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THIS WEEK'S E-TIP: Exempt Employees and the Salary Basis Test (Part 1 of 2)
May 2, 2006, Volume 8, No. 18
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THIS WEEK'S E-TIP: Exempt Employees and the Salary Basis Test (Part 1 of 2)

The FLSA regulations that took effect in August 2004 clarify some key
definitions for exempt employees, but most employers still have
questions about what it means to be paid on a "salary basis." If you get it
wrong, you could owe big penalties and even be personally liable for
your mistakes.
 
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THIS WEEK'S E-TIP: Exempt Employees and the Salary Basis Test (Part 1 of 2)

It has been over 18 months since the new Fair Labor Standards Act
(FLSA) exemption regulations took effect (on August 23, 2004), and
employers seem to be applying the updated definitions fairly well.
(Exempt employees are those who, because of the nature of their job
duties and the fact they generally are paid on a salary basis, are not
subject to FLSA minimum wage and overtime requirements.) However,
while many seem to be able to classify employees correctly based on the
"job duties" test, you may still be having trouble with the "salary basis"
test.

Many common practices, such as tracking hours worked or not giving
paid sick days or holidays, may affect the salary basis determination and
the exempt classification. Your E-Tips Editors have analyzed the FLSA
statute, the new exempt regulations, and recent court cases to answer
eleven common questions concerning the salary basis requirement.

In this week's E-Tips, you will find out what it means to be paid on a
"salary basis," whether you have to provide paid days off, and how to
treat absences related to military leave and inclement weather.

In next week's E-Tips, you will learn whether you can make deductions
for partial day absences and disciplinary suspensions, whether you can
require exempt employees to work a set number of hours or track their
work hours, and when you can provide exempt employees with extra
compensation. In addition, we will address your potential for personal
liability for exemption decisions and the growing incidence of HR
professionals being targeted personally as defendants in employment
legal actions against the employer.

1. What does it mean to be paid on a salary basis?

To be exempt from the FLSA, and not entitled to overtime, an employee
must meet certain job duty requirements, often involving managerial
skills or the use of independent judgment and discretion, and be paid on
a "salary basis." The FLSA regulations provide for six broadly used
classifications of exemptions, including:
  1. Administrative employees,
  2. Executive employees,
  3. Professional employees,
  4. Outside sales employees,
  5. Highly skilled computer-related employees, and
  6. Highly compensated employees.

Salary basis is defined as the payment on a weekly or less frequent
basis of a predetermined amount that constitutes all or part of
compensation, without reductions for variations in the quality or quantity
of the work performed. Under this definition, exempt employees
generally must receive their full salary for any week in which they
perform work, without regard to the number of days or hours worked.
However, payment usually is not required if the employee does not
perform any work during the entire week.

Some exempt salary deductions may be made, but only in limited
circumstances (discussed in today's and next week's E-Tips). You also
should note, however, that the FLSA regulations indicate that doctors,
lawyers, and teachers (typically categorized as professional exempt
employees) and computer-related employees paid at least $27.63 an
hour do not have to be paid on a salary basis to be considered exempt.

 
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2. Do we have to give paid vacation days, sick days, and holidays
to exempt employees?

Paid time-off generally is considered a benefit given at the employer's
discretion. However, if you make deductions from an exempt
employee's salary for unpaid time-off, you should be sure that the
deductions do not violate the salary basis test, or you may lose the
exemptions. The type and amount of time off determine whether you
can make the deductions.

-- Vacation. According to the FLSA regulations, you may make a pay
deduction when an employee is absent for a full day for personal
reasons. Thus, if you do not provide paid vacation or personal days, you
may deduct the day off from the employee's salary. Similarly, if you give
paid vacation days and the employee has used them all, you may deduct
any additional full-day personal time-off.

-- Sick leave. You also may make deductions for a full day's absence
due to illness or injury if you have a bona fide plan, policy, or practice
that provides compensation for loss of salary due to sickness or
disability. A policy that allows employees to accrue paid sick leave is an
example. This deduction is permissible even if the exempt employee
has not yet qualified for the plan or has exhausted the plan's sick leave
allowance. However, according to the regulations, if you do not have a
paid sick leave plan, you may not deduct the day from the employee's
salary if the employee has worked any day that week. An exception to
this rule is sick leave taken under the Family and Medical Leave Act
(FMLA). The FMLA allows deductions from an exempt employee's
salary for leave required by the FMLA.

-- Holidays. The FLSA regulations do not specifically allow deductions
for holidays. Therefore, you should not make deductions from an
exempt employee's pay for holidays not worked.

3. Do we have to pay exempt employees when work is not
available?

Yes. You may not make deductions from an exempt employee's salary
for absences caused by the employer or by the operating requirements
of the business. Thus, if the exempt employee is ready, willing, and able
to work, you must pay for the time when work is not available.

4. What about for jury duty and military leave?

If an employee is absent for part of a week because of jury duty,
attendance as a witness, or temporary military leave, you must pay for
the full week. Deductions for partial week absences caused by these
situations are not permitted. You may offset any military pay or
monetary payments received as jury or witness fees for a particular week
against the employee's salary for that same week. Remember, however,
that you do not have to pay if the employee is absent for the entire week
and does not perform any work during that time.

5. Do we have to pay exempt employees on days they cannot work
because of inclement weather?

Exempt employees generally should be paid for full-day absences
resulting from inclement weather if the employer is closed. If the
employer is open, the Department of Labor has indicated in opinion
letters that employers may require exempt employees to use a paid day
off or even dock their pay for a full day absence if they do not come to
work. However, courts may not agree with this position, so employers
that make deductions from exempt employees' pay for absences caused
by inclement weather should weigh this option carefully.

Next week: Deductions for partial day absences and disciplinary
suspensions, requiring exempt employees to work a set number of hours
or track their work hours, and providing exempt employees with extra
compensation. Plus, your potential for personal liability for exemption
decisions.
 
 
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