The Effect of Improper Deductions on Exempt Status Under the FLSA

White-collar exemptions from the minimum wage and overtime requirements are the most common exemptions under the Fair Labor Standards Act (FLSA).  The second of the three tests used to determine whether an employee is covered by the white-collar exemption is the Salary Basis Test.  If exempt employees’ pay is subject to improper deduction, the exemption may be lost and the employer could be liable for unpaid overtime wages. 

Deductions from the employees’ predetermined salary are improper when 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. 

Payroll Practices that Constitute Improper Deductions

Some examples of improper deductions include:

  • Deduction for a partial-day absence to attend a parent-teacher conference;
  • Deduction of a day of pay because the employer was closed due to inclement weather;
  • Deduction of three days of pay because the employee was absent from work for jury duty, rather than merely offsetting any amount received as payment for jury duty;
  • Deduction for a two-day absence due to a minor illness when the employer does not provide wage-replacement benefits for such absences.

Payroll Practices that Do Not Constitute Improper Deductions

There are some exceptions from the no-pay-docking rule.  In these situations, the employer will not lose the exemption by deducting pay from the employee’s salary:

  • The employee is absent from work for one or more full days for personal reasons, other than sickness or disability;
  • The employee is absent from work for one or more full days due to sickness or disability if deductions made under a bona fide plan, policy, or practice of providing wage-replacement benefits for these types of absences;
  • To offset any amounts received as payment for jury fees, witness fees, or military pay.*
  • Penalties imposed in good faith for violating safety rules of “major significance;
  • Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of written workplace conduct rules;
  • Proportionate part of an employee’s full salary may be paid for time actually worked in the first and last weeks of employment.

*Note that, in some states, employers are prohibited from offsetting wages for these items.

Some additional payroll practices that do not violate the salary basis test include:

  • Taking deductions from exempt employees’ accrued leave accounts;
  • Requiring exempt employees to keep track of and record their hours worked;
  • Requiring exempt employees to work a specified schedule; and
  • Implementing bona fide, across-the-board schedule changes.

Effect of Improper Deductions

An actual practice of making improper deductions from salary will result in the loss of the exemption.  To determine whether an actual practice exists, some of the factors include:

  • 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 both the employees whose salaries were 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 to exist, the exemption will be lost only:

  • during the time period in which improper deductions were actually made
  • for employees in the same job classifications
  • working for the same managers responsible for the actual improper deductions.

flsa example

Using the organization chart above as an example:

  • If Manager A has docked the pay of Engineer A on each of 12 days when Engineer A arrived late to work during the last 3 months,
  • The exemption could be lost only for Engineer A and Engineer B and
  • The exemption could be lost only during those 3 months
  • But the exemption could not be lost for Chemist or for Engineers C or D.

This is because the exemption can be lost only  (1) during the time period when improper deductions were made (the 3-month period); (2) for employees in the same job classification (which is why Chemist’s exemption would not be lost); and (3) who work for the same manager as was responsible for the improper deductions (which is why Engineers C and D do not lose their exemptions).

The Safe Harbor Provision

If no actual practice is found to exist, the employer may be able to take advantage of the Safe-Harbor provision.  Isolated or inadvertent improper deductions will not result in the loss of exempt status if the employer reimburses the employee in accordance with the Safe Harbor provision.  The Safe Harbor provisions provides that the exemption will not be lost if the employer:

  • Has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism;
  • Reimburses employees for any improper deductions; and
  • Makes a good faith commitment to comply in the future
  • Unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.
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