May 2006 Deductions from Pay of Exempt Employees under the Fair Labor Standards Act Provisions of the federal Fair Labor Standards Act (FLSA) governing minimum wages and overtime pay apply to nearly every employer. Some types of employees are exempt from the minimum wage and overtime provisions of FLSA. Among these are executive, administrative, professional and outside sales (“white collar”) employees paid on a “salary basis.” A “salary basis” means an employee must be paid a pre-determined amount for every week worked. The amount may not be subject to deduction for the quality or quantity of work performed. If an employer engages in an “actual practice” of improperly deducting amounts from salaries of exempt “white collar” employees, the exemption may be lost for (1) the directly affected employees and (2) all other exempt “white collar” employees in the same classification working under the supervision of the manager who authorized the improper deductions. This could result in a requirement to pay overtime pay for work above 40 hours per week. In addition to payroll tax dedutions, deductions from pay may be made when an exempt employee: (1) is absent from work for one or more full days for personal reasons other than sickness or disability; (2) 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; (3) to offset amounts employees receive as jury or witness fees, or for military pay; or (4) for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. Also, an employer is not required to pay the full salary (A) in the initial or terminal week of employment; (B) for penalties imposed in good faith for infractions of safety rules of major significance, or (C) for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Under (A) through (C), either partial day or full day deductions may be made. In 2004 the U.S. Department of Labor issued new regulations defining exempt “white collar” employees. These regulations include a “safe harbor” to avoid loss of exemptions from the “actual practice” of improper deductions if (1) the employer has a “clearly communicated policy prohibiting improper deductions,” (2) reimburses employees for any improper deductions, and (3) makes a good faith commitment to comply in the future. An employer can show a policy to have been “clearly communicated” if it is written and distributed to employees before the improper deductions occur, for example, by distributing a copy to all new hires, including the policy in employee handbooks, or posting copies on the employer’s intranet. Where an employer has a policy permitting deductions from pay for such things as loss of or damage to the employer’s property, the deductions may not be made from the pay of an exempt “white collar” employee under FLSA even if authorized by state law. An employer may require an exempt “white collar” employee to work more than 40 hours per week on a regular basis without paying overtime pay and require that missed time be made up, but the employee’s salary may not be “docked” for missed time.
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