Under California and federal law, an exempt employee must receive his or her full salary for any week in which the person performs any work, regardless of the quality or number of hours worked. This is known as the “salary basis” rule. If you dock an exempt employee’s weekly salary, you could violate this rule and destroy the employee’s exempt status.
One exception to the rule, however, permits employers to deduct for absences of a day or more for sickness or disability if the employer has a bona fide sickness or disability plan or policy that compensates employees when they’re sick or disabled. A new case focuses on this exception.
Salary Deductions for Mid-Week Leave
ADVO, Inc., which is in the direct mail coupon business and based in Connecticut, employed about 170 exempt employees in California who were paid on salary. The company gave employees an unlimited number of sick days with pay unless the absence was expected to exceed seven consecutive days. In that case, ADVO’s disability program kicked in: The employee was encouraged to apply for state disability insurance (SDI) benefits and would receive supplemental salary replacement benefits from ADVO after a seven-day SDI waiting period.
If an employee began a disability period in the middle of a workweek, ADVO paid his or her regular salary only for the days worked that week. Thus, an employee who was simply out sick for part of a week would still receive the full week’s pay. But an employee who informed the company that the absence would last more than seven consecutive days would be taken off the regular payroll on the first day absent, even if he or she had already worked one or more days that week.
Benefit Delays
Supplemental salary replacement benefit payments were sometimes delayed by a few weeks because benefits weren’t paid until the employee gave ADVO a copy of his or her first SDI check and ADVO’s insurer approved the disability claim. Also, when an employee returned to work, delays occurred in restoring the employee to active payroll. In particular, ADVO offset the full weekly SDI benefit rather than the actual amount of the SDI check, so if an employee returned mid-week, this could result in a shortfall in full salary replacement for that week, although ADVO would later correct the difference.
A group of employees filed a class action lawsuit charging that ADVO’s program violated the salary basis requirements. ADVO argued that the program didn’t result in any illegal deductions.
No Improper Deductions
Now a California appeals court has dismissed the lawsuit.1 First, the court ruled that neither the benefit payment delays nor ADVO’s practice of offsetting full weekly SDI benefits (and then making up the difference later) were the same as improper deductions from salary.
Second, the court turned to ADVO’s policy of stopping an employee’s regular salary immediately when an employee begins a mid-week disability leave, so that the employee can begin the seven-day waiting period before he or she qualifies for SDI. This would be an improper deduction, explained the court, unless done in compliance with a federal regulation, which California follows, that allows an employer that maintains a “bona fide” disability benefits plan to deduct salary for absences of a day or more “before an employee has qualified under such plan.” Thus, ADVO’s policy wouldn’t violate this regulation if the plan was bona fide.
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A bona fide disability benefits plan must have defined sick/disability leave benefits that have been communicated to employees and that operate as described in the plan. The plan has to be administered impartially and cannot be designed to evade the salary basis rule. The court found that ADVO’s plan met these requirements. It was communicated to employees in writing, in oral presentations, and on the company’s intranet. And despite some occasional paperwork delays, the plan operated as described. Plus, the evidence suggested that the plan was adopted to provide a benefit that would attract qualified employees to the company and not as an end-run around the overtime rules.
Plan Review Points
As this case shows, salary deductions made under a bona fide sickness or disability policy or plan won’t destroy an employee’s exempt status. However, your policy or plan must meet several requirements to be considered bona fide. Examine how the plan is communicated to employees and whether it is being administered impartially (e.g., not disproportionately denying disability leave or providing inferior benefits for any subgroup of salaried employees). Also, note that the state labor commissioner takes the position that these plans must not rely exclusively on the SDI program for disability benefit payments, so your plan must pay out some supplementary amount, as ADVO’s did.
1 Sumuel v. ADVO, Inc., Calif. Court of Appeals (Dist. 1) No. A115921, 2007