|
What does it mean to be paid on a “salary basis”?
Do you have to give paid vacation days, sick days, and holidays to exempt employees?
Do you have to pay exempt employees when work is not available?
What about for jury duty and military leave?
Do we have to pay exempt employees on days they cannot work
because of inclement weather?
Can deductions be made from an exempt employee’s salary for partial
day absences?
Can you make deductions for disciplinary reasons, such as a
suspension?
Can you require exempt employees to work 40 hours a week or to be at
work during set times?
Can you pay exempt employees extra compensation?
Can you keep track of the number of hours exempt employees work?
Penalties for Misclassification Are Severe
[Creating HR Policies or Employee Handbook?]
Are you sure you are classifying your
exempt employees correctly? If you are not paying them on a “salary
basis,” as defined by the
FLSA, you may owe up to three years of
back pay and even be personally liable for penalties.
[Download Free Policies]
Exemption from
the Fair Labor Standards Act (FLSA) and the concept of “exempt”
status employees seem simple enough at first glance. If an employee
performs certain defined job duties and is paid on a “salary basis,”
the employee is then considered “exempt” from the FLSA’s
requirements, freeing you from obligations concerning the minimum
wage or overtime. However, even if you initially classify employees
correctly, you must continue to treat them as exempt on an ongoing
basis. Many common practices, such as the tracking of hours worked
or not giving paid sick days, may affect whether the employee is
considered to be paid on a salary basis and, therefore, can
adversely impact the exemption classification. The Editors have
analyzed the FLSA statute, regulations, and court cases to
answer ten common questions concerning the salary basis requirement
and to address the growing concern for HR personal liability for
exemption decisions.
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, generally involving the use of
independent judgment and discretion, and be paid on a “salary
basis.” The FLSA provides for five broadly used classifications of
exemptions, including:
1. bona
fide administrative employees,
2. bona
fide executive employees,
3. bona
fide professional employees,
4. outside sales employees, and
5. highly
skilled computer-related 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 for any week in which they perform
work, without regard to the number of days or hours worked.
Deductions may be made from their salary, but only in limited
circumstances. (See questions 2 through 7, below.) It 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 you 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 they
do not violate the salary basis test or you may lose the
exemptions. The type and amount of time off taken determines
whether you can make the deductions. 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
personal time off.
You also may make
deductions for a 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 due to sickness or disability, such as a policy that
allows employees to accrue paid sick leave. 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.
The FLSA
regulations do not specifically allow deductions for holidays.
Therefore, you should not make deductions from an exempt employee’s
pay for unworked holidays
3. Do you have to pay exempt employees when work is not available?
If the exempt
employee is ready, willing, and able to work, deductions may not be
made for time when work is not available.
4.
What about for jury duty and military leave?
Deductions for
partial week absences caused by jury duty, attendance as a witness,
or temporary military leave 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 payment usually is not required if
the employee does not work the entire week.
5. 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.
Therefore, exempt employees generally should be paid for absences
resulting from bad weather if they have worked during any of the
workweek in which the absences occur.
6. Can deductions be made 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 an
exempt employee paid on a salary basis. (As discussed in question
2, above, you may make deductions for certain full day absences.)
Many employers
have attempted to avoid the partial day pay docking issue by
requiring exempt employees to use paid leave for these absences.
The Department of Labor (DOL), the agency that enforces the FLSA,
traditionally has permitted this type of arrangement since the
employee does not experience an actual reduction in salary. There
also are special rules for exempt public sector employees that allow
them to be considered exempt even if their pay is reduced for
partial day absences.
A number of
courts have sided with the DOL’s position on this issue. However,
other 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 on this matter
if you are a private sector employer. As a practical matter, 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 type of 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.
7. Can you make deductions for disciplinary reasons, such as a
suspension?
No, unless you
suspend the exempt employee for a full week. However, you may make
deductions for penalties imposed for infractions of “safety rules of
major significance.” These 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. Remember, you can suspend an exempt
employee for less than a week as long as you pay him. Since a
suspension is often the final step before termination, the employee
will most likely understand the seriousness of the suspension even
if he does not lose any pay.
8. Can you 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 will appear to be treating them like nonexempt
employees and may, thus, jeopardize their exempt status. Instead of
focusing on the number of hours an employee works or his starting
time, you are better advised to focus on the employee’s job
requirements and output. For example, if an employee manages
nonexempt employees who must be at work between 9 a.m. and 5 p.m.,
then you can require that employee to be at work during the same
hours to supervise properly. Similarly, you may discipline an
employee who does not complete a project on time or is not available
for a meeting because he left at noon on Friday.
9. Can you pay exempt employees extra compensation?
Generally, you
may pay extra compensation to exempt employees without affecting the
salary basis qualification. The
FLSA regulations give only limited
examples of acceptable additional compensation, and these include
the payment of commissions and bonuses.
Some employers
pay exempt employees additional compensation that is based on the
number of hours the employees work in excess of 40 in a single
workweek. The regulations do not specifically discuss this
practice; however, the courts that have addressed the issue
disagree. Some courts have held that an otherwise exempt employee
who receives extra payments based on the number of hours worked in
excess of 40 is not “paid on a salary basis” and must therefore be
paid overtime. Other courts, however, have determined that payment
of an hourly rate in addition to the salary does not affect the
exempt status of the employee. Because of this split in the courts,
most experts recommend paying extra compensation in the form of
bonuses or other lump sum payments so that it does not look like
overtime pay.
10. Can you keep track of the number of hours exempt employees
work?
Employers that
require exempt employees to account for their work time on an hourly
basis may jeopardize the status of these employees 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.
However, you generally 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 under a federal contract. You
also may record daily attendance.
Penalties for
Misclassification Are Severe
As indicated in
the above discussion, if an employee is classified as exempt but
does not meet the necessary salary basis tests, you may lose the
exemption. Under the FLSA, the employer can be liable for back
overtime pay of up to two years for any employee who is
misclassified as exempt. This back pay liability typically is
extended to three years if the FLSA is determined to have been
willfully (intentionally) violated. In addition, a single
misclassification can trigger a loss of exemption for a whole group
of employees if the rest of the group has been treated similarly
under the organization’s policies and practices. And as a final
legal wake-up call, some court decisions interpreting the
FLSA have found that the individual decisionmaker can be personally
liable for any violations under the Act. In other words, you could
be personally responsible for any back pay and other penalties.
As a practical matter, it is
unlikely that you will be assessed personal remedies by the DOL or a
court unless you intentionally violate the FLSA. However, you need
to realize that many disgruntled employees and their attorneys
threaten legal action against the individual decisionmaker as a way
to put pressure on the employer. Therefore, you should make sure
you are not exposing your organization or yourself to unnecessary
legal actions. The best way to do this is to be familiar with the
FLSA regulations, in particular the regulations dealing with the
salary basis requirements, and then document your exempt
classification decisions. A good starting point is to compare your
policies that affect exempt employee pay with the ten questions and
answers addressed above. A final common sense tip to help ensure
that exempt employees are paid on a salary basis is to focus on
their job duties and completed work, not on the number of hours
worked or their arrival and departure times. |
Personnel
Policy Service, Inc.
