Step-by-Step Guide to Complying with White-Collar Exemptions

Introduction

[Editor's note: On Nov. 15, 2024, the U.S. District Court for the Eastern District of Texas vacated the Biden administration’s overtime rule, which had raised the salary threshold for white-collar exemptions to overtime requirements. The ruling applies nationwide and returns the exempt salary threshold to $35,568 per year.]

Dancing through the steps of the salary basis test to comply with white-collar exemptions within the Fair Labor Standards Act (FLSA) can be a challenge for even experienced HR professionals.

The three basic tests an employee's job description must satisfy to qualify as a white-collar job exempt from overtime pay requirements are:

• A "salary-level" test, which requires that the employee be paid a minimum of $684 per week.
  
• A "duties" test, which requires that the job must have as its primary duty the job functions described under one of the exemptions.
  
• A "salary basis" test, which requires that the employee be paid a predetermined amount of at least the required minimum without regard to the quality or quantity of work.
  

Of those three hurdles, the one that receives the least attention—and yet is often the most exasperating to comply with—is the salary basis test. Employers are often focused on the salary-level and duties tests, and they neglect to fully consider salary basis rules.

The salary basis regulations contain seemingly straightforward exceptions to and examples of the general rule against deductions from salary. But applying the rules in specific situations can be vexing, as indicated by record numbers of queries to the Society for Human Resource Management's (SHRM's) Knowledge Center and by numerous discussions in SHRM's online member community, SHRM Connect.

The key concept that underlies the technical rules is that paying exempt white-collar employees a salary implies that they have discretion to manage their time. They are paid for the general value of their services, not the number of hours worked. And that, precisely, is why they are not entitled to overtime.

Clearly, the salary basis rules provide plenty of opportunities to misstep. But anyone—even those who believe they have two left feet when navigating the FLSA's rules—can master the law's twists and turns.

So get ready. It's time to face the music … and dance.

Box Step: The Basics

​What is the salary basis test?

Employees are considered to be paid on a salary basis if they are paid a predetermined amount, not less than $684 per week, that is "not subject to reduction because of variations in the quality or the quantity of the work performed," according to the FLSA regulations.

This means that, subject to certain exceptions (discussed below), exempt employees must be paid their full salary for any week in which they do any work, regardless of how few or how many hours they work.

Further, employees must earn the minimum salary exclusive of—that is, not including—the value of any noncash items such as room and board.

Are all exempt white-collar employees subject to the salary basis test?

No. The salary basis requirement applies to executive, administrative, professional and highly compensated white-collar employees, except for:

• Outside salespersons.
  
• Employees working as teachers, practicing lawyers and doctors, or medical interns and residents.
  
• Computer professionals who are paid on an hourly basis at a rate not less than $27.63 per hour.
  
• Executive, administrative or professional employees in the motion picture industry who are paid a base rate of at least $1,043 per week or a proportionate amount based on the number of days worked.
  

Must employers pay the salary of exempt employees who perform no work in a workweek?

No. In fact, to meet business needs, employers may cut the schedule of exempt employees by a full week at a time and pay them nothing for the week.

Further, employers can define their own workweek as beginning and ending on any day they like—provided they stick to that definition. So if the employer's workweek is Sunday to Saturday, and an exempt employee works only four hours on Sunday—and no more for the rest of the week—that employee must be paid for the full week's salary, unless the absence is covered by an exception.

Must employees who work less than a full week during their first or last week of employment be paid a full salary?

No. Employers may pay an hourly or daily equivalent of full salary for time actually worked during the first and last weeks of employment. However, employers must not deduct any negative leave balances from the employee's final pay.

​May employers require exempt employees to work a specified schedule?

Yes. The U.S. Department of Labor (DOL) states in the preamble to the final regulations that employers may require exempt employees to record and track hours and work a specified schedule.

May employers make deductions from salary for absences caused by the employer or the operating requirements of the business?

No. According to the regulations, "If the employee is ready, willing and able to work, deductions may not be made for time when work is not available."

Under what, if any, circumstances may employers reduce exempt employees' workweeks by one or more full days and reduce their pay on a pro rata basis during a business slowdown?

Indefinitely reducing the workweeks of a group of exempt employees with a commensurate decrease in pay that does not fall below $684 per week does not jeopardize employees' exempt status, says Camille Olson, a partner with the law firm Seyfarth Shaw LLP. On the other hand, reducing the workweek and pay of a single exempt employee for a couple of weeks as a result of a decrease in that employee's work probably does run afoul of the salary basis test, Olson says.

This issue was addressed in two DOL opinion letters dealing with employers that chose to reduce workweeks instead of lay off employees. One employer reduced five-day workweeks to four-day workweeks at the end of every calendar year; the other imposed an indefinite reduction in workweeks and pay for a group of salaried workers. In both situations, it was clear that the reductions were not made to circumvent the salary basis requirement, and it was unlikely the exempt employees would work overtime during those weeks.

The opinion letters conclude that the employers reduced the workers' salaries because of broad business decisions, not because of the quality or quantity of work performed.

Employers should carefully consider such pro rata adjustments, ensuring that they are not done on an employee-specific basis or to avoid overtime pay and are not viewed as temporary. Although there is no certain period that will be viewed as "not temporary," consider making such changes for a minimum of three months, suggests Olson.

Are pay deductions allowed for absences due to jury duty, witness service and temporary military leave?

No. An employee who works any time at all during the week and spends the rest of the week on court or military obligations must be paid the full week's salary. However, employers are allowed to offset against salary amounts paid as jury fees, witness fees and military pay, and do not have to pay for any week in which no work is performed.

Fox Trot: Deductions for Personal and Sickness Absences

​Are deductions from pay allowed for absences due to personal reasons?

Yes. Employers may deduct from pay "when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability," according to the regulations.

Deductions are allowed only in full-day increments. If an exempt employee is absent two full days for personal reasons, the employer may deduct two full days' pay. If the employee is absent for one and a half (1 1/2) days, the employer can deduct only for one full day. No pay is required for any workweek in which the employee performs no work.

Are deductions from pay allowed for absences due to sickness or disability?

Yes. Employers may deduct from pay for full-day absences due to sickness or disability, but only "in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability." The same rule applies "if salary replacement benefits are provided under a state disability insurance law or under a state workers' compensation law." If there is no such plan or practice, employers cannot deduct for sickness absences. Again, no pay is required for any workweek in which the employee performs no work.

Employers also may deduct for full-day sick or disability-related absences for employees who are not yet eligible for the salary replacement plan or practice or who have exhausted their available leave.

Are employers required to pay the full salary for weeks in which exempt employees take unpaid leave under the Family and Medical Leave Act (FMLA)?

No. In such cases, employers may pay a proportionate part of the full salary for time actually worked. Partial-day deductions from pay are allowed.

If an employer offers unpaid leave beyond that required under the FMLA, is the employer allowed to deduct proportionately from the employee's salary?

Yes, but only in full-day increments. Deductions for less than full-day amounts are permissible only for partial-day absences specifically mandated under the FMLA.

​If an exempt white-collar employee has exhausted all paid and unpaid leave under the FMLA but is cleared to return to work only four hours per day for some definite period, how can the employer accommodate that schedule without violating the salary basis test?

Once an employee has exhausted FMLA leave, salary may not be reduced for any further partial-day absences. As a result, employers have struggled to balance an employee's continued need for flexible scheduling and intermittent leave against the requirement to pay an effectively part-time employee a full-time salary, explains Lisa A. Schreter, a shareholder in Littler Mendelson P.C.'s Atlanta office.

There is little published guidance from the DOL as to how employers should handle this situation, says Schreter. In an opinion letter, the DOL stated that employers could cut an exempt employee's workweek and salary if they did not intend to circumvent the salary basis requirement and did not make recurrent changes of this kind.

In light of that opinion letter, Schreter believes an employer can argue by analogy that a temporary pro rata reduction in salary for a reduced work schedule due to illness should not violate the salary basis requirement. Before implementing such a change, Schreter recommends that employers:

• Discuss with the employee the expected work schedule, its duration and its effect on pay.
  
• Document the meeting in the employee's file.
  
• Ensure that the reduced salary is at least $684 per week.
  

An alternative approach, useful for an employee whose illness has resulted in erratic and unpredictable work schedules, would be to convert him or her temporarily to an hourly, nonexempt position, Schreter says. Like the pro rata reduction method, a conversion to nonexempt status should not affect an employee's previous exempt status nor preclude returning to exempt status in the future.

Cha-Cha: Deductions from Leave Accounts

​May employers make full- or partial-day deductions from exempt employees' accrued leave accounts to cover absences?

The preamble to the final DOL regulations states: "Employers, without affecting their employees' exempt status, may take deductions from accrued leave accounts." In addition, a DOL opinion letter indicates "it is permissible to substitute or reduce the accrued leave in the plans for the time an employee is absent from work, even if it is less than a full day, without affecting the salary basis of payment if by substituting or reducing such leave the employee receives in payment an amount equal to his or her guaranteed salary."

The DOL's position seems reasonable because a deduction from accrued paid leave is not really a deduction from salary. Rather, it is basically a benefit that replaces wages from a "bucket" different from the normal salary bucket, observes Tammy D. McCutchen, a principal with Littler Mendelson P.C. in Washington, D.C. "So the DOL is very unlikely to find a violation if an employer takes deductions from an exempt employee's sick leave in increments equal to partial-day deductions," says McCutchen, who was the DOL's wage and hour administrator while the white-collar regulations were being revised.

Of course, federal courts are not required to follow DOL opinion letters, cautions McCutchen. Thus, employers in jurisdictions where a federal court has not followed the DOL position on this issue are best advised to follow the court decisions.

Double Bump: Deductions for Disciplinary Reasons

Are deductions allowed as penalties for safety rule violations?

Yes. Deductions are allowed in any amount for violations of safety rules of major significance. Safety rules of major significance include those related to prevention of serious workplace dangers, such as rules banning smoking in explosive plants, oil refineries and coal mines.

Are deductions allowed for violations of workplace conduct rules?

Yes. Employers may make deductions for "unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules." Such suspensions must be imposed pursuant to a written policy applicable to all employees, such as those on sexual harassment or workplace violence.

The DOL states in the preamble to the regulations that it "does not intend that the term 'workplace conduct' be construed expansively" and specifically excludes performance and attendance issues from its scope. The term refers to "serious workplace misconduct, like sexual harassment, violence, drug or alcohol violations or violations of state or federal laws."

Tango: Effect of Improper Deductions and Safe Harbor Rules

What happens if an employer makes improper deductions from salary?

Employees' exempt status is not lost if an employer makes an isolated or inadvertent improper deduction—and reimburses the employees for the deduction.

However, an employer could lose the exemption for one or more employees if it did not intend to pay employees on a salary basis, as shown by an "actual practice" of making improper deductions. To determine if such an actual practice exists, the DOL will consider factors such as:

• The number of deductions compared to the number of employee infractions warranting discipline.
  
• The period during which deductions were made.
  
• The number and location of affected employees and managers responsible for taking deductions.
  
• Whether the employer has a clearly communicated policy prohibiting improper deductions.
  

If an actual practice of making improper deductions exists, exemptions will be lost for the time period in which improper deductions were made. This is true not only for the employees originally affected, but for all employees in the same job classification who work for the managers responsible for the deductions. Employees in different job classifications or those working for different managers do not lose exempt status.

How should employers communicate policies prohibiting improper deductions?

Disseminate safe harbor policies to employees in writing via an employee handbook or the company intranet before any improper pay deductions have occurred, such as at the time of hire. The policy should include a complaint mechanism.

What is the benefit of a clearly communicated safe harbor policy?

Employers will not lose exemptions for any employee if they have such a policy, including a complaint mechanism; reimburse employees for any improper deduction; and make a good-faith commitment to comply in the future.

What happens if an employer continues to make improper deductions after receiving employee complaints?

An employer will lose the exemption if it willfully continues to make or fails to reimburse employees for improper deductions. The exemption will be lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the improper deductions.

Salsa: Payments in Addition to Salary

May exempt employees be compensated in addition to their salary without losing the exemption or violating the salary basis requirement?

Yes. Employers may pay exempt employees additional compensation if there is a guaranteed minimum of at least $684 per week paid on a salary basis. Additional compensation may include commissions on sales, a percentage of the employer's sales or profits, or compensation based on hours worked beyond the normal workweek, and may be paid as a flat sum, a bonus, a straight-time hourly amount, time and a half or any other basis.

Unlike nonexempt employees in the private sector, exempt employees may also be granted compensatory time as paid time off.

Margaret M. Clark, J.D., SHRM-SCP, is former manager, workplace law content for SHRM. Erin Patton, SHRM-SCP, is an HR resources editor for SHRM.

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