I. INTRODUCTION
Questions have been fielded as to whether an employer might deduct the salary of an exempt employee for time not worked. Many refer to these questions as raising the “docked salary” issue. The law in this area continues to receive much scrutiny by both the Department of Labor and the U.S. Congress. Although at times deductions are allowed under the law, an employer must be very careful so as not incur liability for making improper deductions. An improper deduction from an exempt employee’s salary can mean the loss of the benefits of the exempt status and possible liability for up to three years of overtime pay, plus interest. An employer’s policy, even if never exercised, that allows for improper deductions to employees’ salaries or against employees’ accrued leave time, may also give rise to liability.
II. PERMITTED DEDUCTIONS
Outside the limited areas in which deductions may be permitted, an exempt employee is to receive his/her salary for each week in which the employee performs any work, no matter how many hours were worked.
Salary deductions from an exempt employee’s salary are permitted when the employee absents himself or herself from work for a day or more for personal reasons other than jury duty, attendance as a witness or temporary military leave. An employer may offset amounts received by the employee as a witness or juror or military pay against the salary due for the particular week without loss of the employee’s exempt status.
Salary deductions may also be made for a day or more of sickness or disability if the deduction is pursuant to a plan, policy or practice of compensation for loss of salary because of sickness and disability. Deductions may be made due to the employee missing a full day or more of work because of illness or disability if the employee has used up leave time or not yet accrued any leave time under the employer’s policy. No deduction may be made from an exempt employee’s salary if less than a full day of work is missed due to illness, even if the employee has exhausted leave benefits.
Again, deductions from the salary of an exempt employee may not be made for an absence of less than one day.
The Department of Labor has also clarified the pay requirements for exempt employees who fail to show up to work during inclement weather. Specifically, when an employer remains open for business during inclement weather, and an employee chooses not to report to work for the day due to the adverse weather conditions and/or related transportation difficulties, the employee’s absence is considered to be for “personal” reasons as opposed to being based on sickness or disability. Any whole-day deduction from the salary of an exempt employee for such reason is permitted and does not otherwise effect the employee’s exempt status.
Deductions are also permitted, if made in good faith, as a penalty for infractions of safety rules of major significance. This exception has been applied by the Department of Labor and the courts in very narrow and limited cases.
III. “WINDOW OF CORRECTION”
The Fair Labor Standards Act permits employers that make a single or inadvertent error in deductions a chance to reimburse the employee for the illegal deduction. Referred to as the “window of correction,” under regulations in effect prior to August 23, 2004, the employer must have also warranted that proper procedures would be followed in the future. This “window” was very limited in scope as applied by the courts.
Under the revised regulations, effective August 23, 2004, the “window of correction” interpretation is that exemption will not be lost, due to improper salary deductions, if the enterprise or employer demonstrates “good faith compliance” by: clearly communicating a policy prohibiting improper deductions and such policy must include a complaint mechanism; reimbursing any employee the deducted amount due to the employer’s noncompliance; and making a commitment to comply with the Fair Labor Standards Act in the future.
If the “window of correction” is not applied, the employer risks losing the benefit of exempt status for all affected employees and may be liable for damages for two years (in the case of willful intent, three years) prior to the incident.
Generally, courts have ruled that the “window of correction” will not be available to employers whose policies provide for improper salary deductions, even if never made. Policies that dock exempt employees for missing work due to weather, car problems or medical reasons, even if never enforced, show an employer’s intent to make illegal deductions and will destroy the employees’ exempt status. An appellate court has held that requiring exempt employees to use leave time for absences of less than a day is a violation.
The U.S. Eighth Circuit Court of Appeals, whose decisions control how the federal law is interpreted in Nebraska, held that an actual deduction must be shown before an exempt status is destroyed. The decision involved public, not private, employers.
IV. CONCLUSION
The severity of the liability necessitates all employers to review policies or employment practices involving deductions from salaries of exempt employees, to avoid losing the exempt status of salaried employees.