When Can an Employer Make Deductions from an Employee’s Salary without Destroying the Employee’s Exempt Status?

January 2015

By: James B. Sherman, Esq.

We frequently are asked whether and under what circumstances an employer may make deductions from an employee’s salary without impacting the employee’s exempt status for purposes of overtime under wage and hour law.  HR professionals know that in order to be exempt from paying overtime, an employee first must be paid on a salaried basis and that making deductions from an employee’s salary can sometimes destroy the exemption.  At the same time salaried employees frequently do things (or fail to do things) that may cause their employers to want to make deductions from their pay.  Consequently, knowing which deductions do not destroy an exempt employee’s required salaried basis of compensation and those deductions that do ruin the exemption, is extremely important to employers.

The following is a “cheat sheet” employers may use as a quick reference addressing some of the more common circumstances where deductions may legally be taken from an exempt employee’s salary and where deductions are not allowed.

            DEDUCTIONS ALLOWED

• Full day absences taken for personal reasons. Example: An exempt employee who misses 1 ½ days of work for personal reasons, such as golfing or helping a family member move, could be docked 1 full day of salary because the absence was for personal reasons, but could not deduct for the additional half day.
• 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. Example:  An employer that maintains a bona fide policy or practice which pays all or a portion of an employee’s salary during absences for sickness or disability, can deduct from an employee’s salary for any related absence occurring before, during and after such payments are exhausted, for any period of full day absences covered by this policy.
• Infractions imposed in good faith for violation of safety rules that are of major significance. Example: An employer may legally make a deduction from an exempt employee’s pay as a penalty for a serious safety rule violation such as smoking in a coal mine.
• Disciplinary suspensions imposed in good faith for infractions of “workplace conduct rules” – must be pursuant to a written policy applicable to all employees.  Example: An employer may legally impose a three-day unpaid suspension for violating a written policy applicable to all employees prohibiting sexual harassment.
• Exempt employees who are on unpaid FMLA leave need not be paid under that law.

            DEDUCTIONS NOT ALLOWED

• Less than full day absences regardless of reason.
• Full day absences occasioned by sickness or disability, where there is no bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability.
• Infractions of safety rules that are not of major significance.
• Infractions of unwritten workplace conduct rules or rules that address things other than workplace conduct (e.g. attendance infractions for tardiness).

Another question we frequently hear from employers is how to discipline an exempt employee for not working enough hours as may be expected of them.  An example would be a salaried exempt employee who does not miss full days of work but shows up late, leaves early, or worse, comes late/leaves early.  Although this appears to present employers with a dilemma based on the above summary of Department of Labor (D.O.L.) regulations, the short list of answers is: (1) fire the employee; (2) demote the employee; or (3) if it is apparent the employee is never going to work a 40 hour week, much less a week exceeding 40 hours (i.e. where there is no risk of incurring overtime) change the employee’s method of pay from salary to hourly – this will make the individual non-exempt, regardless of their job duties, but if there is no risk of incurring overtime liability it is better to pay only for the work an employer is getting, right?

Wage and hour law can be tricky and any of the above rules can be impacted by any number of nuances.  Accordingly, for questions regarding exempt employee status, salary deductions, or related issues please contact attorney James Sherman at 952-746-1700 or jasherman@wesselssherman.com.