1 Wage & Hour Exempt Employees, the Salary Basis Test and Unlawful Deductions By: Christina Lewis
2 Exemptions under the FLSA Executive Employees Administrative Employees Professional Employees Computer Employees Outside Salespersons Highly compensated employees
3 Executive Exemption To qualify for the executive employee exemption, all of the following tests must be met: The employee must be compensated on a salary basis (as defined in the regulations) at a rate not less than $455 per week; The employee s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; The employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and The employee must have the authority to hire or fire other employees, or the employee s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.
4 Administrative Exemption To qualify for the administrative employee exemption, all of the following tests must be met: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; The employee s primary duty must be the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer s customers; and The employee s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.
5 Learned Professional Exemption To qualify for the learned professional employee exemption, all of the following tests must be met: The employee must be compensated on a salary or fee basis (as defined in the regulations) at a rate not less than $455 per week; The employee s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; The advanced knowledge must be in a field of science or learning; and The advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.
6 Important Facts Regarding Exemptions Job titles do not determine whether an employee is exempt. In order for an exemption to apply, an employee s specific job duties and salary must meet all the requirements of the Department s regulations. To qualify for exemption, employees generally must be paid at not less than $455 per week on a salary basis. Exempt computer employees may be paid at least $455 on a salary basis or on an hourly basis at a rate not less than $27.63 an hour.
7 Salary Basis Test 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. Subject to exceptions we are about to discuss, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.
8 Permissible Deductions: Exempt Employees Deductions from pay are permissible when an exempt 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 military pay.
9 Permissible deductions: Exempt Employees, cont. 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. An employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Exempt employees do not need to be paid for any workweek in which they perform no work.
10 Impermissible Deductions Deductions from the employee s predetermined salary because of variations in either the quality or quantity of that person s work Deductions for partial day absences Making deductions for absences that are required by the employer on the basis of the operating requirements of the business
11 Impermissible deductions, cont. Deductions for 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 Deductions for jury duty or military leave that exceed the amount an employee received for such service
12 Consequences A reduction in salary that is inconsistent with these rules is considered an improper deduction. The practice of making improper deductions shows that an employer did not intend to pay employees on a "salary basis" and, therefore, disqualifies employees from the overtime exemption. The employer will lose the exemption if it has an actual practice of making improper deductions from salary. An isolated or inadvertent improper deduction will not destroy the exemption if the employer reimburses the employee for the deduction
13 Consequences, cont. If the DOL finds an actual practice of making improper deductions, all employees in the particular job classification subject to the deductions could lose their exempt status for the period during which deductions were made. This is true even if some of those employees never had their own salaries reduced. Loss of the exemption = liability for overtime compensation The employer could also face civil penalties for repeat or willful overtime violations.
14 Defining Actual Practice Factors to consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to: the number of improper deductions; the time period during which the employer made improper deductions; the number and geographic location of both the employees whose salary was improperly reduced and the managers responsible; whether the employer has a clearly communicated policy permitting or prohibiting improper deductions. Again, an isolated or inadvertent improper deductions will not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
15 Safe Harbor If an employer: (1) has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism, (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future, the employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints.
16 Losing the Safe Harbor This safe harbor is not available, however, if the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints.
17 Snow days Deductions cannot be made when the employer is closed for inclement weather. However, when the employer remains open, and an employee does not report for work for one or more full days, it is considered an absence for personal reasons, and deductions may be made on a full-day basis. If the employer makes deductions from an employee s predetermined salary, i.e., because of the operating requirements of the business, that employee is not paid on a salary basis. If the employee is ready, willing and able to work, deductions may not be made for time when work is not available.
18 Failure to Return Property The DOL takes the position that deducting for replacement costs for lost or damaged property violates the prohibition on reducing compensation based on the quality of an exempt employee s work. Furthermore, these deductions do not fall within one of the categories of deductions expressly permitted by the regulations. The DOL takes the position that, if not expressly permitted by the regulations, the deduction violates the salary basis test.
19 What About Non-Exempt Employees? GENERAL RULE: An employer cannot make a deduction that would reduce the employee below minimum wage In addition, you cannot lessen the overtime premium owed Employer should be mindful, however, of state laws Camara v. Attorney General MA case holding that deduction from wages for property damages violated the state statute because the company served as the sole arbiter, making unilateral assessment of liability as well as amount of damages with no role for an independent decision maker
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