Recent Opinions Interpret The FLSA Salary Requirements For Exempt Employees

May 5, 2006

Recent determinations illustrate the importance of ensuring your policies and practices for paying exempt employees comply with the salary basis test under the Fair Labor Standards Act ("FLSA").  The FLSA requires exempt employees to be paid on a salary basis and permits deductions from that salary in limited circumstances.  A recent decision from the Sixth Circuit Court of Appeals highlights the importance of having a written pay policy that protects employers from the harsh consequences of an improper deduction.  Also, two recent opinion letters from the Department of Labor ("DOL") demonstrate how strictly the DOL construes the permitted deductions.

An employer may make deductions from an exempt employee's salary in the following circumstances: (1) where no work is performed in a workweek; (2) for absences in the initial and terminal weeks of employment; (3) for full-day absences for personal reasons (other than sickness or disability); (4) as a penalty for a violation of a safety rule of major significance; (5) for full-day disciplinary absences for workplace misconduct; (6) for partial-day absences for unpaid leave under the Family and Medical Leave Act; (7) for full-day absences occasioned by sickness or disability that are deducted in accordance with a plan that pays for certain absences; and (8) as an offset for payments received in return for jury, witness, and temporary military service. 

Subject to these exceptions, exempt employees must receive their predetermined salary.  A recent DOL opinion letter states that an employer may require exempt employees to record their hours, to work a certain amount of hours in a week, and to make up lost work time caused by personal absences of less than a day.  However, the DOL warned that an employer cannot dock the employees' pay for violating these policies because the docking would not qualify as an authorized deduction. 

An employer also cannot deduct from an exempt employee's salary or require the employee to reimburse the employer for damage to or loss of company equipment, like a cell phone or laptop.  The DOL declared that the authorized deductions did not contemplate fining an employee for damage to or loss of company equipment.  Such a deduction would violate the salary basis test. 

The consequences of an unauthorized deduction can be drastic.  An employer may lose the exemption for all employees in the same class, unless the deduction is an isolated or inadvertent mistake and reimbursement is made.  The employees may also remain exempt if the employer has a written and distributed "safe-harbor" pay policy that prohibits unauthorized deductions, includes a complaint procedure, and reimburses the employee.  A recent decision from the Sixth Circuit demonstrates the importance of having such a policy.

In Acs v. Detroit Edison Co., the court held that employees' sporadic time-entry errors that occasionally resulted in payments of less than the salary did not alter the exempt status of the employees.  The employer had a written pay policy that required employees to report their hours each week.  Under the payroll system, an exempt employee's failure to report the required 80 hours in a biweekly pay period could mistakenly result in a payment below the employee's salary.

The Sixth Circuit stated that a "relatively low number of shortfalls caused by human error" were not unlawful deductions "in the typical sense (e.g. such as a prohibited disciplinary deduction)."  The employees did not lose their exempt status because the employer had a pay adjustment process for correcting employee time-entry errors or omissions and a written pay policy expressly prohibiting unlawful deductions.  Given the employer's written policy and the low number of mistakes, the court reasoned that the deductions were inadvertent.

Employers should have a written pay policy that specifically outlines the authorized deductions, prohibits other unauthorized deductions, and incorporates the safe-harbor provisions of the FLSA.  If you need assistance reviewing your pay policy, please contact an attorney in our Labor and Employment Department.

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