Protect Your Overtime Exemptions
Mark Wagner
The Fair Labor Standards Act ("FLSA") creates standards for minimum wage, overtime pay, and child labor. Generally speaking, and subject to certain exemptions, the FLSA requires employers to pay employees the greater of a federally specified or state-mandated minimum hourly wage for each hour worked up to 40 hours in a workweek. Whether an employee is compensated for time worked beyond the 40 hours is determined on whether they are exempt or not from overtime exemptions - a status, which if managed improperly, can be costly to employers.
The FLSA contains dozens of exemptions from its overtime pay requirements, the most common of which are the so-called "white collar" exemptions for executive, administrative, and professional employees, computer professionals, and outside sales employees. Under the new regulations ("Regulations") promulgated by the Department of Labor, to qualify for the white collar exemption from the overtime pay requirements of the FLSA, employees must satisfy certain specific duties tests, and generally also must be paid more than $455 per week on a salary basis.
Employees paid on a salary basis regularly receive a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. Subject to the limited exceptions noted below, an exempt employee must receive the full salary for any week in which the employee (i) performs any work, regardless of the number of days or hours worked, or (ii) is "ready, willing, and able" to work but cannot do so because no work is available. The key concept behind this general rule is that paying an employee a salary implies that the employee has discretion to manage his or her time. Such an employee is paid for the general value of his or her services, not the number of hours worked, which is the very reason he or she is not entitled to overtime pay.
An employer cannot reduce this predetermined amount because of variations in the quality or quantity of the employee's work. If adjustments are made, then the employee is not paid on a "salary basis," and the employee's exempt status is destroyed, along with the exempt status of other employees in the same job classification who work for the same managers responsible for the improper deductions. If the employee is "ready, willing, and able" to work, deductions may not be made for time when work is not available.
An employer will also lose the exemption for an employee or a class of employees if it has an "actual practice" of making improper deductions from salary. Factors considered by DOL when determining whether an employer has an actual practice of making improper deductions include, but are not limited to the following: the number of improper deductions made by the employer, particularly as compared to the number of employee infractions warranting deductions; the time period during which the employer made improper deductions; the number and the geographic location of both the employees whose salary was improperly reduced and the managers responsible; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. If an "actual practice" is found, exemptions will be lost for the time period in which improper deductions were made. This is true not only for the employees originally affected, but for all employees in the same job classification who work for the managers responsible for the deductions.
Deductions for Part-Day Absences
Except in the case of intermittent leave taken under the FMLA (discussed below), the Regulations do not allow employers to make deductions from the pay of an exempt employee in less than full-day increments. Full-day increments are allowed in either of the following two instances: (i) when the exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability, and (ii) when the exempt employee is absent from work for one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness.
Deductions for Absences for Jury Duty, Attendance as Witness, or Temporary Military Leave
Employers may not make deductions from the pay of exempt employees for absences due to jury duty, attendance at a court proceeding as a witness, or temporary military leave. Employers are permitted, however, to offset against exempt employees' pay any amounts the employees receive in the form of jury or witness fees or military pay.
Disciplinary Suspensions (What Is Permitted and What Is Not)
The Regulations now allow deductions for "unpaid disciplinary suspensions of one or more full days for infractions of workplace conduct rules," if the suspensions are "imposed pursuant to a written policy applicable to all employees." In a departure from the more strict requirements of the former rule, this new rule will allow partial-week (but not partial-day) suspensions for "workplace conduct" infractions such as sexual harassment, drug use, or workplace violence (but not for more minor matters such as tardiness or performance issues). Out of an abundance of caution, and for the sake of clarity, some legal commentators are now advising employers specifically to add the word "suspension" to their disciplinary policies instead of merely stating "discipline up to and including discharge."
Paid Time Off Policies
Although deductions from pay for partial-day absences generally are not permitted under the Regulations, the Regulations provide that, so long as all other applicable pay-deduction rules are followed, employers may dock exempt employees' leave banks in partial-day (including hourly) increments for hourly vacation and sick leave used.
FMLA Leaves of Absence
There is one instance under the Regulations where employers are permitted to make partial-day deductions from the pay of exempt employees. In particular, the Regulations permit employers to make deductions from the pay of exempt employees in increments proportionate to time taken off by such employees pursuant to the Family and Medical Leave Act ("FMLA"). This exception to the general rule was crafted in recognition of the FMLA's specific requirements that covered employers permit employees to take up to 12 weeks of unpaid leave during a 12-month period for FMLA-qualifying reasons, and that they permit employees to take such leave in partial-day increments.
Safe Harbor
The Regulations provide employers with a so-called "safe harbor," which allows an employer to escape losing the exempt status of one or more employees as a result of an improper deduction if the employer (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good-faith commitment to comply in the future. This safe harbor is not available to an employer that willfully violates the policy by continuing to make improper deductions after receiving employee complaints. When it promulgated the Regulations, DOL promised it would publish a model safe-harbor policy. DOL has made good on this promise, and has published a model safe harbor policy. This model policy is available on the DOL's website, at: http://www.dol.gov/esa/regs/compliance/whd/fairpay/modelPolicy_PF.htm.
The FLSA contains dozens of exemptions from its overtime pay requirements, the most common of which are the so-called "white collar" exemptions for executive, administrative, and professional employees, computer professionals, and outside sales employees. Under the new regulations ("Regulations") promulgated by the Department of Labor, to qualify for the white collar exemption from the overtime pay requirements of the FLSA, employees must satisfy certain specific duties tests, and generally also must be paid more than $455 per week on a salary basis.
Employees paid on a salary basis regularly receive a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. Subject to the limited exceptions noted below, an exempt employee must receive the full salary for any week in which the employee (i) performs any work, regardless of the number of days or hours worked, or (ii) is "ready, willing, and able" to work but cannot do so because no work is available. The key concept behind this general rule is that paying an employee a salary implies that the employee has discretion to manage his or her time. Such an employee is paid for the general value of his or her services, not the number of hours worked, which is the very reason he or she is not entitled to overtime pay.
An employer cannot reduce this predetermined amount because of variations in the quality or quantity of the employee's work. If adjustments are made, then the employee is not paid on a "salary basis," and the employee's exempt status is destroyed, along with the exempt status of other employees in the same job classification who work for the same managers responsible for the improper deductions. If the employee is "ready, willing, and able" to work, deductions may not be made for time when work is not available.
An employer will also lose the exemption for an employee or a class of employees if it has an "actual practice" of making improper deductions from salary. Factors considered by DOL when determining whether an employer has an actual practice of making improper deductions include, but are not limited to the following: the number of improper deductions made by the employer, particularly as compared to the number of employee infractions warranting deductions; the time period during which the employer made improper deductions; the number and the geographic location of both the employees whose salary was improperly reduced and the managers responsible; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. If an "actual practice" is found, exemptions will be lost for the time period in which improper deductions were made. This is true not only for the employees originally affected, but for all employees in the same job classification who work for the managers responsible for the deductions.
Deductions for Part-Day Absences
Except in the case of intermittent leave taken under the FMLA (discussed below), the Regulations do not allow employers to make deductions from the pay of an exempt employee in less than full-day increments. Full-day increments are allowed in either of the following two instances: (i) when the exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability, and (ii) when the exempt employee is absent from work for one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness.
Deductions for Absences for Jury Duty, Attendance as Witness, or Temporary Military Leave
Employers may not make deductions from the pay of exempt employees for absences due to jury duty, attendance at a court proceeding as a witness, or temporary military leave. Employers are permitted, however, to offset against exempt employees' pay any amounts the employees receive in the form of jury or witness fees or military pay.
Disciplinary Suspensions (What Is Permitted and What Is Not)
The Regulations now allow deductions for "unpaid disciplinary suspensions of one or more full days for infractions of workplace conduct rules," if the suspensions are "imposed pursuant to a written policy applicable to all employees." In a departure from the more strict requirements of the former rule, this new rule will allow partial-week (but not partial-day) suspensions for "workplace conduct" infractions such as sexual harassment, drug use, or workplace violence (but not for more minor matters such as tardiness or performance issues). Out of an abundance of caution, and for the sake of clarity, some legal commentators are now advising employers specifically to add the word "suspension" to their disciplinary policies instead of merely stating "discipline up to and including discharge."
Paid Time Off Policies
Although deductions from pay for partial-day absences generally are not permitted under the Regulations, the Regulations provide that, so long as all other applicable pay-deduction rules are followed, employers may dock exempt employees' leave banks in partial-day (including hourly) increments for hourly vacation and sick leave used.
FMLA Leaves of Absence
There is one instance under the Regulations where employers are permitted to make partial-day deductions from the pay of exempt employees. In particular, the Regulations permit employers to make deductions from the pay of exempt employees in increments proportionate to time taken off by such employees pursuant to the Family and Medical Leave Act ("FMLA"). This exception to the general rule was crafted in recognition of the FMLA's specific requirements that covered employers permit employees to take up to 12 weeks of unpaid leave during a 12-month period for FMLA-qualifying reasons, and that they permit employees to take such leave in partial-day increments.
Safe Harbor
The Regulations provide employers with a so-called "safe harbor," which allows an employer to escape losing the exempt status of one or more employees as a result of an improper deduction if the employer (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good-faith commitment to comply in the future. This safe harbor is not available to an employer that willfully violates the policy by continuing to make improper deductions after receiving employee complaints. When it promulgated the Regulations, DOL promised it would publish a model safe-harbor policy. DOL has made good on this promise, and has published a model safe harbor policy. This model policy is available on the DOL's website, at: http://www.dol.gov/esa/regs/compliance/whd/fairpay/modelPolicy_PF.htm.
Copyright 2005. Published for general informational purposes only, and should not be construed as legal advice. If you need legal advice please consult with your attorney.