HR Management & Compliance

Exempt Employees and Pay Deductions—Where’s the Line?

Yesterday’s Advisor presented the rules for deducting pay for nonexempt employees as explained by Attorney Ted Boehm; today, Boehm reviews how deductions can be applied (or not) to 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 the Fair Labor Standards Act (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.

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 Department of Labor (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.

Pay deductions are just one small aspect of the intricate world of payroll. HR professionals need to ensure compliance with applicable wage laws, be efficient in getting compensation to employees, and (of course) keep any associated costs as low as possible.