Many employers assume that simply paying an employee a salary eliminates overtime obligations. It does not. Improper salary deductions can destroy an employee’s exempt status and expose employers to substantial liability for unpaid overtime wages.

Under the Fair Labor Standards Act (“FLSA”), employees classified as exempt under the executive, administrative, or professional exemptions must generally satisfy both a duties test and a salary basis test. While employers often focus on job duties, they frequently overlook the importance of maintaining the employee’s compensation on a true salary basis.

The salary basis requirement is straightforward: an exempt employee must generally receive a predetermined salary that is not reduced because of the quantity or quality of work performed. Exempt employees are supposed to be paid for the job itself — not treated like hourly workers whose pay fluctuates depending on hours worked.

Many employers nevertheless engage in practices that undermine exempt status. As a general rule, if the employee performs any work during the workweek, the employer must pay the employee the full salary amount. One exception to this general rule is that an employer may make deductions for full day for absences due to personal reasons (other than sickness or disability) if the employee is absent for the day. The employer cannot charge the employee for a full day’s absence if only part of the day is taken. The regulations state that if an exempt employee is absent for one and a half days for personal reasons, the employer can deduct only for the one full-day absence. Employers typically cannot reduce a salaried employee’s pay simply because the employee worked fewer hours in a given week or left early for a doctor’s appointment. An employer may deduct paid time off (PTO), not the employee’s pay.When an employer docks an employee's PTO, but not the base pay, the predetermined salary that the employee receives for the pay period does not change. Employers can safely track, record, and deduct partial-day absences from your accrued PTO bank. As long as your actual paycheck remains the same, your exempt status is protected.

When an employee is salaried and exempt from overtime, employers cannot:

• Dock pay because the employee worked fewer than 40 hours;
• Deduct pay because business was slow;
• Penalize employees financially for missing productivity targets;
• Require salaried employees to “make up” missed time;
• Reduce compensation based on timekeeping records.

An employer cannot classify an employee as being exempt from overtime while simultaneously treating that employee like an hourly worker because it is becomes financially advantageous to the employer to do so. Many employers also require exempt employees to clock in and out. Timekeeping alone is not unlawful. Employers often track time for attendance, PTO administration, scheduling, or client billing purposes. The legal issue arises when employers use those time records to reduce compensation based on hours worked.

Improper deductions may jeopardize the exemption from overtime. Under federal regulations, an employer that maintains an “actual practice” of improper deductions may lose the exemption not only for a single employee, but potentially for other employees in the same classification working under the same managers. If this occurs, the “salaried” employee could be entitled to overtime compensation for the hours worked in excess of 40 per week.

If you are a salaried employee whose compensation is reduced based on hours worked, partial-day absences, workload fluctuations, or productivity issues, please contact the Law Firm of Morgan Rooks PC.