The Risky Business of Salary Deductions

Authored by Steve Holden. Published in the Sacramento Business Journal May 2015.

The relationship between an employer and an “exempt” employee is intended to be mutually beneficial. Employers are relieved from tracking hours of work, providing rest periods and paying overtime. In exchange, employees get a higher rate of compensation that cannot be reduced because of variations in the quality and quantity of work.

All too often employers erroneously focus on an exempt employee’s hours — the quantity of work. This can lead to salary deductions based on employee absences that jeopardize the exempt status and the intended mutual benefits.

What does “salary” mean in the context of exempt status? It means that each pay period the exempt employee will receive a predetermined amount of money constituting all or part of the employee’s compensation. This “salary” is a required component of exempt status; without it the exemption is lost. Employers can make a deduction from salary in only a very limited number of circumstances.

We’ll consider two kinds of salary deductions based on an exempt employee’s absence from work: full-day and partial-day.

Full-day deductions are lawful in the following circumstances:

•  The employee is absent for one or more full days for personal reasons, excluding sickness or disability.
• The employee is absent for sickness or disability and the absence exceeds a week. If there is a bona fide policy or practice for providing paid sick leave, then deductions can be made for a single day of absence if an employee has exhausted all of the leave benefit.
• The employee is on an unpaid disciplinary suspension of a full day or more.
• The employee is paid a proportional amount of the regular weekly salary for time actually worked in the first or last week of employment.
• The employee is on unpaid leave under the federal Family Medical Leave Act or California Family Rights Act.

Please note that with the exception of federal or state family leave, these deductions can only be made in full-day increments. For example, if an employee misses two and half days of work the deduction would be for two days. An employer may not deduct the partial day absence.

Partial day salary deductions are permissible in only one circumstance:
The employee is on unpaid leave under FMLA or CFRA. It is improper to deduct an exempt employee’s salary for a partial day of absence, unless FMLA/CFRA related, without compromising an employee’s exempt status.

Several courts and the Department of Labor have said deductions from an employee’s “leave bank” are proper in less than full-day increments. These deductions, however, do not actually reduce an employee’s guaranteed salary.

Rather, they only reduce the amount of accrued leave time in the bank.
When an employee’s leave bank is empty no deductions should be made for a partial day absence unless FMLA/CFRA qualifying. Sticking to the mantra “no partial day deductions allowed” will avoid trouble.

So what does an employer do when an exempt employee leaves early, comes in late and works fewer hours than the employer expects for the position?

If precise hours on the job are truly integral to the position, the employer should reevaluate the employee’s classification and the amount of work assigned to the employee.

If not, the employer should evaluate the employee’s overall work product and results, not the time spent in the office each day. Notwithstanding the hours worked, is the job getting done? Focusing too much on quantity of hours worked rather than results creates the possibility of losing the exempt status — and a resulting liability.