The "Salary Basis" Test for Exempt Employees
Salary basis means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.
The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work. This is referred to as the "no docking rule". Subject to certain exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked. However, exempt employees do not need to be paid for any workweek in which they perform no work. If the employer makes deductions from an employee’s predetermined salary (for example, because of the operating requirements of the organization), that employee is not paid on a salary basis. Thus, if the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.
Exceptions to the No Docking Rule
(Permissible Deductions from a Salaried Employee)
Deductions from the salary of an exempt employee are permissible under the following circumstances:
- Deductions from Salary for Disciplinary Suspensions. An employer may impose unpaid disciplinary suspensions of a full day or more if:
- They are imposed in good faith for infractions of workplace conduct rules. A violation of workplace conduct rules means serious misconduct — such as sexual harassment, workplace violence, or violation of drug or alcohol policies.
- It does not include rules relating to performance or attendance.The suspensions are imposed pursuant to a generally applicable written policy. The written policy must be sufficient to put employees on notice of the consequences of a violation.
- Deductions for Sick or Disability Leave. Except for leaves taken under the Family and Medical Leave Act (FMLA), deductions for absences for sickness or disability are permissible only for full-day absences and only in accordance with a bona fide plan, policy, or practice that provides compensation for salary lost due to illness.
- Deductions during FMLA Leave. Pursuant to 29 C.F.R. 541.602(b)(7), “An employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the FMLA,” but rather “may pay a proportionate part of the full salary for time actually worked.” Employees and employees sometimes have the right under the FMLA to substitute paid leave for FMLA leave. To the extent paid leave is substituted for FMLA leave, no deductions may be made.
- Penalties for Safety Violations. An employer may offset salary with penalties imposed in good faith for violations of safety rules of major significance.
- First and Last Weeks of Employment. If an employee does not work a full workweek during the first or last week of employment, an employer is only required to pay a pro rata percentage of the salary for that workweek.
- Deductions for Jury or Witness Fees, and for Temporary Military Duty. An employer may offset salary with jury duty or witness fees and temporary military pay
Note: According to IRS Revenue Ruling 2009-11 and the Internal Revenue Code § 3401(h), differential wage payments made to an individual on active duty for more than 30 days are subject to income tax withholding, but not to Social Security and Medicare (FICA) or unemployment tax (FUTA). A differential wage payment is a payment of part or all of the wages the employee would have received if the employee still provided services to the employer. Employers must report the differential wage payments and the amounts withheld on the employee’s Form W-2. Note: An employer is not required to pay the full salary in the initial or terminal week of employment or for weeks in which an exempt employee takes unpaid leave under the FMLA.
(Improper Deductions from a Salaried Employee)
- Deductions from Accrued Leave Accounts. Employers may deduct from a salaried employee’s accrued paid leave time an amount of time equal to the duration of the employee’s tardiness or absence. For example, if an employer has a vacation or sick leave policy under which an employee accrues paid time off, the employer may deduct from such accrual for any absences. See WH Admin Op. FLSA 2005-7 (Jan 7, 2005). However, employers should remember that deductions from accrued leave for absences related to sickness or disability may violate the ADA or the FMLA.
- The employer will lose the exemption if it has an actual practice of making improper deductions from an employee’s salary.
- If an actual practice is found, the exemption is lost during the time period of the deductions for employees in the same job classification working for the same managers responsible for the improper deductions.
1. The number of improper deductions, particularly as compared to the number of employee infractions warranting deductions.
2 The time period during which the employer made improper deductions. The number and geographic location of the employee(s) whose salary was improperly reduced and the manager(s) responsible.
3. Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.
- Factors to consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to, the following:
Note: Isolated or inadvertent improper deductions should not result in loss of the exemption if the employer reimburses the employee for the improper deductions.
Based upon safe harbor provisions, employers will not lose an exemption if the employer complies as follows:
- Has a clearly communicated policy prohibiting improper deductions, which includes a complaint mechanism.
- Reimburses employees for any improper deductions.
- Makes a good faith commitment to comply in the future.
However, the exemption will be lost if the employer willfully violates the policy by continuing the improper deductions after receiving employee complaints.
Note: The best evidence of a clearly communicated policy is a written policy that was distributed to employees prior to the improper pay deductions; for example, by providing a copy at the time of hire or publishing the policy in an employee handbook.
The information provided above is intended to give you a basic understanding of the salary basis test, but this does not constitute legal advice and it cannot substitute for a thorough review and determination of individual employment issues, situations and requirements with your attorney.
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