Deduction for damage could impact exempt status

By Allen Smith Apr 12, 2006

A policy requiring deductions from the wages of nonexempt workers who lose or damage company equipment such as cell phones and laptops may not be extended to exempt workers without jeopardizing their exempt status, according to a U.S. Department of Labor (DOL) opinion letter.

An unidentified company asked the DOL whether the Fair Labor Standards Act (FLSA) would permit such a policy extension or, alternatively, let employers require exempt employees to pay for the damage out of pocket without jeopardizing their exempt status. No and no, the DOL responded in an opinion letter released March 27 (FLSA2006-7, signed March 10, 2006).

Some deductions permitted

For employees to be considered paid on a salary basis they must be paid a “predetermined amount … not subject to reduction because of variations in the quality or quantity of the work performed,” the DOL stated. An exempt employee must receive the full salary, subject to the following exceptions outlined in the FLSA regulations:

    • Full-day deductions when an exempt employee is absent for personal reasons aside from sickness or disability.

    • Deductions for absences of one or more full days because of sickness or disability if the deductions are in accordance with a bona fide plan, policy or practice of compensating for loss of salary due to such sickness or disability.

    • Offsets for jury fees, witness fees or military pay.

    • Penalties imposed in good faith for infractions of safety rules of major significance.

    • Deductions for unpaid disciplinary suspensions of one or more full days if imposed in good faith for infractions of workplace conduct rules.

In addition, full salary is not required for the first or last week of employment, but only pro rata for the time actually worked. And an employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave. (An employer may pay a proportionate part of the full salary for time actually worked when unpaid leave is taken.)

“None of the exceptions listed contemplates charging employees a fine for damage to or loss of company equipment,” the DOL observed in the opinion letter. Salary deductions for damage to company equipment would defeat the exemption because the salaries no longer would be guaranteed and paid “free and clear,” it added.

Moreover, the department stated that “such impermissible deductions violate the regulation’s prohibition against reductions in compensation due to the quality of the work performed by the employee.” As a result, any salary deductions to reimburse the employer for lost or damaged equipment would violate the salary basis rule, it determined.

This conclusion corresponds with other agency pronouncements such as its prior conclusions that:

    • Deductions from an otherwise exempt employee’s salary may not be made for cash register shortages (Field Operations Handbook, §22b14).

    • Salary deductions of an unacceptably high charge for the unauthorized use of a business phone would result in the loss of a restaurant manager’s exemption (a Nov. 4, 1981, opinion letter).

The DOL also determined that it would not matter whether an employer implements a policy to reimburse it for damaged equipment by making periodic deductions from employee salaries, or by requiring employees to make out-of-pocket reimbursements from compensation already received. “Either approach would result in employees not receiving their predetermined salaries when due on a ‘guaranteed’ basis or ‘free and clear’ and would produce impermissible reductions in compensation,” it stated.

While the company assured the DOL that its deductions from nonexempts’ pay has not resulted in reductions of pay below minimum wage, the DOL noted that the company had not indicated whether the reductions impinged on any overtime pay. The department reminded the employer that no impermissible deductions may reduce any statutorily required overtime.

Allen Smith, J.D., is senior legal editor for HR News.

Related article:
Step by Step
, HR Magazine, February 2005.

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