HR MATTERS E-TIPS
THIS WEEK'S E-TIP: Exempt Employees and the Salary Basis Test (Part 2 of 2)
May 9, 2006, Volume 8, No. 19
Published by Personnel Policy Service, Inc.
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^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ THIS WEEK'S E-TIP: Exempt Employees and the Salary Basis Test (Part 2 of 2) Making sure you pay your exempt employees on a "salary basis" can be difficult. Find out if you can make deductions from exempt employee pay for partial day absences, when you can make disciplinary deductions, and whether you can add extra compensation. The stakes are high because, if you get it wrong, you could be personally liable. |
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THIS WEEK'S E-TIP: Exempt Employees and the Salary Basis Test
(Part 2 of 2) In last week's E-Tips, you found out what it means to be paid on a "salary basis" under the Fair Labor Standards Act (FLSA) exemption regulations. In addition, you learned whether you have to provide paid days off and how to treat absences related to military leave and inclement weather. (If you missed that issue, please click here for a copy.) In this week's E-Tips, you will learn whether you can make deductions for partial day absences and disciplinary suspensions and if you can require exempt employees to work a set number of hours or track their work hours. Also, you will learn when you can provide exempt employees with extra compensation. Finally, we discuss your potential for personal liability in making exemption decisions and the growing incidence of HR professionals being targeted personally as defendants in employment legal actions against the employer. 1. May we make deductions from an exempt employee's salary for partial day absences? No. Generally, the FLSA regulations indicate that if you make deductions from an exempt employee's pay for absences of less than a day, you are considered to be treating the employee as an hourly worker, instead of as an exempt employee paid on a salary basis. Thus, you could be liable for any overtime worked by the employee, as well as all other exempt employees subject to your policy allowing deductions for partial day absences. (As discussed in last week's E-Tips, you may make deductions for certain full day absences.) Many employers have attempted to avoid the partial day docking issue by requiring exempt employees to use paid leave for these absences. The Department of Labor (DOL), the agency that enforces the FLSA, traditionally has permitted this type of arrangement since the employee does not experience an actual reduction in salary. And, in the comments to the new regulations, the agency specifically acknowledges that employers may make deductions from exempt employee leave accounts without jeopardizing the employee's exempt status. (Of course, if the employee does not have any accrued paid time, you cannot deduct a partial day from his salary.) A number of courts have sided with the DOL's position on this issue. However, other courts have disagreed and have determined that this practice does, in fact, treat an exempt employee like an hourly, nonexempt employee and, therefore, causes loss of the exemption. Because of the split in the courts, you should consult legal counsel before acting on this matter if you are a private sector employer. (Special rules apply to exempt public sector employees allowing them to be considered exempt even if their pay is reduced for partial day absences.) As a practical matter, though, you may find that exempt employees resent being required to use paid leave for partial day absences, particularly if they regularly work more than 40 hours per week. Under this type of policy, they are not entitled to additional pay when they put in long hours, but are required to use vacation or sick leave if they need a few hours off. Finally, as discussed in last week's E-Tips, the FMLA allows employers to require the use of accrued paid leave for partial day absences for any hours taken as intermittent or reduced FMLA leave, without affecting the employee's exempt status. 2. May we make deductions for disciplinary reasons, such as a suspension? Under the 2004 regulations, you may suspend an exempt employee without pay for one or more full days in limited circumstances involving infractions of workplace conduct rules. (Previously, employers could suspend an exempt employee without pay only for a full week.) To apply this the deduction, you must have a written policy alerting exempt employees that they may be subject to an unpaid disciplinary suspension that is applied to all employees. Note, too, that comments to the final rule point out that the term "workplace conduct" covers only inappropriate conduct, which includes harassment, violence, drug or alcohol violations, and violations of state or federal laws. The term does not cover performance or attendance issues. In addition, you may make deductions for penalties imposed for infractions of "safety rules of major significance." These deductions can be in full or partial day increments. Covered infractions include rules relating to the prevention of serious danger to the worksite or to other employees, such as no smoking rules in explosives plants, oil refineries, and coal mines. 3. If an exempt employee works only part of the first or last week of employment, do we have to pay the full week? No. You are not required to pay the full salary in the initial or terminal week of employment if the employee only works a portion of the week. You may pay a proportionate part of the salary. 4. May we require exempt employees to work 40 hours a week or to be at work during set times? If you require exempt employees to work a specific number of hours or arrive at a specific time, you may appear to be treating them like nonexempt employees and, thus, may jeopardize their exempt status. Instead of focusing on the number of hours an employee works or the starting and ending time, you are better advised to focus on the employee's job requirements and output. So, for example, if an exempt manager supervises employees who must be at work from 8:00 a.m. until 4:30 p.m., it would be appropriate to require the manager to be available during those working hours to supervise the employees. 5. May we pay exempt employees extra compensation? Generally, you may pay extra compensation to exempt employees without jeopardizing the exemption or violating the salary basis requirement. The 2004 regulations clarify the circumstances under which you may make these additional payments. Specifically, if the exempt employee is guaranteed a minimum weekly payment of $455, you also may pay a commission on sales or a percentage of profits or sales, or even additional compensation based on hours worked beyond the normal workweek. This additional compensation can be paid on any basis, including a flat sum, bonus payment, straight-time hourly amount, time and one-half, or any other basis, including paid time-off. 6. May you keep track of the number of hours exempt employees work? Yes, as long as this requirement does not affect their pay. The DOL preamble to the 2004 exemption regulations specifically states that employers may require exempt employees to record and track hours without affecting their exempt status. If, however, you require exempt employees to account for their work time on an hourly basis, you may jeopardize their status if the accounting has the effect of treating them like hourly workers. For example, if the employee's salary fluctuates based on the number of hours worked, the employee most likely will not be considered exempt. Thus, you may keep track of hours worked for other purposes unrelated to the employee's pay, such as to account for work time to be billed to clients or for performance under a federal contract. You also may record daily attendance. Monetary Penalties and Your Personal Liability The revised exemption regulations do provide guidance for employers on how to implement the salary basis test. But, they also create a number of requirements that can be difficult to comply with, particularly when it comes to disciplinary deductions and partial day absences. So, even if you properly classify employees as exempt initially, you can lose the exemption if your policies do not adhere to the salary basis test. Under the FLSA, the loss of exemption can be expensive. Specifically, the employer can be liable for back overtime pay for up to two years for any employee who is misclassified as exempt. This back pay liability typically is extended to three years if you are found to have willfully (intentionally) violated the law. Perhaps even more importantly, a single misclassification can trigger a loss of exemption for an entire group of employees if the rest of the group has been treated similarly under your organization's policies and practices. And as a final legal wake-up call, some recent court decisions interpreting the FLSA have found that the individual decision-maker can be personally liable for any violations under the Act. In other words, you could be personally responsible for any back pay and other penalties. Accordingly, you need to take extra care to make sure you are not exposing your organization or yourself to unnecessary legal actions. The best way to do this is to be familiar with the FLSA regulations, in particular the regulations dealing with the salary basis requirements, and then document your exempt classification and deduction decisions. A good starting point is to compare your policies that affect exempt employee pay with the eleven questions and answers addressed in both this week's and last week's HR Matters E-Tips. |
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Subscribers to the Personnel Policy Manual and HR Policy Answers on
CD can find more information on exempt employees and the salary basis test in Hours of Work, Chapter 207, notes 24 to 32. |
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