Let’s assume you’ve
taken the necessary steps to ensure that managers you have classified as exempt
from overtime actually meet the state and federal requirements for the
exemption. But classifying workers properly isn’t the end of the story when it
comes to exempt status. You also have to be careful not to jeopardize that
status by treating them as if they were paid by the hour—such as by docking an
exempt manager’s salary for reasons the law doesn’t permit. But if you misstep
by making a deduction that the exemption rules don’t permit, it may still be
possible to preserve the employee’s exempt status—if you have a safe harbor
policy. We’ll explain.
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Salary Basis Basics
The federal Fair Labor
Standards Act (FLSA) and
wage and hour law require that, to qualify for overtime exemption, an employee
must be paid a predetermined salary. Under the FLSA, the salary must be at
least $455 per week. The
minimum salary is pegged to an amount equal to two times the state minimum wage
(currently $6.75 per hour, or $2,340 per month). You cannot reduce—or dock—an exempt
employee’s salary because of variations in the quality or quantity of this
person’s work. This is known as the “salary basis” rule.
Some Deductions
Permitted
However, the laws
specify some circumstances when you can deduct from an exempt employee’s salary.
These include:
1. Absences of a full
day or more for personal reasons.
2. Absences of full days
for sickness or disability, where an employee is compensated for such absence
under a sick/disability plan. (If you don’t have such a plan, you can only
deduct for illness if the absence exceeds one week.)
3. If the employee
performs no work in a week.
4. Days that aren’t
worked in the employee’s first and final weeks of employment.
5. Time taken off under
the state or federal family leave laws, even if less than a full day is missed.
6. Committing a major
safety violation. Note, however, that this deduction is only permitted by the
FLSA and not
apply to private employees in
who are covered by both laws.
A
Policy
Now, suppose you find
that your company has made one or more improper deductions from an exempt
employee’s pay. What can you do?
The FLSA’s special “safe
harbor” rule permits employers to correct improper deductions. If you satisfy
the conditions for the safe harbor, you won’t lose the exemption for any
employee unless you willfully violate the salary basis rule by continuing to make
improper deductions after receiving employee complaints.
To qualify for the safe
harbor, you must do all of the following:
1. Policy. Have a clearly
communicated written policy prohibiting improper pay deductions and including a
complaint mechanism. The policy should be distributed to employees at hire and
published both in your employee handbook and on your company intranet.
2. Pay back. Reimburse employees for
any improper deductions that have occurred.
3. Compliance. Make a good-faith
commitment to comply with the regulations in the future.
If you’re a public
employer in
your employees are only covered by the FLSA, so the safe harbor can apply if
you follow the above rules. But it is important to note that the FLSA safe
harbor isn’t recognized under
law. This means that, if you’re a private employer and you make an improper deduction,
the outcome may be trickier because your employees are covered by the FLSA and
the stricter
law.
Nevertheless, it is a
good practice for private
employers to adopt a formal safe harbor policy by putting in place the
three-step program described above. Having such a policy can help reduce your
liability if you’re sued for making improper deductions and the employee seeks
damages under both the FLSA and
law. Additionally, having a safe harbor policy might provide you with some
protection from claims—and resulting penalties—that you willfully violated the
exemption rules.