEMPT EMPLOYEES EXTRA COMPENSATION?

Generally, 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.

13.     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.

If, however, 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 attendance.
For exempt employee definitions and salary basis test, see HOURS OF 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 www.dol.gov/dol/allcfr/ESA/Title_29/Part_541/Subpart_G.htm. Download exempt status policies here.

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Question: If an 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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This article is not intended as legal advice. Readers are encouraged to seek appropriate legal or other professional advice.

 
  
 



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