FLSA Overtime Exemption & the Appropriateness of Payroll Deductions

14
Mar
2016
Posted by: charlesakrugel  /   Category: Business Management / Charles Krugel / Labor and Employment Law   /   2 Comments »
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Recently, I came across a reporter inquiry concerning deductions from salaried employees. The reporter was under the impression that payroll deductions must be made only in full-day increments; an employer can’t make partial-day deductions. I don’t know the reporter’s source for this belief, but I know it’s not true.

It’s generally true that you’re not supposed to “deduct” compensation from salaried employees, but there’s no law about full or partial deductions for significant safety violations. The one-day rule does apply for disciplinary reasons; e.g., suspending a salaried employee for a half-day without pay for fighting is, in most instances, illegal.

The issue with payroll deductions & salaried employees is that a salaried employee is supposed to earn an established amount of money on an annual, semi-annual or more frequent basis. Any deductions from that amount of money makes the salary classification seem more like a trick to evade paying overtime. This is why deductions are frowned upon, but aren’t necessarily illegal.

The FLSA allows employers to exclude certain types of compensation from salary, but employers have the burden of showing that a particular exception applies. However, the exceptions are construed narrowly in favor of employees. 29 U.S.C. § 207(e); 29 C.F.R. § 778.200(a); Idaho Sheet Metal Workers, Inc. v. Wirtz, 383 U.S. 190 (1996); Arnold v. Ben Kanowsky, Inc., 361 U.S. 388 (1960).)

Employers cannot avoid the regular rate requirement by simply defining payments as excludable or declaring, by policy or agreement, that the regular rate equals the employee’s base rate or some other standard amount. The regular rate is derived from the employee’s total compensation, and whether a payment can be excluded from the regular rate depends on the nature of the payment, not the employer’s characterization. 29 C.F.R. § 778.108; Walling v. Harnischfeger Corp., 325 U.S. 427, 430 (1945); Dietrick v. Securitas Sec. Servs. USA, Inc., 50 F. Supp. 3d 1265, 1270 (N.D. Cal. 2014).

You can also refer to the U.S. Dept. of Labor’s website, http://webapps.dol.gov/elaws/whd/flsa/Overtime/cr5.htm, for this guidance:

“Are there any types of pay deductions that an employer may impose to discipline an employee? An employer may only dock an exempt employee’s pay for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those related to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries or coal mines. A deduction from pay as a penalty for violating a safety rule of major significance can be made in any amount.”

Then, there’s the 1-day disciplinary suspension rule: “How long can an exempt employee be suspended without pay for disciplinary reasons? Deductions from the pay of an exempt employee may be made for suspensions of one or more full days imposed in good faith for disciplinary reasons for infractions of workplace conduct rules. Such disciplinary deductions may only be made in full day increments.”

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2 Comments

  1. CML March 21, 2016 at 2:00 pm  / 

    What’s the appropriate way of handling a situation where a salaried, exempt employee has used up all their sick leave and annual leave and yet is out of work for a portion of a day due to illness or a personal appointment?

  2. Bill Kuzmin December 10, 2016 at 9:26 pm  / 

    I think that you have two options:

    1. Ask the employee to (a) schedule personal appointments either during off hours , and (b) ask the employee to take vacation days in when sick.

    2. The national “days off” averages about 5% of the working days, or about 13 per year. If the employee has exceeded that amount, exclusive of authorized time off, i.e. sick and annual leave and, dependent on past practice, you may be forced to follow that practice (or change it for the future by the workforce that excessive time off will no longer be tolerated and that everyone will have their past absences dissolved so that they will be starting from a “clean slate”.)

    If no past practice exists, then look at the records of all the employees to determine if there is anyone with a more serious record of absences, if not counsel the employee that his/her absences are beginning to affect the morale of the workplace, that (s)he is close to the national average of absences and that if the attendance problem is not addressed and resolved, then disciplinary action up to and including termination may be forthcoming.

    If there are other employees with a higher rate of absenteeism, then I would recommend that you address those situations first using the same means as discussed above.



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