For an employee to
qualify for the executive or managerial overtime exemption under California and
federal law, several conditions must be satisfied, including that the employee
be paid on a “salary basis.” This means that the 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. And, with certain exceptions, if you
dock an exempt manager’s weekly salary, the exemption could be lost. One such
exception 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. We’ll
take a look at a new ruling that puts the spotlight on this exception.
Disability Program
Details
ADVO, Inc., which is in
the direct mail coupon business and based in
employed about 170 exempt employees in
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 also 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. This resulted in an anomaly: While
an employee who was simply out sick for part of a week would still receive the
full week’s pay, 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.
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.
Join us this fall in San Francisco for the California Employment Law Update conference, a 3-day event that will teach you everything you need to know about new laws and regulations, and your compliance obligations, for the year ahead—it’s one-stop shopping at its best.
Class Action Challenges
Plan
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.
Salary Basis Rule Not
Violated
A
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
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.
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 endrun around the overtime rules.
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
Are You Complying?
Salary deductions made
under a bona fide sickness or disability policy or plan won’t destroy an employee’s
exempt status. To determine whether your plan or policy is bona fide, examine
how the plan is communicated to employees and whether it is being administered
impartially (for example, not disproportionately denying disability leave or
providing inferior benefits for any subgroup of salaried employees). Keep in
mind, too, that the
labor commissioner says that these plans must not rely exclusively on the SDI
program for disability benefit payments— thus, your plan must pay out some
supplementary amount.
_
1 Sumuel v. ADVO, Inc.,
(Dist. 1) No. A115921, 2007
7