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July 30, 2012
Nonexempt vs. exempt: The salary basis test

Are all your employees accurately classified in terms of nonexempt vs. exempt? Have you recently evaluated your employees’ exemption status? Ensuring that your exempt employees are classified correctly can be your first step to ensuring FLSA compliance.

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The DOL estimates that nearly 70 percent of employers are not in compliance with FLSA. In 2010 alone, it set aside $25 million for an enforcement crackdown, adding 350 FLSA investigators with the goal of finding employers who commit wage and hour offenses – especially exemption misclassifications. One way you can protect yourself is to conduct an internal payroll self-audit that evaluates your current policies and practices, including an evaluation of your nonexempt vs. exempt classifications. If you routinely conduct self-audits, you’ll be more likely to find any errors before you run into legal troubles.

In a recent BLR webinar, Allen M. Kato discussed one of the first things you should look at when conducting an audit: the salary-basis test. He then outlined when it is actually permissible to deduct from the salary of an exempt worker without violating the salary-basis test.

The Salary Basis Test

When you’re conducting an audit to ensure that your nonexempt and exempt workers are all classified correctly, one of the first things you can check is whether your exempt employees meet the salary basis test.

Kato explained that "one essential element – and frankly the most simple part of this process – is to see whether the exemption satisfies the salary basis test." He continued: "all of these [primary] exemptions have an element [in common]: the need to satisfy the salary basis test, which means that the individual (the incumbent employee in the exempt position) has to be paid a salary or what is referred to as a fee basis – in other words, the equivalent of a salary even if it’s not called a salary – of at least $23,600 a year." This is a federal requirement. Employees earning less than $23,600 annual salary or fee basis (which is the annual equivalent of $455 per week) are entitled to overtime pay.

Salary Deductions for Exempt Workers?

Even for employees with salaries above the rate of pay required, the salary-basis test fails if the employer takes deductions from the employee’s salary for absences caused by the employer; for example, if employee is ready, willing, and able to work, the employer may not make deductions for time when work is unavailable.

That said, employers can take some deductions while still paying exempt employees a salary that qualifies under the salary-basis test. Deductions are allowed for:

  • Absences from work for one or more full days for personal reasons, other than sickness or disability.
  • Absences from work for one or more full days due to sickness or disability – but only if deductions made under a bona fide sick plan, policy or practice.
  • Offsetting amounts received as payment for jury fees, witness fees, or military pay.
  • Penalties imposed in good faith for violating safety rules of major significance.
  • Unpaid disciplinary suspension of one or more full days imposed in good faith for violations of workplace conduct rules.
  • Reduced schedules (paid pro rata) during the first and last weeks of employment.
  • Unpaid leave taken pursuant to the Family and Medical Leave Act (FMLA).

What About Salary Deduction Mistakes?

Sometimes, despite the best of intentions, mistakes can happen. What happens if you are reviewing the nonexempt vs. exempt status of employees and discover that an exempt employee has had an impermissible salary deduction? Do you lose the exempt status entirely?

Kato told us during the webinar that there is a safe harbor element to the law. Despite an impermissible deduction, the employee’s exemption status will not be lost if the employer:

  • Has a clearly-communicated policy prohibiting improper deductions, including a complaint mechanism.
  • Reimburses employees promptly for any improper deductions found.
  • Makes a good faith commitment to comply, and complies going forward.

For more information on nonexempt vs. exempt classifications and the salary rules associated with the exemption categories, order the webinar recording for "HR’s Pay Practice Checkup: How to Find and Fix Exemption and Other Costly Errors,". To register for a future webinar, visit http://catalog.blr.com/audio.

Allen Kato is an attorney in the Employment Practices Group of Fenwick & West LLP in San Francisco. His practice concentrates exclusively on representing management in equal employment opportunity, wage and hour, wrongful termination, privacy, unfair competition, and trade secret matters, and litigating individual and class action lawsuits before courts and agencies.

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