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Beware Deductions for Lost or Stolen Property from Exempt Employees’ Pay

by Kathy Neal

Many things can be scary for the unseasoned HR manager, particularly when it comes to wage and hour law. One of the scariest areas involves pay deductions.

HR Guide to Employment Law: A Practical Compliance Reference

Understanding the Fair Labor Standards Act – FLSA
Many employers issue laptops or smartphones to their employees. But what recourse does the employer have if one of those items is lost, stolen, or damaged? What happens when the company car is in a fender-bender? Can you fine workers for lost or damaged company property or make them pay for it out of their own pockets? Can you require them to sign an agreement authorizing deductions from their pay to reimburse you for repairs or the cost to replace company property?

The general rule under the Fair Labor Standards Act (FLSA) is that an exempt employee’s salary cannot be reduced regardless of the quality or quantity of his work. He must receive his full salary for any week in which work was performed regardless of the number of hours worked. There are, however, some exceptions to the rule. Employers may make salary deductions to an exempt employee’s salary in the following situations:

  • when he is absent from work for one or more full days for personal reasons other than sickness or disability;
  • when he is absent from work for one or more full days because of sickness or disability (provided the deduction is made in accordance with a bona fide plan, policy, or practice);
  • to offset the amount received for jury duty, witness fees, or military pay;
  • as a penalty for infractions of major safety rules; or
  • for unpaid disciplinary suspensions for infractions of workplace conduct rules (provided the deduction is equivalent to at least one full day’s pay).

HR Guide to Employment Law: A practical compliance reference manual covering 14 topics, including overtime and FLSA requirements

According to the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL), if you make a deduction that isn’t specifically listed, you violate the salary-basis rule because:

  1. the employee’s salary is no longer “guaranteed” or paid “free and clear”; and
  2. the deduction is a result of the quality of the work performed by the employee.

Thus, with respect to exempt employees, deductions made as reimbursement for lost or damaged company property are a violation the salary-basis rule. The same is true for out-of-pocket payments.

Deductions from other forms of compensation are permissible, however, and do not affect the exempt employee’s status. That’s because any compensation paid in addition to an employee’s guaranteed salary is consistent with the salary-basis requirement. Some exempt employees receive a guaranteed salary and a discretionary bonus under a written bonus program. Some receive a guaranteed salary and a percentage of the company’s sales or profits. Others receive additional compensation based on hours worked beyond the normal workweek (e.g., a flat sum or straight-time hourly work).

The FLSA allows deductions from the additional compensation. That means you may make deductions for damaged or lost property from the additional compensation component of the employee’s pay. The prohibition against deductions applies only to guaranteed salary.

The rules are different for hourly nonexempt employees. Because they don’t receive a guaranteed salary, employers may make deductions from their pay for damaged or lost company property. The only restriction is that you cannot reduce their pay below minimum wage or lessen the overtime premium they’re owed. You must pay the statutorily required minimum wage or overtime premium “finally and unconditionally,” or free and clear.

Audit your wage and hour and employee classification policies and practices with the Employment Practices Self-Audit Workbook

Bottom line
Exempt employees receive guaranteed salaries. There are only five categorical exceptions that allow salary reductions. Know them well, or the DOL may come knocking on your door.