New England Biz Law Update
Employers often spend much time, money and effort to structure positions and compensation packages so employees will be exempt from the Fair Labor Standards Act’s (FLSA) overtime requirements.
But despite employers’ best efforts, some policies could unwittingly jeopardize employees’ exempt status, thereby exposing companies to the risk of having to pay overtime for past work.
A recent Department of Labor (DOL) Opinion Letter illustrates the point.
An employer asked whether it could deduct from exempt employees’ salaries amounts necessary to reimburse it for damage to or loss of company equipment without jeopardizing their exempt status.
The DOL said, “No.” In other words, according to the DOL, an employer who has and uses such a policy may have to pay overtime to an employee who damages company equipment, even if deliberate. What is more, an employer may also be required to pay overtime to other employees subject to the policy.
This article briefly discusses FLSA exemptions and the effect of salary deductions on an exemption’s availability, and provides guidance as to what deductions are permissible.
FLSA exemptions and salary basis test
The FLSA exempts from its minimum wage and overtime requirements any employee employed in a bona fide executive, administrative, or professional capacity.
An employee may qualify for exemption if three tests are met: (1) the employee must perform executive, administrative, or professional duties, as defined in the regulations (the “duties” test); (2) the employee must be paid at least $455 per week (the “salary level” test); and (3) the employee must be paid on a salary or fee basis (the “salary basis” test).
An employee must satisfy all three tests to be exempt. This article focuses on the “salary level” test, which is often overlooked. The salary basis test is inapplicable to most lawyers and doctors, and does not necessarily apply to “computer professionals,” who may be exempt if paid at least $27.63 an hour.
Salary deductions may violate the salary basis test. To be paid on a “salary basis,” an employee must be paid “a predetermined amount … not subject to reduction because of variations in the quality or quantity of the work performed.” Moreover, “an exempt employee must receive the full salary for any week in which the employee performs any work.”
Exceptions to these rules are very narrow.
Whether a deduction violates the salary basis test depends on whether the “predetermined amount” is reduced – not on whether overall compensation is reduced. Thus, if there is a predetermined amount that satisfies the salary level test, deductions from other compensation are permissible.
For instance, if an employer pays an employee $500 a week and $100 a week extra if the employee works beyond the normal workweek, it may deduct from the extra $100 without losing the exemption. Nevertheless, an employer can not artificially divvy up an employee’s compensation simply to make deductions from one part.
Permissible and impermissible deductions
The regulations list some exceptions to the rule against salary deductions. To provide a few examples, an employer may deduct from an exempt employees’ salary for unpaid Family and Medical Leave Act leave and for unpaid disciplinary suspensions of a full day or more pursuant to a written policy.
An employer may also deduct for additional days an employee may take off in excess of accrued vacation time. An employer may deduct for hours not worked in the first and final weeks of employment as well.
According to the DOL, any salary deductions not explicitly permitted by the regulations violate the salary basis test and may result in a lost exemption. Consequently, deductions for working a partial day are impermissible.
Thus, if an exempt employee is scheduled to work a full day but decides to take the afternoon off, the employer cannot dock the employee’s pay for the unworked hours. Deductions for cash register shortages are also forbidden, as are fines for violating company rules, such as fining employees for submitting timesheets late. Docking an employee’s pay to recoup any judgments or fines an employer suffers because of an employee, such as parking tickets, is similarly impermissible.
So far as the DOL is concerned, it is irrelevant whether an employer docks an employee’s pay or requires the employee to pay out-of-pocket from salary already received. Either way, the result is to reduce impermissibly an employee’s salary in violation of the salary basis test.
Effect of impermissible deductions
Impermissible deductions may result in an employee losing exempt status and becoming entitled to overtime pay. More drastic still, the exemption may be lost not only as to the employee whose pay was docked, but also as to other employees in the same job classification working for the same manager who made the improper deduction. Hence, the potential overtime exposure could be huge.
What can an employer do when an exempt employee returns a damaged laptop or decides to spend the afternoon sailing rather than working?
The answer is simple: Resort to discipline. Nothing in the FLSA or its regulations impacts an employer’s ability to mete out discipline, so long as the discipline is not an impermissible salary deduction.
Moreover, the restrictions on deductions do not apply to nonexempt employees, provided the deductions do not reduce their pay below the statutorily required minimum wage. Employers may also pursue legal action against employees who damage company equipment such as laptops.
But so far as exempt employees are concerned, docking their pay in response to undesirable behavior or damaged property may result in the employer itself being punished by losing its overtime exemption and being faced with significant liability.
Jonathan Keselenko ([email protected]) is a partner, and John Duke([email protected]) is an associate, both in the labor and employment practice at Foley Hoag LLP (www.foleyhoag.com).
