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Employers often ask when it’s permissible to deduct amounts from an employee’s wages, or to dock an employee’s pay. Deductions can be made in certain cases, but the legality often depends on the nature and purpose of the deductions, as well as the status of the employee as exempt or non-exempt.
Note that the following information is based on the federal Fair Labor Standards Act (FLSA) regulations. State agencies may have more restrictions for deductions.
One test that must be met for an employee to be “exempt” is to be paid on a salary basis. This salary is not subject to reduction because of variations in the quality or quantity of the work performed. An exempt employee must receive the full salary for any week in which the employee performs any work, without regard to the number of days or hours worked. However, exempt employees need not be paid for any week in which they perform no work.
There are a few allowable deductions, however. They’re provided at 29 CFR 541.602(b), and outlined below.
Deductions may be made when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability. This applies only to full days, and not to partial days. If an exempt employee is absent for one and a half days for personal reasons, you can only deduct for the full-day. For example, if an employee calls in for a personal day due to bad weather, the employee is not entitled to pay for that day.
An FLSA Opinion Letter dated October 28, 2005, states that an exempt employee’s voluntary absence due to adverse weather is an absence for personal reasons. A company that remains open for business may deduct one full-day’s absence from the salary of an exempt employee who does not report for work for the day. Deductions for less than a full-day’s absence are not allowed.
If your business closes for a “snow day” or other reason, you can’t deduct the day from a salaried employee because a business closing is not a “personal day.” In this case, you can direct an exempt employee to use vacation or other leave. However, if the employee doesn’t have vacation available (or the company doesn’t have a personal leave policy) the employee is still entitled to full wages if he or she performed work that week.
Under the FLSA, you aren’t required to provide vacation or other paid leave. Since paid leave isn’t regulated, you can require that vacation (or other leave) be used on any specific day. In short, the FLSA doesn’t regulate how you classify the time for a business closing (i.e., vacation or personal time off) for an exempt employee, as long as the employee receives his or her full salary.
Deductions may be made for absences of one or more full days of sickness or disability (including work-related accidents) if the deduction is made according to a bona fide plan, policy, or practice of providing compensation for loss of salary. Deductions for full-day absences also may be made before the employee has qualified under the plan, policy, or practice, and after the employee has exhausted the leave allowance.
For example, if you have a short-term disability insurance plan providing salary replacement for 12 weeks starting on the fourth day of absence, you can make deductions from pay:
Similarly, you can make deductions for full-day absences if salary replacement benefits are provided under a state disability insurance or a workers’ compensation law.
You can’t dock pay for jury duty, attendance as a witness, or temporary military leave. However, you can offset any amounts received as jury fees, witness fees, or military pay for a particular week against the salary due for that week. For example, if an employee on jury duty receives $20 per day for serving, you can deduct that income from the exempt employee’s salary.
Deductions from pay can be made for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those relating to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries, and coal mines.
Deductions from pay can be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Suspensions must be imposed pursuant to a written policy applicable to all employees.
For example, you may suspend an exempt employee without pay for a few days for violating a written policy prohibiting sexual harassment. Similarly, you may suspend an exempt employee without pay for several days for violating a written policy prohibiting workplace violence.
Again, these deductions are only allowed for full-day suspensions. If you send an employee home after a partial workday, he or she is still entitled to a full day’s wage for that day.
NOTE: These provisions are based on the salary basis rule as adopted in 2004. Many states incorporate the previous version of the salary basis rule (from 2003) which was 541.118, Salary Basis. The provisions of the “old” law and the “new” law are substantially identical except that the old law did not provide for disciplinary suspensions of less than one week. Thus, some states may not recognize or allow this provision, and imposing an unpaid suspension of less than one week could violate state law.
You are not required to pay the full salary in the initial or terminal week of employment. You may pay a proportionate part of an employee’s full salary for the time actually worked in the first and last week of employment.
You are not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the FMLA, including intermittent leave. When an exempt employee takes unpaid FMLA leave, you may pay a proportionate part of the full salary for time actually worked.
For example, if an employee who normally works 40 hours per week uses four hours of unpaid leave under the FMLA, you could deduct 10 percent of the employee’s normal salary that week (four hours is 10 percent of 40 hours).
When calculating the amount of a deduction, you may use the hourly or daily equivalent of the employee’s full weekly salary, or any other amount proportional to the time actually missed. A deduction as a penalty for violations of major safety rules may be made in any amount.
Although the allowable salary deductions are restricted to those described above, employers can make a reduction in salary as a result of a reduced workweek (i.e., due to short-term economic circumstances or similar conditions). The Department of Labor’s Field Operations Handbook includes the following on this issue:
Salary reduction as result of reduced workweek. A prospective reduction in the predetermined salary amount to not less than the applicable minimum salary due to a reduction in the employee’s normal scheduled workweek is permissible and will not defeat the exemption, provided that the reduction in salary is a bona fide reduction that is not designed to circumvent the salary basis requirement (e.g., a 20 percent reduction in an exempt employee’s salary while assigned to work a normally scheduled four-day reduced workweek due to the financial exigencies of the employer and/or to avoid layoffs would not violate the regulations as long as the reduced predetermined salary amount is at a rate that is not less than the applicable minimum salary of $455 per week).
This section if the Field Operations Handbook is referenced in an Opinion Letter (FLSA 2004-5) which addressed a question about an employee whose hours would be temporarily reduced because of a disability. This letter includes the following:
[In a 1970 opinion letter, the Wage & Hour Division] addressed a situation involving an employer that already had made extensive layoffs, but needed to further reduce costs either by reducing the workweek of its employees or laying off additional employees. We concluded in that instance that the salary basis requirement would not preclude a reduction in employees’ salaries to match the reduced workweek, because the reduction to avoid layoffs was bona fide and not designed to circumvent the salary basis requirement. A March 4, 1997 opinion letter allowing a salary reduction when the normal workweek was reduced from 40 to 32 hours to avoid layoffs due to reduced state funding for mental health services reached the same result. We believe that a reduction in salary due to an employee’s reduced workweek while the employee is medically incapacitated from working full-time is directly analogous to these previous situations, assuming that the rehabilitation pay program applies only to significant periods of disability (i.e., recurrent changes in the normal scheduled workweek, such as a change for every routine short-term illness, more likely would appear to be designed to circumvent the salary basis requirement).
Certain deductions can not be made against the salary of an exempt employee without jeopardizing the employee’s exempt status. The regulation at 29 CFR 541.603 begins by stating:
An employer who makes improper deductions from salary shall lose the exemption if the facts demonstrate that the employer did not intend to pay employees on a salary basis. An actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis.
An example of an improper deduction would be for damage or loss of company equipment. An FLSA Opinion Letter dated March 10, 2006, includes the following:
.... deductions from the salaries of otherwise exempt employees for the loss, damage, or destruction of the employer’s funds or property due to the employees’ failure to properly carry out their managerial duties (including where signed “agreements” were used) would defeat the exemption because the salaries would not be “guaranteed” or paid “free and clear” as required by the regulations. Such impermissible deductions violate the regulation’s prohibition against reductions in compensation due to the quality of the work performed by the employee. Consequently, any deductions made to reimburse the employer for lost or damaged equipment would violate the salary basis rule.
However, the situation gets more complicated for employees who also earn commissions above and beyond their guaranteed salary. An Opinion Letter dated July 6, 2006, states the following:
The final rule at 29 CFR 541.600(a) requires only that exempt employees be paid a guaranteed salary of at least $455 per week, and any additional compensation above this salary amount is generally something that may be agreed upon between the employer and the employee. The prohibition against improper deductions from the guaranteed salary under 29 CFR 541.602(b) does not extend to any such additional compensation provided to exempt employees. Therefore, it is our opinion that cash shortage deductions may be made from a salaried exempt employee’s commission payments without affecting the employee’s exempt status ....
A non-exempt employee is not entitled to wages during an absence simply because non-exempt employees are only entitled to wages for hours actually worked. For the most part, a deduction that’s allowed for exempt employees is also allowed for non-exempt employees, but the reasons may be different. For example, if a non-exempt employee doesn’t report to work because of bad weather, you don’t have to provide wages for that day because the employee didn’t actually work (regardless of whether the business was open or closed).
For non-exempt employees, any deduction can not reduce the employees’ wages to less than the minimum wage.
One of the most common questions involves a deduction for uniforms or other “tools of the trade.” The costs of furnishing items to employees that are primarily for the benefit or convenience of the employer may not be counted as a part of wages due. Violations occur in two ways:
(1) Directly, when an employer deducts the cost of furnishing an item; or
(2) Indirectly, when the employee must incur out-of-pocket expenses to buy the item and the employer fails to reimburse the employee.
The regulation at 29 CFR 531.3 provides a short list of general items that are considered to be primarily for the benefit of the employer. The list includes:
It makes no difference whether you require an employee to purchase a uniform or equipment before beginning work or during the course of the work – both situations are potential violations if the employee acquires the item in connection with employment. If you require a prospective employee to purchase a uniform before starting work, you must reimburse the employee no later than the next regular payday. These same principles apply to the costs of furnishing any tools or equipment required by other law by the nature of the work, or by the employer.
Other items which are primarily for the benefit or convenience of the employer are listed in 29 CFR 531.32(c), to include (among others):