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The
"Salary Basis" Test
Disciplinary Deductions Can Jeopardize the Exemption
Deductions for Full-Day Absences Allowed
Use of Paid Leave for Partial-Day Absences Raises Questions
Practical Solution: Revise Policies to Prevent Questions
Most employers
have little difficulty determining whether a worker qualifies as an
"exempt" employee under the
Fair Labor Standards Act ("FLSA").
Generally, if an employee is paid on a salary basis and meets the
job criteria of an administrative, executive, or professional
employee (the so-called "white collar" professions), the employee is
exempt from the overtime provisions of the FLSA. Seems simple
enough. However, many employers unintentionally jeopardize this
exemption by instituting pay and disciplinary policies that treat
these employees as if they are nonexempt. In particular, policies
that dock exempt employees for disciplinary reasons or require the
use of paid partial-day absences raise questions about whether the
employee is really being paid on a "salary basis" as required by the
FLSA’s regulations. The consequences of these policies can be
substantial and include potential liability for overtime to the
affected employees.
The
"Salary Basis" Test
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The Department of Labor ("DOL")
regulations implementing the
FLSA define "salary basis" as payment
on a weekly or less frequent basis of a predetermined amount,
constituting all or part of compensation, without reductions for
variations in the quality or quantity of the work performed. Thus,
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. Payment usually is not required if the
employee does not perform any work during the entire week.
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If an exempt employee is ready,
willing, and able to work, deductions may not be made for time when
work is not available. Further, deductions for partial-week absences
caused by jury duty, attendance as a witness, or temporary military
leave are not permitted. However, the employer may offset any
monetary payments received for these duties in a particular week
against the employee’s salary for that same week.
Disciplinary Deductions Can Jeopardize the Exemption
Some employers have policies that
link pay to discipline. For example, as part of a progressive
disciplinary policy, they will suspend employees without pay for
part of a week. However, the
FLSA restricts this practice for exempt
employees. According to the DOL regulations, employers may not dock
exempt employees’ pay for disciplinary reasons. The Supreme Court
recently affirmed the DOL’s position in Auer v. Robbins, 117 S. Ct.
905 (1997). The FLSA does allow a limited exception to this
restriction. An employer may make deductions for infractions of
"safety rules of major significance," which includes those rules
relating to the prevention of serious danger to the worksite or
other employees, such as no smoking rules in explosive plants, oil
refineries, and coal mines.
Deductions for
Full-Day Absences Allowed
The DOL regulations recognize
several instances where an employer may make deductions, or "dock"
employees, for absences of a full day or more without jeopardizing
the exemption. An employer may make deductions when the exempt
employee is absent from work for a day or more for personal reasons,
such as when an employee takes an unpaid personal day. Deductions
also may be made for absences of a day or more because of illness or
injury if the employer has 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 may be made even if the exempt employee
has not yet qualified for the plan or has exhausted the plan’s sick
leave allowance. However, if a private employer makes deductions
from an exempt employee’s pay for absences of less than a day, the
employer is considered to be treating the employee as an hourly
employee and may jeopardize the exempt status. (Unlike employees in
the private sector, exempt public employees are considered to be
paid on a "salary basis" even if their pay is reduced for
partial-day absences when the deduction is the result of a pay
system that meets certain requirements. These requirements are
discussed in Hours of Work, page 207:16, note 28.)
Use of Paid Leave for Partial-Day Absences Raises Questions
Many employers attempt to avoid
docking pay and jeopardizing the exemption by requiring exempt
employees to use paid leave for partial-day absences. For example, a
typical policy may require an exempt employee to use two hours of
sick leave when going to a doctor’s appointment for two hours during
the work day. The Department of Labor traditionally has considered
this type of arrangement to be permissible because the employee does
not experience a reduction in weekly compensation. A few courts,
including the Tenth Circuit Court of Appeals, have agreed with the
DOL’s position as long as the exempt employee does not lose any pay
for the week. However, several courts have disagreed with the DOL
and have determined that this practice treats an exempt employee
like an hourly, nonexempt employee and, therefore, causes a loss of
the exemption and creates overtime liability. For example, the
Seventh and District of Columbia Circuit Courts of Appeals have
determined that policies that require exempt employees to use paid
absences for partial-day absences undermine the salary basis test.
Practical Solution: Revise Policies to Prevent Questions
As the above discussion
illustrates, employers may become liable to exempt employees for
overtime pay if they: (1) discipline them by suspending them without
pay; or (2) require the use of paid time for partial-day absences.
In addition, from an employee relations viewpoint, exempt employees
who are subjected to these policies and who regularly work more than
a standard 40-hour week may feel as though their employers are
taking advantage of them. In these cases, they are not entitled to
overtime pay even though they put in long hours, yet they are
required to use a few hours of vacation or sick leave to take care
of personal business.
Accordingly, employers should
consider revising their disciplinary and absence policies to
eliminate practices that both may create morale problems with exempt
employees and result in a loss of salaried status for them. The
consequences of losing the exemption can be serious and include
potential overtime and backpay liability for every exempt employee
who is subject to the improper policies. Employers that engage in
these practices should consult with legal counsel to determine if
the courts in their jurisdiction have ruled that these policies
jeopardize the exempt status.
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