By: Bruce M. Luchansky, Esq.
Employers work hard to preserve the exempt status of employees whose duties meet an exempt category under the Fair Labor Standards Act and who are paid on a salary basis. Common sense tells us that paying an employee on a “salary basis” means that employers may not make deductions from an exempt employee’s salary except in very limited circumstances. The FLSA tells us that also:
An employee will be considered to be paid on a “salary basis” … if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.
In other words, as long as an employee does any work in a given week, that employee must be paid that week’s full salary to remain exempt under the FLSA. An employer cannot deduct from that predetermined weekly (or bi-weekly, or monthly) amount if the employee decides to take off half a day for a round of golf.
But employers often face the question of whether making deductions from an employee’s PTO or other leave bank is also considered making a “deduction” from an employee’s salary that results in destroying exempt status. The scenario looks something like this.
Phil is an electrical engineer, and is exempt under the FLSA’s professional exemption. As part of his employment benefits package, Phil receives 120 hours of paid time off (PTO) per year. Phil’s employer informs him at the time of hire that he is guaranteed to receive his pay of $2,000 per week. However, when Phil takes a week of time off for vacation, will the company’s deduction of 40 hours from Phil’s PTO account constitute a “deduction” that violates the employee’s “salary basis” compensation and risk Phil’s exempt status?
No, it does not. Phil still is exempt from overtime. He just has used some of his PTO.
But what about after Phil has exhausted his 120 hours of PTO? If he takes another 8 hours of leave, Phil does not have any additional PTO in his account for the company to deduct. At this point, can the company deduct 8 hours’ worth of pay from Phil’s salary?
No—not if the company wants to maintain Phil’s exempt status. Even once an exempt employee’s paid leave account is exhausted, the company’s deduction of any wages – as opposed to leave balance – will destroy the employee’s “salary basis” compensation. At that point, if the company objects to Phil’s use of excess leave, the proper response is through the use of counseling or other discipline, but not through a deduction from wages.
Employers don’t lose exemptions knowingly. It’s usually because a well-meaning payroll manager decided to treat a salaried employee like an hourly one, docking pay instead of leave. A clean and straightforward PTO policy, training HR in these areas, and a discipline-first approach will keep the focus on accountability and maintaining company standards without losing exempt status for your employees.
Navigating the world of exempt employees under the FLSA and other overtime laws is tricky. If you have questions concerning the way your company pays its employees and accounts for its paid leave, send me an email at lucky@luchanskylaw.com, or give me a call at 410.522.1020. I would be happy to help.
