Most employers are well aware that employees must be paid on a “salary basis” to be considered exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). This means employees must receive the same amount of pay each week regardless of the amount or quality of work they perform for a given week. Accordingly, exempt employees must be paid their full weekly salary for any week in which they perform work, whether or not the employee has actually worked a full work week. See 29 C.F.R. § 541.602(a)(1).

One issue that may fly under the radar, however, is which deductions from an exempt employee’s pay are permissible.

Of course, deductions are permitted for items such as taxes, Social Security, and certain benefits like medical insurance. Beyond that, the ability to deduct from an exempt employee’s pay is limited to specific situations governed by the FLSA and its regulations. See 29 C.F.R. § 541.602(b).

Permissible Deductions

Employers are permitted to make deductions from an exempt employee’s pay for the following reasons:

  • Absences of one or more full days due to personal reasons other than sickness or disability (deductions for partial days are not allowed)
  • Absences of one or more full days due to illness or disability (including work-related accidents) if the employer has a bona fide plan, policy or practice of providing compensation for salary lost due to such illness or disability (g., paid sick time policy, short-term disability benefits, etc.), even if the employee has yet to qualify under the plan or has exhausted the benefits under the plan (deductions for partial days are not allowed)
  • To offset amounts employees receive as jury or witness fees, or for military pay (but deductions due to full or partial day absences for serving as a juror or witness or taking temporary military leave are not permitted)
  • Penalties imposed in good faith for infractions of safety rules of major significance, such as rules related to the prevention of serious danger in the workplace or to other employees (both full and partial days)
  • Unpaid disciplinary suspensions of one or more full days imposed in good faith for violations of workplace conduct rules, such as harassment and violence, but not rules governing absences, work quality, cash shortages, and damaged equipment (deductions for partial days are not allowed)
  • Absences under the Family and Medical Leave Act (both full and partial days)
  • During the initial or final week of employment, if the employee works less than a full week (both full and partial days)

Impermissible Deductions

In addition to the limitations described above, employers are also not permitted to take deductions for the following reasons:

  • Holidays
  • Business closures for less than a full week (such as for weather, emergencies, or lack of work)
  • Poor job performance

The Consequences of Making Improper Deductions

Employees can lose exempt status if the improper deductions demonstrate that the employer did not intend to pay the employee on a salary basis. If the employer is found to have a practice of making improper deductions, the exemption will be lost during the time period in which the improper deductions were made for all employees in the same job classification who work for the same manager(s) responsible for the improper deductions.  In such case, the employees would be classified as non-exempt and the employer would be required to pay for all hours worked, any overtime incurred, and potentially face penalties.

Fortunately for employers, there is a safe harbor when improper deductions are isolated or inadvertent, provided the employer reimburses the employee. See 29 C.F.R. §§ 541.603(c).  In circumstances where employers believe an improper deduction has been made, they should consult with counsel to ensure the correct steps are being taken to rectify the situation.

Final Considerations

Since violating the rules governing permissible deductions from exempt employees’ pay can lead to costly consequences, employers should take caution when deducting pay from an exempt employee’s salary. Additionally, employers should always confirm whether there are state or local laws governing exemption status under state or local wage and hour laws, in addition to ensuring compliance under the FLSA.

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