4 Steps to Comply with the FMLA's Key-Employee Exception

Eligible employees can take up to 12 weeks of leave under the Family and Medical Leave Act (FMLA), and employers must reinstate them to the same or an equivalent job when they return to work. But what happens if key employees—workers in positions that a business just can't do without—take leave? Does the employer have to keep a position open for them?

The FMLA has a narrow exception that allows employers to replace employees in important positions and decline to reinstate them at the end of the leave period. However, the circumstances under which it may be used are rare, said Patricia Anderson Pryor, an attorney with Jackson Lewis in Cincinnati. 

Typically, when an employer hires a full-time replacement—rather than a temporary worker—while an employee is taking FMLA leave, the employer must still reinstate the employee to an equivalent job with the same pay, benefits and prestige and substantially similar job duties. But there is an exception for key employees if reinstatement would cause "substantial and grievous economic injury" to the employer's operations, according to the FMLA. 

An employer may consider invoking the exception when it cannot operate without a particular worker for 12 weeks and needs to immediately replace that employee, said Joel O'Malley, an attorney with Nilan Johnson Lewis in Minneapolis.

Here's an example: Perhaps it would cause serious economic injury if an employer needed to immediately replace a highly compensated executive who took FMLA leave and then had to reinstate the executive at the same salary when the leave period ended.

Key employees are those who are paid on a salary basis and are among the highest paid 10 percent of the organization's employees who work within 75 miles of the particular employee's worksite.

There are no specific jobs that qualify an employee for key-employee status, noted Bari Goldstein, an attorney with FordHarrison in West Palm Beach, Fla.

"Obviously high-ranking executives are the first to come to mind, but in the caselaw, we have seen it used for the executive housekeeper up to the general manager," Pryor said. "It depends on who makes up the highest paid 10 percent."

Employers should take the following steps when considering whether to use the exception.

1. Determine if the exception applies.

First, figure out if the employee is paid on a salary basis and among the highest paid 10 percent of all employees within 75 miles of the relevant worksite. Year-to-date earnings—including wages, premium pay, incentive pay, and nondiscretionary and discretionary bonuses—should be divided by the number of weeks the employee worked. Weeks in which paid leave was taken should be included in the calculation.

Next, the employer should consider whether it can find a temporary replacement or do without the employee during the leave, according to the U.S. Department of Labor (DOL). If the employer must find a permanent replacement, it may then consider the cost of reinstating the employee in determining the effect on operations.

For example, if a company had to permanently replace the chief financial officer, who was earning $400,000 a year, it may cause the employer substantial and grievous economic injury to pay the salaries of two chief financial officers. Minor inconveniences and costs, however, would not show a substantial and grievous economic injury.

2. Provide notice to the employee.

An employer must inform the worker in writing at the time leave is requested that he or she qualifies as a key employee and might be denied reinstatement. The notice must discuss the potential consequences of denying reinstatement—including any impact the decision would have on the maintenance of health benefits—and must be provided to the employee in person or by certified mail.

[SHRM members-only forms: FMLA Notice of Eligibility and Rights & Responsibilities]

Then, after making a good faith determination, the employer must notify the employee in writing of its determination and the reasons for it. Focus on the harmful impact of the return, rather than the harmful effect of the employee's absence, O'Malley said.

The determination letter must let the worker know that the employer can't deny FMLA leave, but it intends to deny reinstatement. If the leave period has already started, the employer must provide the worker with a reasonable opportunity to return to work.

Importantly, an employer who fails to provide notice will lose its right to deny reinstatement even if substantial and grievous economic injury will result, Goldstein said. 

3. Approve the underlying leave.

Even if an employer properly notifies the key employee that he or she might not be reinstated at the end of the leave period, the actual leave must still be granted if the employee qualifies for it.

"A key employee's rights under the FMLA continue unless and until the employee either gives notice that he or she no longer wishes to return to work, or the employer actually denies reinstatement at the conclusion of the leave period," according to the DOL's website. Workers are eligible to maintain their health benefits during the leave period, and employers must continue to pay associated premiums.

"Keep in mind that the ultimate decision is not made until the employee is ready to return to work," Pryor noted.

If a key employee seeks to return to work at the conclusion of the leave period, despite receiving notice, the employer must again make a determination that restoration would cause substantial and grievous economic injury based on the facts at that point in time, O'Malley explained. "The employer cannot simply copy and paste its previous finding."

If the employer was unable to fill the position by the time the employee was ready to return to work, then the exception would not apply.

4. Review the applicable state's leave laws.

"Watch out for state and local leave laws which may provide an entitlement to reinstatement regardless of whether the employee is a key employee," Pryor said.

Employers need to research any applicable state laws and then determine how best to ensure compliance with all federal and state requirements.   

In some cases, state law may provide for additional time off after FMLA leave has been exhausted, or the federal and state leave period may run concurrently. Goldstein recommended that employer policies inform employees that:

• State family and medical leave laws may offer more or different protections or benefits to employees than federal law.
  
• The organization will comply with all such laws.
  
• Eligible employees will receive all required leave and benefits.
  

Given the rarity of the key-employee exception and the risks associated with making mistakes—such as being sued for wrongful termination by a high-level employee who can allege large wage losses—employers should consider seeking legal counsel whenever the exception is being considered, O'Malley said.