Employment: FLSA Exemptions - Part III - How Much Trouble is Caused by an Improper Deduction?


After reading the first two articles in this series you've determined that you have made some improper deductions from the salary of one or more employees who you intended to be exempt. Now what happens?

Generally, an employer who makes improper deductions from an exempt employee's salary will lose the exemption if the facts indicate that the employer did not intend to pay the employee on a salary basis. An actual practice of making improper deductions will establish that the employer did not intend to pay employees on a salary basis. Some courts have even ruled that being subject to a policy allowing impermissible deductions is sufficient to lose an employee's exempt status, even though an employee is never actually affected by the policy. Other courts have ruled that a deduction must actually be made before exempt status is affected.

The factors considered in determining whether an employer has an actual practice of making improper deductions are:

  1. The number of improper deductions made, particularly when compared to the number of employees and the reasons for making the deductions.
  2. The time period during which the employer made the improper deductions, the number of employees whose salaries were impermissibly reduced, and the geographic location of those employees.
  3. The number and geographic locations of the managers responsible for taking the improper deductions.
  4. Whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.

Generally, if it is established that the employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made, for the employees in the same job classification, and working for the same managers responsible for the actual improper deductions. This means those employees must be paid the overtime premium rate for all hours worked in excess of 40 per week. Employees in different job classifications or who work for different managers will not lose their status as exempt employees.

On the other hand, if an employer has a clearly communicated policy that prohibits improper pay deductions, provides a complaint mechanism, reimburses employees for any improper deductions and makes a good faith commitment to comply in the future, the employer will not lose the exemption. The best evidence of clearly communicated policy is, of course, a written policy that was distributed to employees prior to the improper pay deductions. This can be accomplished by, for example, providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employer's intranet.

In addition, the regulations adopted by the U.S. Department of Labor provide a safe harbor for employers who make an impermissible deduction, allowing them to correct the error under certain circumstances and preserve the employee's exempt status. The exemption will not be lost if the impermissible deduction is inadvertent, or is made for reasons other than lack of work, and the employer reimburses the employee for such deductions and promises to comply in the future. The DOL interprets its "window of correction" regulation to be limited to the situation where the employer has exhibited an "objective intention" to pay its employees on a salaried basis.

By Rebecca M. Fowler rfowler@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment litigation and counsels clients regarding everyday employment matters. 

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