Holiday pay policy may violate the FLSA

Q: Our company has a long-standing policy that, to be paid for a holiday, an employee must work both the day before and the day after the holiday. I understand that this may cause a problem with our exempt employees. Can you explain why?

A: This is not an uncommon policy for an employer to adopt to discourage employees from calling in sick and extending their time off around a company holiday. It can, however, cause major problems for the employer if the policy applies to exempt as well as non-exempt employees.

To qualify as “exempt,” an employee must be paid on a salary basis. According to Section 541.118 of the Department of Labor’s Fair Labor Standards Act regulations, “An employee will not be considered to be ‘on a salary basis’ if deductions from his predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business. Accordingly, if the employee is ready, willing, and able to work, deductions may not be made for time when work is not available.”

Since the company holiday is an “absence occasioned by the employer,” and the employer has no way of knowing whether the employee would be “ready, willing and able to work” on that day, reducing the employee’s pay for the holiday could potentially violate the salary basis test.

This may cause exempt employees to be converted to nonexempt status and could result in significant financial liability for the company, including two or three years of back overtime pay, liquidated damages, attorney fees and court costs.

Even if the employer has not actually reduced exempt employees’ pay, the fact that they could be “subject to” such a reduction under the employer’s policy is enough for some courts to conclude that the employees are not being paid “on a salary basis.” Therefore, if an employer wishes to maintain such a policy, it would be wise to specify that the policy is intended to cover only its nonexempt workforce.

Linda K. Anguish, SPHR, is an information specialist for SHRM’s Information Center.

Please Note: This material is provided as general information and is not a substitute for legal or other professional advice. National members may reach the HR Knowledge Center by calling (800) 283-7476 and choosing option #5 or by using the HR Knowledge Center Request Form found under HR Answers on SHRM Online.