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Payroll Deductions That Don’t Affect Employees’ Exempt Status

by Gary Fealk

Workers who qualify as executive, administrative, or professional employees may be exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) if they are paid on a salaried basis or not less than $455 per week. However, if an employee’s basis of compensation isn’t “salaried,” the exemption will be lost. Let’s examine when employers can make deductions from an employee’s salary without destroying the overtime exemption.

Find more on wage and hour issues in the Wage and Hour Compliance Manual

What is a salary?
An employee is paid on a “salaried basis” if, on a weekly or less frequent basis, she receives a predetermined amount of pay that isn’t subject to reduction regardless of the quality or quantity of her work. In addition, she must receive her full salary for any week during which she performs work without regard to the number of hours she worked. An exempt employee’s salary may be subject to deductions only in certain situations set forth in the regulations.

State-by-state comparison of 50 employment laws in all 50 states, including wage laws

Effect of deductions
If an employer makes improper deductions from an exempt employee’s salary, the salaried basis of payment is destroyed, and the exemption is lost. An improper deduction results in the loss of exemption not only for the employee whose pay is reduced, but also for all of the employees in the same job classification working for the same managers responsible for the improper deductions. You also can lose the exemption for a group of employees even if their pay is never actually reduced if you have a written or unwritten policy of making unlawful deductions or regularly made such deductions in the past.

Generally, employers cannot reduce an employee’s salary in a given workweek without destroying the executive, administrative, or professional exemption. Some exceptions do exist, however. Examples of deductions you may be able to make without jeopardizing exempt status include those made when:

  1. the employee has performed no work at all during the entire workweek;
  2. the employee is absent for a full day for personal reasons other than illness or an accident;
  3. the employee is absent for a full day and the deduction is made according to a bona fide plan, policy, or practice of providing compensation for loss of salary due to sickness but the employee hasn’t yet become eligible to participate in the plan or has exhausted all accrued leave allowed under the plan;
  4. an employee has violated a safety rule of major significance; and
  5. an employee misses any work (whether it’s a full day or partial day) because he took leave under the Family and Medical Leave Act (FMLA).

If you do make an isolated or inadvertent deduction from an exempt employee’s pay, you may attempt to remedy it under the safe-harbor provision. If you promptly reimburse the employee for the deduction, his exempt status will remain intact. However, the safe harbor is available only to employers with a “clearly communicated policy” prohibiting improper pay deductions that contains a complaint mechanism. Other exemptions not dependent on salary

Unlike executive, administrative, and most professional employees, workers whose primary duty is outside sales (soliciting for sales away from the employer’s premises) aren’t required to be paid on a salaried basis to be exempt. And although teachers technically fall under the professional exemption, they aren’t required to be paid on a salaried basis. Computer professionals who meet certain criteria for the degree of technical work they perform are also exempt if they are paid a salary of not less than $455 per week or if they are paid not less than $27.63 per hour (not including board, lodging, or other expenses).

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

Bottom line
It’s wise to closely monitor your company’s compensation policies to be sure that you’re complying with federal and state wage and hour laws. Failing to comply with the law can result in significant liability.

Gary Fealk is an attorney and shareholder in Vercruysse, Murray & Calzone, P.C., in Detroit. You can reach him at (248) 433-8708.