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Salary Basis

Salary Basis for FLSA Overtime Exemptions

Several common FLSA overtime exemptions require that employees be paid on a salary basis. A salary usually refers to a fixed amount of compensation that an employee receives regularly. But, for FLSA purposes, paying employees on a salary basis is more complicated than just that.

Minimum Wage & Overtime Exemptions

The FLSA is a federal law that covers most employers in the United States. It generally requires them to pay employees a minimum wage and overtime for working over 40 hours in a week. The law allows various exemptions from these standard requirements. The most widely applicable are often referred to as “white collar exemptions”. (They primarily apply to employees who perform little manual labor.) These include the executive, administrative, professional, and outside sales exemptions.

Employers do not have to pay overtime to employees who qualify for these exemptions. (They are also technically exempt from minimum wage, though their compensation typically exceeds that level anyway.)

The executive, administrative, and professional exemptions require that the employee is paid on a salary or fee basis of at least $455 per week. There is no salary requirement for the outside sales exemption.

Many states have similar minimum wage and overtime laws and exemptions. Some of these have higher salary requirements for exemption. Employers usually must satisfy both state and federal overtime requirements.

Salary Basis Requirement

“Salary Basis” compensation means the employee receives a predetermined amount of pay each pay period on a weekly or less frequent basis. That part is relatively straightforward.

The complexity lies in the further detail that the predetermined amount cannot be reduced based on the quality or quantity of the employee’s work. Improper salary reductions can destroy an exemption. That can open up the employer to substantial liability for unpaid overtime.

Permissible Deductions

Generally, an exempt employee must receive their full salary for any week in which they work at all. Conversely, if an exempt employee does not work at all in a week, then no payment is required under the FLSA.

There are also a few limited situations where missing time during a week can warrant a lawful pay reduction without jeopardizing the salary basis requirement:

1. First and Last Weeks of Employment

An exempt employee who starts their job after the first day/hour of a workweek can receive a pro-rated salary payment for that week.

The same applies to an employee who ends employment before the last day/hour of a workweek.

2. Absence for Personal Reasons Other than Sickness or Disability

If an exempt employee voluntarily takes one or more full days off for personal reasons, then their employer could dock their pay for the day(s) without undermining their FLSA exemption. No pay reduction is permissible, however, for partial day personal leave.

3. Absence for Sickness or Disability

Employers may also reduce an exempt employee’s pay for full-day absences due to sickness or disability. But, the pay reduction must be consistent with a bona fide plan, policy, or practice of providing compensation for salary lost due to illness.

If the employer does not have a sick leave policy, then making pay deductions for sickness or disability, even in full-day increments, will interfere with the salary basis component of applicable FLSA exemptions.

However, when an exempt employee is eligible for paid sick leave but exhausts available leave time, then their employer may reduce their salary for full-day absences due to additional sick days.

Employers may likewise pay only a pro-rated salary in weeks where an employee receives workers’ compensation or disability insurance benefits for days they are not working.

4. Unpaid FMLA Leave

When employees are eligible to take time off under the Family and Medical Leave Act (FMLA), the law only guarantees unpaid leave. Accordingly, employers may reduce salaried exempt employees’ pay for time off under the FMLA.

FMLA leave can sometimes be taken for only part of a workday. In those cases, employers could make pay deductions in less than full-day increments.

5. Offsetting Jury or Witness Fees or Military Pay

Employees who are off of work to serve on a jury, testify as a witness, or serve in the military might receive alternative compensation to do so. In these cases, the employer does not have to maintain the full salary over the periods of these absences, even if only for part of a day.

6. Penalties for Infractions of Safety Rules of Major Significance

Employers may reduce salaried employees’ pay for certain safety violations. According to FLSA regulations:

“Safety rules of major significance include those relating to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries and coal mines.”

7. Disciplinary Suspensions for Workplace Conduct Rule Infractions

If an employer suspends an exempt employee for violating a written policy that applies to all employees, then they may deduct pay for full days that the employee does not work. This allows the employer to implement an unpaid suspension.

Consequences of Improper Salary Deductions

An employer that makes impermissible deductions from an exempt employee’s salary may lose the exemption not only for that employee, but perhaps for all employees in the same job classification.

However, isolated or inadvertent deductions will not destroy the exemptions as long as the employer reimburses the employees for all improper deductions.

There is a “safe harbor” protection available to employers that:

(1) have a clearly communicated policy prohibiting improper deductions and including a complaint mechanism;

(2) reimburse employees for any improper deductions; and

(3) make a good faith commitment to comply in the future,

An employer that satisfies the safe harbor parameters will not lose exemptions improper deductions unless it willfully continues to make improper deductions after receiving employee complaints.

Review Your Pay Practices

Employers who are uncertain about their full compliance with these rules should promptly review their exempt employee pay practices. The penalties for losing exemptions can be costly if employees subsequently seek overtime compensation.

Keep in mind that state wage and hour laws might have different exemptions or construe them differently. Employers covered by both state and federal overtime laws must comply with both. Many states apply similar salary basis concepts, but some situations might necessitate alternative or additional analysis.