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Legal & Regulatory Issues : Can a company deduct a terminating employee’s negative leave balance from the employee’s final paycheck as a way to “pay it back” to the company?

   1/14/2014
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In instances where payment on a “salary basis” is a requirement for the exemption, regulations under the Fair Labor Standards Act (FLSA) have established circumstances under which an employer is permitted to make deductions from an exempt employee’s pay without losing an FLSA-exemption. For example, the “executive” exemption and “administrative” exemption both require payment on a “salary basis.” This list of permitted deductions is exhaustive, meaning that if the deduction is not on the list, then the deduction cannot be made without losing the exemption. This is the FLSA’s exhaustive list of permitted deductions from exempt employee’s pay without endangering an exemption where payment on a “salary basis” is an element of the exemption:

  • Full day absences for personal reasons.
  • Full day absences for sickness or disability if the deduction is made as part of a bona fide paid leave plan.
  • Offset fees paid to employees for serving as a witness, juror or military pay.
  • Bona fide penalties for breaking safety rules or rules of major significance.
  • Full day disciplinary suspensions for breaking workplace rules.
  • Deductions made for employees working partial weeks in the initial and terminal weeks of employment.

The risk of making an improper deduction is that the exemption may me lost not only as to the departing employee, but all similarly-situated employees.

Given this list, the question does arise, could an employer track excess PTO hours the employee had taken (but not yet earned) and ask the employee to pay back those hours upon their exit? This course of action may be problematic.            

In 2005, the Department of Labor published an opinion letter regarding the partial day use of paid leave for exempt employees. Even though the bulk of the letter discusses the topic of partial day PTO use for exempt employees, the letter does explicitly state that employers still have an obligation to pay an exempt employee’s full salary even if the employee has a negative leave balance. 

Theoretically, this type of deduction could be made with very careful, detailed recordkeeping that would separate negative leave hours for partial day absences (not a permissible deduction) from negative leave hours for full day absences (a permitted deduction). Even with this type of recordkeeping, state wage payment and wage deduction laws may still prohibit this type of deduction. Moreover, deductions should not take the employee below the applicable minimum salary for the exemption, and certainly not below the applicable minimum wage. 

Two options that pose the least amount of risk for employers faced with this situation are:

  • Establish a maximum number of negative leave hours an employee can take. Ideally, this should be a number that the employee could earn back relatively quickly, within a single pay period or a few pay periods. Any absences taken over this amount would be subject to the exhaustive FLSA deduction rules stated above. If the employee separates before the negative leave is earned back, the employer should not deduct this amount from the employee’s pay, but the potential for loss is lessened because of possible deductions during the employment.
  • Attempt to make proper deductions in real time, that is to say, in the pay period in which the absence occurred. Deductions for partial day absences cannot be made due to FLSA regulations, but deductions for full day absences can be made. The employer could establish a rule of making deductions for full day absences if no leave is available and allowing the employee to use negative leave for partial day absences. 

Legal counsel should review any policy or practice on this topic prior to implementation to ensure compliance with all applicable state and federal wage deduction laws. 

 

 

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This material is for informational purposes only and not for the purpose of providing legal advice. You should always contact your attorney to determine if this information, and your interpretation of it, is appropriate to your particular situation.

 

 

This material is for informational purposes only and not for the purpose of providing legal advice. You should always contact your attorney to determine if this information, and your interpretation of it, is appropriate to your particular situation.

 

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