Tuesday, April 13, 2010

Exempt Employee Definition: Five Frequently Asked Questions

Some of the most common questions we receive cover the definition of an exempt employee under the Fair Labor Standards Act. The definition is important because an employer must pay overtime to employees who work more than 40 hours per week unless the employees meet that definition via certain tests regarding job duties and salary.

The FLSA provides exemptions for executive, administrative, and professional employees; outside sales personnel, certain specialized computer personnel; certain highly compensated employees; certain retail sales employees; and employees covered by the Motor Carrier Act (MCA). In order to qualify as exempt from the overtime pay requirements, an employee must pass three tests: the salary level test, salary basis test, and duties tests.

Here are some common questions about exempt employees.

Q: Our company’s business has fallen off dramatically. Can we require that each exempt employee take a one-week unpaid furlough before the end of our fiscal year?

A: Unfortunately, many employers are in the position of looking for ways to cut costs, and many are opting for furloughs as a means to cut costs without cutting jobs. The Department of Labor recently released several opinion letters addressing how furloughs affect exempt employees. The following are the main principles:

• Weeklong furlough. If an employer sets up a weeklong furlough and doesn’t pay exempt employees, there is no risk of losing the employees’ exempt status because the FLSA regulations provide that exempt employees need not be paid for any workweek in which they perform no work.

• Partial-week furlough deducting employee pay. If an employee sets up a partial-week furlough and deducts the pay of exempt employees for the furlough days, the employees are at risk of losing their exempt status and may be entitled to overtime.

• Partial-week furlough using vacation time. If an employer sets up a partial-week furlough and uses vacation time for the furlough time so that the employees receive their usual salary, there is no risk of losing the exemption. But this requires that every employee on furlough has enough vacation time to cover the furlough.

• Permanent furlough arrangement. Employers may set up a permanent change in an employee’s usual weekly schedule, such as changing the weekly work schedule from 5 days to 4 days, and altering the employee’s salary to match. As long as the exempt employees receive at least the $455 weekly salary required by the FLSA for exemption, they will remain exempt. Based on this information, you may require exempt employees to take a one-week unpaid furlough without jeopardizing their exempt status.

Q: Can a full-time exempt employee be suspended without pay?

A: Deductions from the pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. The disciplinary deductions must involve serious misconduct (harassment, workplace violence, etc.), not performance or attendance issues. The employer must have a written policy applicable to all employees in order to make disciplinary deductions. For example, an employer may suspend an exempt employee without pay for three days for violating a generally applicable written policy prohibiting sexual harassment or workplace violence.

Q: Can we require exempt employees to clock in and out for lunch periods and at the start and end of the workday?

A: Employers may require exempt employees to clock in and out for lunch periods and at the beginning and end of their work day. There are a number of reasons why an employer might want to require exempt employees to “punch a time clock” in the same way that non-exempt employees are required to do so. One reason involves the equitable treatment of all employees regardless of level in the company. Another reason is that a time clock provides a record of exempt employees’ attendance. However, in order to continue to be classified as exempt, these employees must be paid on a salary basis meaning they must paid a fixed salary each week. The United States Department of Labor (DOL) enforces regulations that define the salary basis requirement for exempt status (29 CFR 541.118, 541.212, and 541.312). To be exempt, administrative, executive, and professional employees must generally be paid a predetermined amount each pay period that is at least the minimum weekly salary required by the regulations (currently $455 per week). The amount paid may not be reduced because of a variation in the quality or quantity of the work performed. With few exceptions, the employee must receive his or her full salary for any week in which he or she performs any work without regard to the
number of days or hours worked.

Accordingly, if an exempt employee clocks in late to work or leaves early at the end of the day, the employer may not dock his or her pay as it does for a non-exempt, hourly employee. We hope this information is helpful. Please let us know if you have additional questions.

Q: If an exempt employee comes into work for half of an hour and needs to leave due to personal reasons, are we required to pay the employee for the entire day or can we use available PTO time?

A: As a general rule, employers may not deduct from an exempt employee’s weekly salary because of a partial day absence from work. He or she must be paid the full weekly salary even though a partial day was missed. However, if the employer has a written policy of which the employee is aware providing for the use of accrued paid time off in partial day increments, the employer may charge a partial day absence to vacation or other accrued paid time off. The result is that the employee still receives the full salary for the week.

The U.S. Department of Labor has issued an Opinion Letter addressing this issue. The relevant paragraph is copied below: “’To respond to your specific concern about whether or not an exempt employee’s accrued PTO leave bank may be reduced for partial day absences, the answer is yes. Where an employer has a benefits plan (e.g., vacation time, sick leave), it is permissible to substitute or reduce the accrued leave in the plan for the time an employee is absent from work, whether the absence is a partial day or a full day, without affecting the salary basis of payment, if the employee nevertheless receives in payment his or her guaranteed salary. Payment of the employee’s guaranteed salary must be made, even if an employee has no accrued benefits in the leave plan and the account has a negative balance, where the employee’s absence is for less than a full day.”

The federal Fair Labor Standards Act (FLSA) has strict rules about deductions from the pay of an exempt employee. There is a detailed discussion on Compensation.BLR.com that can be found here. For your convenience, the part most relevant to your question is copied below:

• Personal reasons. Deductions may be made when the employee is absent from work for a full day or more for personal reasons other than sickness or disability. Thus, if an employee is absent for a day or longer to handle personal affairs, his or her salaried status will not be affected if deductions are made from his or her salary for such absences. If an employee is absent for less than a day, he or she must be paid for the full day.

• Family and Medical Leave Act (FMLA) leave. Employers may dock the pay of otherwise salaried and exempt employees for family and medical leave-related absences of less than one full day without affecting their exempt status but only in situations where the employer is required to provide leave under the FMLA.

Q: Do you have a policy for giving exempt employees compensatory time? Specifically, when employees travel for the company on weekends, the company would like to show their appreciation by giving them an additional day of PTO.

A: Instituting a formal compensatory time off policy for exempt employees is legal, but many employers avoid formal policies due to the complications such a policy can create. Employers sometimes avoid formal comp time policies because they may create the expectation that exempt employees work set hours or that certain work is “extra.” Instead, many employers opt to grant additional leave to exempt employees on an individual and discretionary basis, based on
exceptional performance.

If your organization wishes to provide comp time to exempt workers in a formal policy, it is best to set out a policy or clear expectations regarding when comp time is earned, how it will be tracked and within what time frame it must be used. For example:

• The policy should first limit and define the employees eligible for comp time to those that are exempt from overtime provisions of the FLSA. The policy should specifically state nonexempt positions are entitled to overtime pay and must be compensated for any hours worked over 40 hours in a work week and are not eligible for compensatory time off.

• State that the employer has no legal requirement or obligation to grant compensatory time off to exempt employees. A supervisor may choose to grant compensatory time off to exempt employees who are required to work in excess of 40 hours per week for special projects or during weekends or any normally scheduled time off. State how compensatory time will be granted (e.g., on an hourfor-hour or other basis).

• Require supervisory approval of work that qualifies the exempt employee for comp time. Consider requiring recordkeeping of hours worked, use of timesheets, etc., depending on the
work environment.

• Set time periods for use of comp time (i.e., within a year of date which comp time is accrued, within 60, 90 days, etc.)

• Set limits on when an employee can use comp time (i.e., allowing supervisors to deny comp time leave requests if taking such time will “unduly disrupt” the department’s operations.

• Set limits on the number of hours of comp time an employee can accrue in a set period.



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