Determining if a position is non-exempt or exempt is done on a case by case analysis. A great tool is the Fair Labor Standards Act Advisor. In addition, how we calculate pay is extremely important. I will focus on what could go wrong when a company incorrectly pays an employee with some real life examples as well as examples of improper deductions from pay.
When I describe the employment relationship to new hires, I will often say it’s basically their time and/or productivity for our money. I make it clear to non-exempt hourly employees that we want to pay them for every second of their work and that is why it is important that we keep accurate records of their time worked. I let them know that the fastest way to get fired is working off the clock, since we consider doing so an egregious policy violation.
It is a little different with exempt salary employees since “Being paid on a ‘salary basis’ means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.” (Fact Sheet #17G: Salary Basis Requirement and the Part 541 Exemptions Under the Fair Labor Standards Act (FLSA)). There are some exceptions on when it’s permissible to deduct which I will touch on later.
What Could Go Wrong When You Incorrectly Pay an Employee?
Restaurant to pay $563,350 in back wages: in addition to other violations, the restaurant was found to have “paid some kitchen workers flat salaries, regardless of the number of hours that they worked. This practice resulted in violations when those employees worked more than 40 hours in a workweek, but the employer failed to pay them overtime. Similar violations occurred for employees paid flat daily rates regardless of the number of hours they worked.”
HVAC company pays $40,371 in back wages: the company “failed to count the time employees spent driving between job sites as work time when determining when overtime was due. Instead, the employer recorded drive time separately and paid for it at straight time rates, regardless of the total number of hours employees worked. By doing so, the employer failed to pay overtime when those hours occurred in workweeks of more than 40 hours.”
Manufacturer pays $279,505 in back wages: it was found that the company was “deducting breaks shorter than 30 minutes from employees’ pay as lunch breaks. The FLSA requires employers to pay for short rest breaks, usually 20 minutes or less, as work time. Meal periods, typically 30 minutes or longer, may be unpaid as long as workers are completely relieved of job duties during that time.”
Retailer to pay $582,000 in back wages for overtime: “the company failed to pay overtime to certain workers from May 12, 2000 through May 11, 2002… did not include night premium pay and incentive bonuses in computing the overtime pay rate. In addition, merchandise managers and managers in training were not paid overtime.”
Company pays nearly $18.3mil in overtime: the company “incorrectly categorized employees in 28 job positions as exempt from overtime. The company did not pay overtime to these salaried employees — working as field service representatives, pipe recovery specialists, drilling tech advisors, perforating specialists and reliability tech specialists — when they worked more than 40 hours in a workweek, in violation of the Fair Labor Standards Act. The company also failed to keep accurate records of hours worked by these employees.”
Improper Deductions from Pay
In addition to federal guidelines on deductions from pay, states may have specific rules which should be referenced before making a deduction. For non-exempt hourly employees, whether a deduction is permissible or not will generally depend on 1) whether or not it would bring the employee below minimum wage and 2) whether it’s a voluntary deduction. Since for non-exempt this will vary on a case by case basis, I am focusing on improper deductions from pay for exempt salary employees.
According to Fact Sheet #17G, an employer will lose exemption if it has “an ‘actual practice’ of making improper deductions from salary…Isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.”
An employer may make deductions from an exempt employee’s pay in the following circumstances:
When an employee is absent from work for one or more full days for personal reasons other than sickness or disability;
For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
To offset amounts employees receive as jury or witness fees, or for temporary military duty pay;
For penalties imposed in good faith for infractions of safety rules of major significance;
For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions;
In the employee's initial or terminal week of employment if the employee does not work the full week, or
For unpaid leave taken by the employee under the Federal Family and Medical Leave Act.
Please note it says “may make”. The employer can choose not to. If choosing not to, it should be done on a consistent basis across the board.
Improper Deductions (recapped from FLSA Overtime Security Advisor)
Deductions for partial day absences generally violate the salary basis rule, except those occurring in the first or final week of an exempt employee's employment or for unpaid leave under the Family and Medical Leave Act. For example, if an exempt employee is absent for one and one-half days for personal reasons, the employer may only deduct for the one full-day absence. The exempt employee must receive a full day's pay for the partial day worked.
Other examples of improper deductions include:
A deduction of a day's pay because the employer was closed due to inclement weather;
A deduction of three days’ pay because the exempt employee was absent for jury duty;
A deduction for a two-day absence due to a minor illness when the employer does not have a bona fide sick leave plan, policy or practice of providing wage replacement benefits; and
A deduction for a partial day absence to attend a parent-teacher conference.
Opinion Letter FLSA2006-7 also states that “deductions from the salaries of otherwise exempt employees for the loss, damage, or destruction of the employer’s funds or property due to the employees’ failure to properly carry out their managerial duties (including where signed “agreements” were used) would defeat the exemption because the salaries would not be “guaranteed” or paid “free and clear” as required by the regulations. Such impermissible deductions violate the regulation’s prohibition against reductions in compensation due to the quality of the work performed by the employee. Consequently, any deductions made to reimburse the employer for lost or damaged equipment would violate the salary basis rule.
The key takeaway is this quote from the above Opinion Letter:
“It is WHD’s long-standing position that an exempt employee must actually receive the full predetermined salary amount for any week in which the employee performs any work unless one of the specific regulatory exceptions is met.”
Paying an employee properly is a basic tenet of the employment relationship.