EXEMPT SALARY BASIS A WAGE AND HOUR REQUIREMENT EVERY EMPLOYER SHOULD FULLY UNDERSTAND. Written by: Cheryl J. Lopez, Vice President July 9, 2013

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1 A WAGE AND HOUR REQUIREMENT EVERY EMPLOYER SHOULD FULLY UNDERSTAND Written by: Cheryl J. Lopez, Vice President July 9, 2013 About the Author Cheryl Lopez is Vice President at WhitneySmith Company, a full service human resources consulting firm in Fort Worth, Texas. Cheryl provides human resources consulting services to business clients in a variety of industries. Cheryl is certified as a Professional in Human Resources (PHR) through the HR Certification Institute of the Society of Human Resource Management; certified as a Compensation Professional (CCP) through WorldatWork Society of Certified Professionals, licensed as a private investigator in employment matters through the Texas Private Security Bureau of the Texas Department of Public Safety, and has numerous training hours in conflict resolution, negotiation, mediation, and arbitration. Cheryl has extensive human resources experience with concentration in the areas of compensation, employee relations, training, expert witness testimony, HR legal and regulatory compliance, equal employment opportunity, investigations, and performance management systems. Cheryl is a graduate of Texas Wesleyan University. Cheryl is a past president of the Fort Worth Human Resources Management Association. Cheryl has served as an adjunct professor at Fort Worth universities and serves on Fort Worth civic and charitable Boards.

2 Base Salary Requirements to be Exempt from FLSA Coverage Business and human resources professionals frequently hear the term exempt salary basis. But what is it, really? It is a term that describes the base salary requirement for an employee to be classified as exempt from the minimum wage and overtime provisions of the Fair Labor Standards Act. The Wage and Hour Division of the Department of Labor has the authority for promulgating the white collar exemption classification rules. The salary basis test is only one part of the determination as to whether a job can be classified as exempt. Sometimes employers are misguided on this provision of the law. Many employers have made the mistake of assuming that a job is exempt simply because the employee is paid a base salary. This is a very risky presumption, especially since it is entirely acceptable for nonexempt employees to be paid a base salary yet still be covered by the FLSA minimum wage and overtime requirements. Although very important to the exempt classification test, the salary basis requirement is only part of the test but such an important part of the test that is should be the very first consideration when analyzing the exemption status of a job. Let s make sure we fully understand Exempt Salary Basis and see how an employer can inadvertently change an otherwise exempt employee into a nonexempt employee by not fully understanding the salary basis test. Guaranteed Salary Week to Week Exempt salary basis means regularly receiving a predetermined amount of compensation on a weekly or less frequent basis such as biweekly, semimonthly, or monthly. This set amount must be paid on a consistent and regular basis and not be subject to reduction for variations in the quality or quantity of work performed or for lack of available work by the employer. Exempt employees should receive a guaranteed salary from week to week when any work is performed. A common mistake made by employers is to make deductions from exempt employees guaranteed salary for reasons not allowed under federal law. Employers must become knowledgeable of the wage and hour law and be aware that there are only a few exceptions for making deductions from the guaranteed salary of an exempt employee. No Work Performed in a Workweek An employee paid on an exempt salary basis must be paid the full salary for any week in which the employee performs any work for the employer. Something that confuses this salary basis requirement is the provision in the law that stipulates that an exempt employee need not be paid their guaranteed salary if they perform no work in a given week. It is presumed that no employment relationship exists when an exempt employee performs no work in a given workweek; therefore, the employer is not obligated to pay the exempt employee the weekly salary for the workweek in which the employee performs no work. Docking is Allowed in Full Days So when can an employer make deductions from an exempt employee s salary? Well, there are limited situations when docking of an exempt employee s salary is permitted. With some slight 1

3 variations, docking can occur but must be in full days. Full day docking is permitted when exempt employees absent themselves for personal reasons, when they have exhausted all paid time off that typically would be used to compensate an exempt employee when they are ill (sick leave), or when a major policy violation is made by the exempt employee such as harassment in the workplace. Of course, depending upon the severity of the workplace harassment or policy violation, other disciplinary action including termination may be appropriate. The fact of the matter is if the policy violation is serious but not deemed a terminable offense; the exempt employee can be suspended from work without pay in full days. Interestingly, before the 2004 update to the FLSA regulations, in order to suspend an exempt employee without pay, the employer had to suspend the employee in full week(s) because disciplinary docks were not a permitted exception. With the 2004 update, exempt employees can be disciplined with suspension of pay in full days for serious policy violations. Remember, the employment relationship is not deemed to exist if an exempt employee performs no work for the entire week. So before the 2004 update, employers could only suspend without pay in full weeks as a form of discipline. Today, employers can suspend an exempt employee without pay for policy violations in full days. Docking is Allowed in Partial Days in Limited Circumstances There are two unique occurrences when an employer may dock an exempt employee s salary in ways other than full days. The regulations permit docking in any amount when a serious safety violation occurs in which the exempt employee is responsible. The regulations also permit docking in partial days when an exempt employee takes a bona fide unpaid Family and Medical Leave of absence. This allows employers to only pay for time worked by the exempt employee on days in which the employee is absent due to FMLA reasons without jeopardizing the exemption status of the employee. When Business is Slow During slow economic times, some businesses experience a slowdown in production or operating business activities resulting in layoffs, shift closings, or reduced work schedules. Because an exempt employee must be paid on a salary basis, a deduction from the weekly pay for lack of work is prohibited. The FLSA deems that an employee is not paid on a salary basis if deductions from the predetermined salary 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. Here again, an exempt employee need not be paid for any workweek when no work is performed. So if the employer shuts down in full week(s) as some businesses do, or if the employer has a practice of shutting down at the end of the year or some designated time, exempt employees need not be paid when the business is closed for the full week. Permitted Exceptions for Docking So, when can an employer make deductions from an exempt employee s salary? There are seven 2

4 (7) exceptions to the guaranteed base salary requirement. Let s take a look at all seven permitted exceptions in detail with examples of workplace application of the exceptions. 1. An absence from work for one or more full days for personal reasons. Example: An exempt employee needs to take the entire day off on Monday to appear in court for a personal matter. The employee does not have paid time off to use so the employee absents himself for personal reasons on Monday. The employee returns to the job on Tuesday and works the rest of the week so the employer may dock the exempt employee s pay for one full day. 2. An absence of one or more full days due to sickness or disability if the employee is covered under a bona fide plan, policy, or practice of providing wage replacement benefits for illnesses. Example: An exempt employee works for an employer that provides sick leave benefits through a paid time off or sick leave plan. The employee is out sick for the full day on Wednesday due to a non-fmla illness but has exhausted all sick time benefits. The employer may dock the exempt employee s pay for one full day. Please make note: If the employer does not provide a bona fide sick leave or paid time off plan for illnesses, the base salary of the exempt employee in this example could not be docked for the non-fmla illness. 3. Absences for jury duty, witness duty, or military duty where the exempt employee receives some form of payment for the service can have the salary offset by the amounts received for such service. Example: An exempt employee is summoned to appear for jury duty. The exempt employee does not perform any work on Monday, Tuesday, and Wednesday due to jury duty service. The exempt employee is released from jury duty, receives jury duty pay for three days, and returns to the job and works Thursday and Friday. The employer may offset the exempt employee s weekly salary by the amount of jury duty pay received for the three days of jury duty service. Please make note: If the employee works any part of the workweek when absences for jury duty, witness duty, or military duty occur, the employee s full salary must be paid. No docks are allowed for these reasons; only offsets by payments received by the employee for the service. If the exempt employee is absent for the full week, no employment relationship is deemed to exist for that week and the guaranteed salary is not required to be paid. 4. Penalties imposed in good faith for violating safety rules of major significance; a deduction from pay as a penalty for violating a safety rule of major significance can be made in any amount. Example: An exempt employee violates the employer s safety policies or rules relating to the prevention of serious danger in the workplace or to other employees. The safety rules of major significance include prohibiting smoking in explosive plants, oil refineries or coal mines and the employer s safety rules include dollar penalties for related violations. The exempt employee violated a safety 3

5 rule of major significance and the employee s pay is docked for $350 as a penalty according to the employer s safety rules. 5. Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of written workplace conduct rules. Example: An exempt employee violates a major company policy that is conduct related on Tuesday. The employer determines the seriousness of the offense and determines that disciplinary action is appropriate. The employer may suspend the employee without pay for the rest of the week and dock the base salary for Wednesday, Thursday, and Friday for the workplace misconduct. 6. Proportionate part of an employee s full salary may be paid for time actually worked in the first and last weeks of employment. Example: An exempt employee s first day of employment starts on Thursday so the employee works Thursday and Friday of the first week. The employer need only pay for Thursday and Friday of the first week of employment. Alternatively, an exempt employee s last day of employment occurs on Tuesday so the employee works Monday and Tuesday of the last week of employment. The employer need only pay for Monday and Tuesday of the last week of employment. 7. Unpaid leave taken for a Family and Medical Leave (FMLA) reason. Example: An exempt employee is on an intermittent Family and Medical Leave of absence and has no available paid time off benefits available. The exempt employee must receive medical treatment every Tuesday and Thursday from 1:00 p.m. to 5:00 p.m. for an indefinite period of time. Due to the necessary medical treatment, the exempt employee misses 4 hours of work on Tuesdays and 4 hours on Thursdays until the need for the intermittent FMLA leave is over. The employer may dock the exempt employee s pay 4 hours on Tuesdays and 4 hours on Thursdays due to the absences being for FMLA reasons. Charging Paid Time Off Accounts Paid Time Off accounts including sick leave and vacation can be charged in any increments according to the employer s policy or practice. When an exempt employee is absent from work for a partial day, the employer may charge the exempt employee s paid time off account for the time off to make up the full day of pay for the exempt employee. In situations when the exempt employee does not have enough accumulated or available paid time off time to make up to the salary for the full day, the employer cannot dock the employee s guaranteed salary for the difference. Remember, when an exempt employee has exhausted all paid time off benefits, the employer may only dock the salary in full days; not partial days (unless the time off is related to a FMLA reason). Charging paid time off accounts in partial days is permitted, but docking the exempt employee s salary in partial days is not. Effect of Improper Deductions What happens if employers make improper or illegal docks? If the improper docking shows an actual practice of making improper docks from the guaranteed salary, the 4

6 exemption will be lost. The exemption can be lost during the time period in which the improper deductions were made and for all employees in the same job classifications working for the same managers responsible for the actual improper deductions. The FLSA places strict accountability on managers to comply with the law. Usually a manager has the authority to make pay decisions for their employees including docking pay. Payroll administrators typically follow the pay requests made by managers so the actual practice and accountability for FLSA salary basis compliance will fall on the manager. Fortunately, the loss of exempt status will not result for isolated or inadvertent improper deductions if the employer reimburses the employee. Safe Harbor for Employers How can an employer prevent potential violations of the salary basis requirements by managers? The exemptions will not be lost if the employer has a clearly communicated policy prohibiting improper deductions. The policy must include a complaint procedure for the exempt employee to report the improper deduction. Again, the employer must reimburse the employee for the improper deduction to avoid the loss of the exemption. And to completely rely upon this safe harbor, the employer must make a good faith commitment to comply with the rules in the future. The safe harbor is not available if the employer willfully violates the policy by continuing to make improper deductions from the salary after receiving employee complaints about such deductions. DOL Decisions and Guidance Through Interpretive and Opinion Letters The requirements of the FLSA are set by statutes and regulations. The Wage and Hour Division of the Department of Labor is responsible for enforcing the FLSA. The Wage and Hour Division issues Administrator Interpretations Letters that provide a general interpretation of the law and regulations applicable across the board to all affected by the provision at issue. Also, the Wage and Hour Division issues Opinion Letters that are responses to fact-specific requests from individuals and organizations that explain the requirements of the statutes and regulations and how they apply in the context of a specific factual situation. An interpretation or ruling issued by the Administrator or acting official interpreting the FLSA is an official ruling or interpretation of the Administrator. Rulings and interpretations signed by other Wage and Hour officials are considered Non- Administrator Letters, and do not constitute official rulings or interpretations. The Administrator Interpretations Letters, Non- Administrator Letters, and Opinion Letters help business and human resources professionals understand how the statutes and regulations have been interpreted by the DOL and provide important guidance for complying with the Act. Let s take a look at excerpts taken from interpretations and rulings made by the respective officials of the Wage and Hour Division relating to exempt salary basis situations. FLSA2003-3NA The exempt employee would be considered to be paid on a salary basis within the meaning of the 5

7 regulations where the employer deducts from his/her pay for full sick day absences after the employee has exhausted his/her paid sick leave. If the absence were covered by the FMLA, the employer could make a pro rata deduction from the exempt employee s salary even for a partial day absence. FLSA We believe that your client could convert recuperating employees to nonexempt pay status during the disability period without jeopardizing the exempt status of other salaried exempt employees who are not on disability. If an employee s change in pay moves them from exempt to nonexempt status, that change does not affect the employee s status during other periods of employment when all the requirements for the exemption are satisfied, absent evidence of an intent to circumvent the salary basis requirement. Such a change to nonexempt pay status will not affect the future exempt status of the rehabilitating employee or other, non-rehabilitating exempt employees. FLSA Where an employer has a benefits plan (e.g., vacation time, sick leave), it is permissible to substitute or reduce the accrued leave in the plan for the time an employee is absent from work, whether the absence is a partial day or a full day, without affecting the salary basis of payment, if the employee nevertheless receives in payment his or her guaranteed salary. Payment of the employee s guaranteed salary must be made, even if an employee has no accrued benefits in the leave plan and the account has a negative balance, where the employee s absence is for less than a full day. The one or more full-day deduction requirement applies to deductions from an employee s salary, as opposed to a leave bank. Moreover, such deductions due to absences related to sickness and disability may only be made, without violating the salary basis of payment requirement, where the employer has a bona fide sick leave plan. A PTO plan may qualify as bona fide even though it is not exclusively for use during sickness or disability. Assuming that a bona fide plan exists, an employer can make deductions from an employee s salary for absences of one or more full days because of sickness or disability before the employee has qualified under the plan and after the PTO/sick leave has been exhausted. Of course, an employer is not required to establish a paid sick leave plan. FLSA It is the Department s view that an employer that remains open for business during adverse weather emergencies may make deductions, for full-day absences only, from the pay of an otherwise exempt employee who chooses not to report for work for the day(s) because of the adverse weather emergencies, and treat any such full-day absence(s) as being for personal reasons under the applicable regulations. Deductions may be made when an exempt employee is absent from work 6

8 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. The Department of Labor considers an absence due to adverse weather conditions, such as when transportation difficulties experienced during a snow emergency cause an employee to choose not to report for work for the day even though the employer is open for business, an absence for personal reasons. Such an absence does not constitute an absence due to sickness or disability. An employer that remains open for business during a weather emergency may lawfully deduct one full-day s absence from the salary of an exempt employee who does not report for work for the day due to the adverse weather conditions. If an exempt employee is absent for one and a half days due to adverse weather conditions, the employer may deduct only for the one full-day absence, and the employee must receive a full-day s pay for the partial day worked, in order for the employer to meet the salary basis rule. If the employer closes operations due to a weather-related emergency or other disaster for less than a full workweek, then the employer must pay an exempt employee the full salary for any week in which the employer performs any work without regard to the number of days or hours worked, because deductions may not be made for time when work is not available. When an employer remains open for business during a weather emergency, and an employee chooses not to report for work for the day due to the adverse weather conditions and/or attendant transportation difficulties, the employee s absence in that situation is considered to be an absence for personal reasons under the applicable regulations. Any fullday deduction from the salary of an exempt employee for such reason will not violate the salary basis rule or otherwise affect the employee s exempt status. FLSA NA An exempt employee paid on a salary basis may also receive additional compensation such as a percentage commission on sales, a percentage of sales or profits, or a payment based on hours worked for work beyond the normal workweek. Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off. Any compensation paid in addition to the guaranteed salary is not inconsistent with the salary basis of payment. The prohibition against improper deductions from the guaranteed salary does not extend to such additional compensation provided to exempt employees. It is our opinion that bad check and other cash shortage deductions from bonus payments paid to salaried exempt employees are permissible and do not affect the employees exempt status. 7

9 FLSA In no event can any deductions from an exempt employee s salary be made for full or partial day absences occasioned by lack of work. Employers can, however, make deductions for absences from an exempt employee s leave bank in hourly increments, so long as the employee s salary is not reduced. If exempt employees receive their full predetermined salary, deductions from a leave bank, whether in full day increments or not, do not affect their exempt status. An employer can substitute or reduce an exempt employee s accrued leave for the time an employee is absent from work, even if it is less than a full day and even if the absence is directed by the employer because of lack of work, without affecting the salary basis of payment, provided that the employee still receives in payment an amount equal to the employee s guaranteed salary. An employee will not be considered to be paid on a salary basis, however, if any deductions from the salary are made for full or partial day absences occasioned by the employer or by the operating requirements of the business. In the case of a permanent change in the work schedule from 52 five-day workweeks to 47 five-day workweeks and 5 four-day workweeks, the salary basis requirement was not circumvented because all the exempt employees were to be paid according to a bona fide reduction of one-fifth of their salaries for a fixed schedule of five annually recurring four-day workweeks. A fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment. Therefore, the exemption would remain in effect as long as the employee receives the minimum salary required by the regulations and meets all the other requirements for the exemption. Unlike a salary reduction that reflects reduction in the normal scheduled workweek and is not designed to circumvent the salary basis, deductions from salary due to day-today or week-to-week determinations of the operating requirements of the business are precisely the circumstances the salary basis test is intended to preclude. Such a plan is, therefore, inconsistent with the guaranteed salary basis of payment required by the regulations. Easy Steps to Ensure Compliance with FLSA Salary Basis Requirements How can employers avoid running afoul of these extensive regulations regarding the exempt salary basis test? Employers can follow these basic steps and avoid problems in the future with complying with the FLSA salary basis requirements. 1. Ensure all exempt employees receive their guaranteed salary for each week in which they perform some work for the employer. 2. When making any deductions from the guaranteed salary of an exempt employee, ensure the 8

10 deductions fall into the permitted exceptions. 3. Remember that most of the permitted deductions that fall into the exceptions to the salary basis test must be made in full days; not partial days. 4. Understand that it is acceptable to charge paid time off benefits in any increments to make up the salary for a full day. 5. Train managers on the requirements of the salary basis test and hold them accountable for improper deductions. 6. Develop and implement a company policy on Exempt Salary Basis that includes all safe harbor requirements and communicate the policy to employees. 7. If inadvertent or improper deductions are made and the employer receives a complaint from an exempt employee, reimburse the employee for the improper deduction as soon as possible. Sources Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Computer and Outside Sales Employees. U.S. Government Printing Office - Keeping America Informed. Electronic Code of Regulations Title 29: Labor, Part June 2013 ed., Print. Disciplinary Deductions. Elaws FLSA Overtime Security Advisor. Accessed: 7/1/2013. Available: < Rulings and Interpretations. United States Department of Labor Wage and Hour Division Website. Accessed: 7/7/2013. Available: < U.S. Department of Labor Wage and Hour Division. Non-Administrator Interpretive Letter FLSA2003-3NA. Washington D.C. 5 May U.S. Department of Labor Wage and Hour Division. Non-Administrator Interpretive Letter FLSA NA. Washington D.C. 3 November U.S. Department of Labor Wage and Hour Division. Opinion Letter FLSA Washington D.C. 25 June U.S. Department of Labor Wage and Hour Division. Opinion Letter FLSA Washington D.C. 7 January U.S. Department of Labor Wage and Hour Division. Opinion Letter FLSA Washington D.C. 28 October U.S. Department of Labor Wage and Hour Division. Opinion Letter FLSA Washington D.C. 16 January U.S. Department of Labor Wage and Hour Division. Comprehensive FLSA Presentation. ONLINE Accessed: 6/25/2013. Available: < 9