Benefits and Compensation

Pay Deductions—What About Exempt Employees?

In yesterday’s Advisor, attorney Ted Boehm explained the rules governing deductions in pay for nonexempt employees (and how to avoid the pitfalls); today, he presents the facts regarding deductions and exempt workers.

Boehm, an associate with the law firm of Fisher & Phillips, LLP, shared his expertise on these wage and hour issues in a recent webinar presented by BLR® and HR Hero®.

Deductions and Exempt Employees

This, arguably, is even more problematic than pay deductions with nonexempt employees, says Boehm. The so-called “white collar” exemptions under FLSA are subject to a series of tests, throwing the issue of misclassification into the mix.

Assuming your salaried, exempt employees are properly classified, you can deduct under the following circumstances:

  • A salaried employee does not need to be paid in a given workweek where he or she has done NO work at all. (If some work is done, you cannot reduce pay.)
  • Full-day absences for personal reasons. If an employee is absent for 1.5 days in a workweek for personal reasons, the employer can only deduct for 1 day under FLSA, says Boehm.
  • Full-day absences for sickness, disability, or accident IF there is a bona fide sick-pay plan, policy, or practice under which the employee receives compensation.
  • Employers can deduct from salary in order to impose a penalty in good faith for violating a safety rule of major significance. Use this with caution, warns Boehm—it all depends on how consistent you’ve been applying these penalties. The Department of Labor (DOL) will scrutinize what you’ve done in the past.

Employees’ financial situations affect employers as well. Learn how to steer your workforce toward financial literacy in the free best practices report, Money Smarts: Helping Employees Make the Grade. Download Here

Types of Deductions

According to the DOL, employers can make deductions from an exempt employee’s vacation/leave/PTO bank for full- or partial-day absences without destroying the salary basis, says Boehm. For example, let’s say an exempt employee misses a half-day of work in a workweek due to personal reasons. The employer is required to pay the full salary for the workweek—but also can deduct a half-day from the employee’s accrued vacation bank.

Employers also may:

  • Offset amounts received by the absent employee for jury fees, witness fees, or military pay in a given workweek.
  • Pay a proportionate part of salary for time worked in the first or last week of employment.
  • Impose an unpaid disciplinary suspension of one or more whole days in good faith for infractions of workplace conduct rules. Make sure this is done under a written policy applicable to ALL employees, says Boehm.
  • Make deductions for weeks in which the employee takes unpaid leave under the Family Medical Leave Act (FMLA). For example: If an exempt employee uses 4 hours of FMLA leave in a 40-hour workweek, the employer can deduct 10 percent of the employee’s salary.

Be Careful!

Boehm cannot stress enough that employers should exercise caution when deducting from an exempt employee’s pay. If the facts show the DOL that an employer has an “actual practice” of making improper deductions, the exemption is lost—not only for the employee in question, but also for all employees in the same job classification working for the same manager responsible for making the deduction(s).

As with nonexempt employees, be mindful of all state and local laws as well as FLSA. Some jurisdictions may have limitations on (or outright prohibitions against) deductions, says Boehm.

You may have noticed that some pay deductions (such as for taxes, wage advances, and loans) may possibly be the result of an employee’s poor financial wellness. Problems with personal finance are a particularly prominent issue today—36 percent of employees don’t have at least $2,000 in emergency savings, 61 percent don’t have a budget, and 61 percent failed a basic financial literacy test.

Seven out of 10 HR professionals indicated that personal financial challenges have “a large” or “some” impact on overall employee performance. However, employers can help—by incorporating a financial education program into their benefits package. How to get there? Start with the free white paper from Purchasing Power, Money Smarts: Helping Employees Make the Grade.

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Is financial wellness an issue among your employees? Download the free best practices report, Money Smarts: Helping Employees Make the Grade. Learn More

With the right tools and education, employees can face their personal finances with confidence. This best practices report is a great first step towards helping employees develop peace of mind when it comes to money—and keep them focused and engaged while on the job.

You’ll learn:

  • Why financial literacy is an urgent concern
  • What is included in a financial education program
  • How to incorporate financial wellness into your benefits package
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1 thought on “Pay Deductions—What About Exempt Employees?”

  1. Too many employers seems to think that exemptions are forever–forgetting they exempt status can be forfeited and the results can be very costly!

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