White collar salary basis test clarified in two DOL opinion letters

By G. Phillip Shuler

In the July 2004 edition of Louisiana Contractor, we prepared employers for the new "white collar" regulations issued by the U.S. Department of Labor (DOL) effective August 23, 2004. The regulations were intended to clarify and update the exemptions from the Fair Labor Standards Act (FLSA) overtime requirements. In general, to fall under one of the most used exemptions (Executive, Administrative, Professional), an employee must satisfy three requirements:

• The employee must be paid a certain weekly minimum, now $455 or $23,660 per year (salary level test)
• The employee must be paid on a salary basis, i.e. regularly receive a predetermined amount which is not subject to deduction because of variations in the quality or quantity of the work performed (salary basis test); and
• The employee must perform certain exempt duties (duties test).

Both the duties test and the salary basis test have, before and after the new regulations, resulted in substantial and costly litigation against employers and contractors.

Under the salary basis test. An employer need not pay employees their full salary in any week in which the employees perform no work. Thus, full-week deductions from salary do not violate the salary basis test.

If an employee is ready, willing and able to work when work is not available, the employer may not make deductions from the exempt employees' pay in anything other than full-week increments, because the absences are not within the employees' control.

Similarly, an employer cannot deduct pay for absences occasioned by jury duty, attendance at a litigation proceeding as a witness, or temporary military leave, again because those absences are not within the employees' control.

Deductions for disciplinary reasons. This rule against partial week deductions has been applied to deductions made for disciplinary reasons. Under the old regulations, an employer could not suspend an employee without pay for disciplinary reasons (other than for violating major safety rules) in any increment other than a full week without violating the salary basis test.

This meant that employers might have to impose different disciplinary penalties on exempt employees than those they imposed on non-exempt employees. For example, if a violation of an anti-harassment policy would result in a one-, two-, or three-day unpaid suspension for a non-exempt employee, an employer could not similarly discipline an exempt employee for the same infraction without running afoul of the salary basis test. Thus, the employee would have to be suspended with pay or be suspended for a week - a more severe penalty than that suffered by a non-exempt employee.

Under the new rule, employers may make deductions from salary for "unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to a written policy applicable to all employees." This change permits employers to apply the same progressive disciplinary rules to exempt and non-exempt employees. It is a necessary and welcome change in light of federal and state anti-discrimination laws requiring employers to take effective remedial action to address employee misconduct, especially that of exempt supervisors.

However, in a recently issued opinion letter, the DOL has concluded that it is not permissible for an employer to dock exempt employees for damages to company property or equipment such as cell phones and laptop computers. The DOL takes the position that deduction of replacement cost of employer property would defeat the exemption because the salaries would not be "guaranteed" or paid "free and clear" as required by regulations. The DOL stated that it would not matter whether the employer implemented the policy by making periodic deductions or requiring out-of-pocket reimbursement from compensation already received.

Deductions for personal absences. Deductions for personal absences within the exempt employee's control are treated differently under the salary basis test; that principle has not changed under the new regulations. Employers may deduct amounts from salary proportional to the time actually missed by the employee in full-day increments only. Thus, an employer may make a full-day deduction for an exempt employee's full-day absence taken for personal reasons (or require that the employee use available benefit time).

An employer also may make full-day deductions from an exempt employee's pay for full-day absences occasioned by sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. Deductions may be made for such absences before the employee has qualified under the plan, policy or practice, and after the employee has exhausted his or her leave allowance.

Partial-day deductions. The new regulations do not change the rules governing partial-day deductions. There is one explicit circumstance under which employers can make partial-day deductions from an exempt employee's salary: for intermittent leave taken under the Family and Medical Leave Act (FMLA).

Deductions for intermittent leave are permissible only when leave is taken under the FMLA. That is, if the employee has not yet qualified for FMLA leave under the law, but the employer's policies generously provide for leave for the employee anyway, deductions for intermittent leave taken under the employer's policy do not qualify under this exception.

Similarly, if employees have used up their 12 weeks of FMLA leave, but the employer's policies generously provide for additional leave, or grant additional leave as an accommodation under the Americans with Disabilities Act, the employer cannot make partial-day deductions for intermittent leave. It should be noted that salary basis requirements do not apply to the initial and termination weeks of employment.

Additional Compensation. Provisions of the new regulations and comments in the preamble support two generally accepted propositions concerning additional compensation:

• That an employer generally may give exempt an employee's additional compensation over and above their salary - even if the extra is paid on an hourly basis - without jeopardizing the employee's salaried status.
• That an employer may deduct from exempt employees' vacation, paid time off or benefit time (leave bank) on an hour-for-hour basis.

While these two propositions have now been fully endorsed by the DOL, some courts have been reluctant to accept hour-for-hour deductions and it remains to be seen whether they change their views in light of the DOL's recent pronouncements.

In a related matter, the DOL has recently issued a second opinion letter where it has ruled that employers could insist that exempt employees work more than 40 hours per week and could discipline them for not fulfilling that work requirement, but could not impose a disciplinary suspension of one day or more for such an infraction.

The DOL opined that a disciplinary suspension was not permissible because such a rule is not a workplace conduct rule but that employees could be required to make up work time lost due to personal reasons.