Pay and Absence Concerns for Exempt Employees

The Federal Labor Standards Act (FLSA) governs
pay, overtime and pay offsets for absence for most employment in
this country. Among other things, the law requires payment for “overtime”
work at one-and-a-half times an employee’s hourly rate. The
FLSA also provides exemptions from this overtime requirement. You
can have salaried employees who do not receive overtime no matter
how many extra hours they work. These employees must be paid at
least $455 per week, and meet certain requirements in order to be
validly “exempt.”

The U.S. Department of Labor audits employers regarding the treatment
of these exempt workers. It is not enough that the employee originally
meets the FLSA standards for an exemption. The employer has a continuing
duty to treat the employee as a salaried worker. Failure to continuously
treat salaried employees in an “exempt manner” can cause
loss of the exemption. The employees and Department of Labor have
sued employers on this point. The result of “loss of exempt
status” can be that all salaried
employees are declared “non-exempt” and the employer
is required to pay all of these
workers retroactive overtime pay for the past two or more years.
This can mean tens to hundreds of thousands of dollars in back pay
damages for the average employer. Nordstrom Corp., a large employer,
paid approximately $20 million in back pay and fees for failure
to properly follow the exemption rules.

There are four major areas which create trouble: (1) salary deductions
for general part-week absences; (2) salary deductions for absences
caused by jury duty, attendance as a witness or temporary military
leave; and (3) temporary alterations of pay for lack of work or
performance reasons; (4) suspensions without pay for disciplinary
infractions.

Deduction For Absences

The primary cause for loss of exemptions is deducting pay for
the absence of a salaried employee. In general, a salaried employee
gets paid for the full day if present at all, even for five minutes
during the day. In general, “part-day” pay docking is
forbidden. In some situations, the employee must miss an entire
week (i.e., Sunday to Saturday)
before any pay can be withheld.

The theory of “salary” is that the employee receives
a set amount no matter how much or little they work. The presumption
is that salaried employees, due to their special sorts of work,
will usually put in well over forty hours a week. Sometimes, though,
they will fall short. It usually does not “even out;”
over time they still tend to put in more than a forty-hour week
average. If you are not required to pay the exempt employee any
more in “overtime” when they exceed the forty-hour week,
you may not “dock” them on those occasions they fall
short. Since the “annual hours balance” usually comes
out in the employer’s favor, the company cannot “stack
the deck” further by demanding extra hours for no added pay
while then docking pay on weeks falling under forty hours.

The controlling federal regulation reads:

§541.602(a) Salary basis.

General rule. An employee will
be considered to be paid on a “salary basis” within
the meaning of these regulations if the employee regularly receives
each pay period on a weekly, or less frequent basis, a predetermined
amount constituting all or part of the employee’s compensation,
which amount is not subject to reduction because of variations
in the quality or quantity of the work performed. Subject to the
exceptions provided in paragraph (b) of this section, an exempt
employee must receive the full salary for any week in which the
employee performs any work without regard to the number of days
or hours worked. Exempt employees need not be paid for any workweek
in which they perform no work. An employee is not paid on a salary
basis if deductions from the employee’s predetermined compensation
are made for absences occasioned by the employer or by the operating
requirements of the business. If the employee is ready, willing
and able to work, deductions may not be made for time when work
is not available.

Part-Day Absences

The federal courts have held that you cannot dock pay for absences
of less than a day. If salaried employees show up for a few minutes,
they get the full day’s pay. One court stated:

Subjecting an employee’s pay to deductions for absences
of less than a day, including absences as short as an hour, is
completely antithetical to the concept of a salaried employee.
A salaried employee is compensated not for the amount of time
spent on the job, but rather for the general value of services
performed. It is precisely because executives are thought not
to punch a time clock that the salary test for “bona
fide
executives requires that an employee’s predetermined
pay not be subject to reduction because of variations in the .
. . quantity of work performed” – especially when hourly
increments are at issue.

Full-Day Absences

Deductions without pay may be made, however, when the employee
is voluntarily absent from work for a day or more for personal reasons
other than sickness or disability.
Thus, if an employee is absent for a day or longer to handle personal
affairs, the salaried status will not be affected if deductions
are made from salary for those absences. Section 541.602(b)(1) states:

Deductions from pay may be made when an exempt employee is absent
from work for one or more full days for personal reasons, other
than sickness or disability. Thus, if an employee is absent for
two full days to handle personal affairs, the employee’s
salaried status will not be affected if deductions are made from
the salary for two full-day absences. However, if an exempt employee
is absent for one and a half days for personal reasons, the employer
can deduct only for the one full-day absence.

However, under the Department of Labor’s current interpretation
of the law, you can use accrued vacation time or other “paid
time off” to cover the part-day absence. As long as there
has been no lessening of the week’s paycheck, DOL will not
find a “docking” of wages. Once the vacation pay or
other paid time off is exhausted, though, you are back to the general
rule. The salaried employee must miss the entire
day
before pay can be lessened.

Sick Leave

Under federal rules, unless an ill or disabled salaried employee
is gone an entire week, you cannot deduct from wages at all. If
the employee shows up to work even a few minutes on any one day,
he or she must be paid the full week’s salary UNLESS you have
a formal written sick leave policy or benefit plan that says otherwise
and pays for days off. The federal rules, §541.602(b)(2), state:

Deductions from pay may be made for absences of one or more
full days occasioned by sickness or disability (including work-related
accidents) if the deduction is made in accordance with bona fide
plan, policy or practice of providing compensation for loss of
salary occasioned by such sickness or disability. The employer
is not required to pay any portion of the employee’s salary
for full-day absences for which the employee receives compensation
under the plan, policy or practice. Deductions for such full-day
absences also may be made before the employee has qualified under
the plan, policy or practice, and after the employee has exhausted
the leave allowance thereunder. Thus, for example, if an employer
maintains a short-term disability insurance plan providing salary
replacement for 12 weeks starting on the fourth day of absence,
the employer may make deductions from pay for the three days of
absence before the employee qualifies for benefits under the plan;
for the twelve weeks in which the employee receives salary replacement
benefits under the plan; and for absences after the employee has
exhausted 12 weeks of salary replacement benefits. Similarly,
an employer may make deductions from pay for absences of one or
more full days if salary replacement benefits are provided under
a State disability insurance law or under a State workers’
compensation law.

Though the language of this regulation states “absences
of a day or more,” again the DOL’s current interpretation
is a help. If you have a paid sick leave plan, then part-day absences
can be covered by that pay without a violation until
the paid leave has been exhausted.

The paid sick leave provisions then allow you to dock full-day
illness absences even after the paid leave is exhausted. No pay
is due for those full days. Be aware that DOL has also ruled that
you cannot “advance” pay against future sick leave for
a salaried employee, then “dock” (recoup) the pay later.
Any pay advance to a salaried employee must be very carefully structured
in order to not threaten the exempt status.

So, having a written, formal sickness and leave of absence plan,
or a disability insurance plan, is crucial if you wish to place
a cap on or have control of the amount of pay you must give when
salaried employees miss work.

The rule does not say what you have to put into your plan except
that it must offer some sort of compensation coverage for days missed.
There is no specific number of required days of paid sick leave.
You can choose the number you wish. You may also set up eligibility
periods before new employees become entitled to the leave compensation.
Once this written plan is in place, you can deduct full days missed
from any salaried employee who has not yet qualified for the leave
or has already exhausted the leave.

The Family Medical Leave Act Changes the Rule

The Federal FMLA does allow “salary deductions” for
less than a day for new child care or serious
medical conditions
. There is a special provision in the Act,
§541.602(b)(7), which allows employers to do this, without
affecting the exempt status, and without it being seen as a violation
of the Department of Labor’s rules.

An employer is not required to pay the full salary for weeks
in which an exempt employee takes unpaid leave under the Family
and Medical Leave Act. Rather, when an exempt employee takes unpaid
leave under the Family and Medical Leave Act, an employer may
pay a proportionate part of the full salary for time actually
worked. For example, if an employee who normally works 40 hours
per week uses four hours of unpaid leave under the Family and
Medical Leave Act, the employer could deduct 10 percent of the
employee’s normal salary that week.

This means that employers of fifty (50) or more workers can withhold
pay for part-day absences even after all sick leave is exhausted,
or where there is no sick leave accrual or other benefit plan, if
the absence qualifies under FMLA.

This is only a partly effective answer to the issue. This use
only applies for new child care and “serious” medical
conditions that are taken as FMLA leave. “Serious” would
not include most doctor or dentist appointments, colds, flu or other
illnesses that employees often use their sick leave for. Therefore,
non-serious part-day absence, would
not fall under the FMLA exemption.
Labeling a part-day absence for a minor illness as FMLA, in order
to dock the time off, would violate the salary basis rules.

An employer that docks pay for part-day absences should be careful
that it is something that fits under the Act. One should get the
employees verification that an absence is for an FMLA situation,
if possible.

Also, remember that state FMLA laws can give the employee the right
to elect to use or refuse to use sick leave pay for the state “protected
periods.” Unless the employer has a carefully drafted leave
policy, one might not be able to “force” exhaustion of
sick leave benefits, even though the pay could still be docked for
the state FMLA time period. This is another little wrinkle to the
situation.

Sounds confusing? It can be. We are treading between two conflicting
federal laws, federal and state FMLA with somewhat differing provisions,
and a divided court system. So, one should be careful to assure
that part-day deductions for personal medical leave fit the FMLA
exceptions, and, under any applicable state laws, to give the employee
the opportunity to elect whether to use accrued leave to cover the
initial state protected leave period.

Jury Duty, Court Appearances
and Military Duty

Section 541.602(b)(3) states:

While an employer cannot make deductions from pay for absences
of an exempt employee occasioned by jury duty, attendance as a
witness or temporary military leave, the employer can offset any
amounts received by an employee as jury fees, witness fees or
military pay for a particular week against the salary due for
that particular week without loss of the exemption.

Again, this applies to less than full week absences. Any absences
of full calendar work weeks may
be deducted from pay or accrued leave benefits.

Lack of Work

Under §541.602(a), an employer may not subject a salaried
employee’s pay to deductions due to lack of work, if the employee
is ready, willing and able to work.

This rule applies to “lay offs” or slow downs of less
than a week. It would seem unfair to expect salaried employees to
work long hours at peak times, for no extra money, and then cut
them off during slow times. Salary is supposed to cushion the employer
from overtime, but also cushion
the employee from lulls in business.

A “lay off” of full calendar work weeks is not
covered. You may dock pay for a
full week or more if the lay off is due to low work or budget cuts.

Neither can a salary be reduced for quality of work. Short-term
salary cuts for work quality or quantity problems is not valid discipline
under the FLSA.

Disciplinary Suspension

The 2004 rule changes allow part week (full day) deductions for
disciplinary suspension. They allow even greater “penalties”
for serious safety violations. Section 541.60(2)(b)(5) provides:

Deductions from pay of exempt employees may be made for unpaid
disciplinary suspensions of one or more full days imposed in good
faith for infractions of workplace conduct rules. Such suspensions
must be imposed pursuant to a written
policy applicable to all employees
. Thus, for example,
an employer may suspend an exempt employee without pay for three
days for violating a generally applicable written policy prohibiting
sexual harassment. Similarly, an employer may suspend an exempt
employee without pay for twelve days for violating a generally
applicable written policy prohibiting workplace violence. (Emphasis
added.)

Written Policy

The rule emphasizes a written policy underlying the part week
suspension. Absence of a written policy,
therefore, seems to place one under the old general principle that
an exempt employee disciplinary suspension must be for a full
week
in order to be non paid. So, the regulation creates
an incentive to have written policy statements in the employee handbook
which give fair warning of disciplinary consequences.

The “Contract Catch”

Courts in “Employment At Will” states have ruled that
a specific set of policies or work rules which threaten discipline
or discharge can create a contractual guarantee that these are the
dischargeable infractions; that employees cannot be fired for other
violations “at will.” So an employer which has a specific
set of discipline/discharge violations in order to comply with the
FLSA runs the risk of diminishing the At Will status. Therefore,
any set of rules subject to discipline/discharge should be carefully
worded to “thread” between these two legal principles.
Get the advice of your legal counsel.

Safety Penalty

Section 541.602(b)(4) and (c) state:

Deductions from pay of exempt employees may be made for penalties
imposed in good faith for infractions of safety rules of major
significance. Safety rules of major significance include those
relating to the prevention of serious danger in the workplace
or to other employees, such as rules prohibiting smoking in explosive
plants, oil refineries and coal mines.

. . . and . . .

When calculating the amount of a deduction from pay allowed under
paragraph (b) of this section, the employer may use the hourly
or daily equivalent of the employee’s full weekly salary
or any other amount proportional to the time actually missed by
the employee. A deduction from pay as
a penalty for violations of major safety rules under paragraph
(b)(4) of this section may be made in any amount
. (Emphasis
added.)

This section does give one the right to impose a temporary salary
cut for major safety violations. Be careful,
though, that it is a pay “reduction” instead of a pay
“deduction.” A number of states have laws prohibiting
pay deduction/withholding for loss, theft, quality or disciplinary
purposes. The way you structure the pay action and what you call
it can make a big difference.

All full week suspensions without
pay are permitted under the rules. Remember that a “full week”
for FLSA purposes is a calendar week, not just five or six days.
An employee suspended for seven straight days, from one Wednesday
to Thursday of the next week, has actually “worked
in each of those two calendar weeks.
Generally, a week’s suspension should be Sunday to Saturday, or
whatever the normally scheduled work week of the employee may be.
Less than full week suspension should be pinned to written rules
which give warning that there can be disciplinary consequences,
or major safety violations.

Policies and Cure

Improper Deduction – Safe Harbor

Improper deductions can cause loss of the exempt status and huge
amounts of back overtime pay. However, the 2004 rule changes provide
a safe harbor for infrequent, good faith errors.

Effect of Improper Deductions from Salary

Section 541.603(a) and (b) provide:

(a) An employer who makes improper deductions from salary shall
lose the exemption if the facts demonstrate that the employer
did not intend to pay employees on a salary basis. An actual practice
of making improper deductions demonstrates that the employer did
not intend to pay employees on a salary basis. The factors to
consider when determining whether an employer has an actual practice
of making improper deductions include, but are not limited to:
the number of improper deductions, particularly as compared to
the number of employee infractions warranting discipline; the
time period during which the employer made improper deductions;
the number and geographic location of employees whose salary was
improperly reduced; the number and geographic location of managers
responsible for taking the improper deductions; and whether the
employer has a clearly communicated policy permitting or prohibiting
improper deductions.

(b) If the facts demonstrate that the employer has an actual
practice of making improper deductions, the exemption is lost
during the time period in which the improper deductions were made
for employees in the same job classification working for the same
managers responsible for the actual improper deductions.

Safe Harbor

The rules, under §541.603(c) and (d) provide an “out”:

(c) Improper deductions that are either isolated or inadvertent
will not result in loss of the exemption for any employees subject
to such improper deductions, if the employer reimburses the employees
for such improper deductions.

(d) If an employer has a clearly communicated
policy
that prohibits the improper pay deductions specified
in §541.602(a) and includes a complaint mechanism, reimburses
employees for any improper deductions and makes a good faith commitment
to comply in the future, such employer will not lose the exemption
for any employees unless the employer willfully violates the policy
by continuing to make improper deductions after receiving employee
complaints. If an employer fails to reimburse employees for any
improper deductions or continues to make improper deductions after
receiving employee complaints, the exemption is lost during the
time period in which the improper deductions were made for employees
in the same job classification working for the same managers responsible
for the actual improper deductions. (Emphasis added.)

The rules emphasize the criteria of “isolated
and “inadvertent.” So
the safe harbor may not cure a pattern and practice which violates
the regulations.

Written Policy. The safe harbor
only works if one has a “clearly communicated policy”
prohibiting improper deductions and advising employees how to raise
complaints. A “clearly communicated” policy is as provable
as the paper or disk it is published upon. Only a published policy
in a handbook (probably with the employee’s signature of receipt)
is likely to meet the requirements.

The policy should follow some of the guidelines the courts have
established for anti-harassment policies:

  • Clear, commitment to follow the rules
  • Clear and easy method to raise issues or complaints
  • Guarantee of prompt action to review issues and remedy improprieties
  • Guarantee of no retaliation for raising issues. (The FLSA can
    impose personal liability against
    managers who violate the rules — especially for retaliation).
    (See article on Personal Liability,
    by Bob Gregg, Boardman Law Firm)

Extra Compensation

The 2004 rule revisions make another important change. Extra compensation
for overtime is allowed for exempt
employees.

Though exempt status means that no overtime has to be paid, many
employers wish to give some sort of recognition to the extra efforts
put in by salaried employees; especially when the efforts go “above
and beyond.” normal expectations. However, the pre-2004 rules
discouraged this, and could penalize an employer for exempt “overtime”
pay by nullifying the exempt status.

The 2004 rules change this and allow employers to give some rewards
for extra effort. Section 541.604(a) states:

Minimum guarantee plus extras.
An employer may provide an exempt employee with additional compensation
without losing the exemption or violating the salary basis requirement,
if the employment arrangement also includes a guarantee of at
least the minimum weekly-required amount paid on a salary basis.
. .

One may give extra compensation over the salary in a variety of
ways. Extra pay can be on an hourly basis, commission in addition
to salary, bonus, profit share, even time and a half for overtime.

Other Exempt Compensation Methods – Reasonable
Relationship

The 2004 rules, §541.604(b), provide an alternative form
of payment. However, the reasonable relationship test is really
not much different than the salary basis; one must pay the guaranteed
salary amount per week; it is just broken down by smaller increments.

An exempt employee’s earnings may be computed on an hourly,
a daily or a shift basis, without losing the exemption or violating
the salary basis requirement, if the
employment arrangement also includes a guarantee of at least the
minimum weekly required amount paid on a salary basis regardless
of the number of hours, days or shifts worked
, and a reasonable
relationship exists between the guaranteed amount and the amount
actually earned. The reasonable relationship test will be met
if the weekly guarantee is roughly equivalent to the employee’s
usual earnings at the assigned hourly, daily or shift rate for
the employee’s normal scheduled work week. Thus, for example,
an exempt employee guaranteed compensation of at least $500 for
any week in which the employee performs any work, and who normally
works four or five shifts each week, may be paid $150 per shift
without violating the salary basis requirement. The
reasonable relationship requirement applies only if the employee’s
pay is computed on an hourly, daily or shift basis
. It
does not apply, for example, to an exempt store manager paid a
guaranteed salary of $650 per week who also receives a commission
of one-half percent of all sales in the store or five percent
of the store’s profits, which in some weeks may total as
much as, or even more than, the guaranteed salary. (Emphasis added.)

The same “deduction” rules still apply to this method
of compensation as to the regular salary basis. So a missed “part
shift” is no different than a missed part day.

Fee (Task) Basis

This compensation method does
allow one to pay less than the full week salary to administrative
and professional employees, under §541.605(a) and (b):

Fee Basis. Administrative and
professional employees may be paid on a fee basis, rather than
on a salary basis. An employee will be considered to be paid on
a “fee basis” within the meaning of these regulations
if the employee is paid an agreed sum for a single job regardless
of the time required for its completion.

These payments resemble piecework payments with the important
distinction that generally a “fee” is paid for the
kind of job that is unique rather than for a series of jobs repeated
an indefinite number of times and for which payment on an identical
basis is made over and over again. Payments based on the number
of hours or days worked and not on the accomplishment of a given
single task are not considered payments on a fee basis.

To determine whether the fee payment meets the minimum amount
of salary required for exemption under these regulations, the amount
paid to the employee will be tested by determining the time worked
on the job and whether the fee payment is at a rate that would amount
to at least $455 per week if the employee worked 40 hours. Thus,
an artist paid $250 for a picture that took 20 hours to complete
meets the minimum salary requirement for exemption since earnings
at this rate would yield the artist $500 if 40 hours were worked.

This regulation allows pay for task accomplishment, and “deductions”
are not an issue. Pay for the work done is the issue. No pay is
made for non-work.

This compensation method is intended for those who have fluctuating
hours which can generate less, or more, than the base salary on
a fee basis, but without much predictability.

Remember, one cannot shift back and forth between salary and fee
basis. One cannot hold an exempt employee to a set salary and no
overtime in times of abundant work (and long hours) and then shift
to a fee basis in lean times to cut hours and save money by paying
less than the salary basis.

 

 

 
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