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Pay and Absence Concerns for “Exempt” Employees

Bob Gregg | 06.13.18

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, $23,660 per year, as of December 1, 2016, and meet certain requirements in order to be validly ​“exempt.” [The DOL 2016 Rule revisions changing the salary base to $47,476 and/​or $913 weekly, are on indefinite hold, and may not take effect.]

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 for less than full-day absences. So, even though you can allow salaried employees to use paid leave in part-day increments, any ​“advances” against leave cannot be recouped for part days — only full days. 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 DOL rules 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 Clark Law Firm)

Extra Compensation

The 2004 DOL rule revisions allowed extra compensation for overtime 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

Section 541.604(b) provides 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 $913 per week if the employee worked 40 hours. Thus, an artist paid $500 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 $1,000 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. 

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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