Our recent Quick Quiz Answer on recovering losses from non-exempt employees has caused some to ask whether the same analysis applies to employees who are treated as exempt under the federal Fair Labor Standards Act's executive, administrative, or professional exemption (including the "computer employee" and "highly compensated employee" versions).  To answer this question, let's repeat the facts with a few changes:

Store Manager Alex is paid on a salary basis at the rate of $800 per week.  He meets all of the duties requirements for the FLSA's "executive" exemption.  On Monday, he approves accepting a $150 check in payment for merchandise.  He was so busy that he forgot to ensure that the cashier had the necessary customer information, and now the check has been returned because the account is closed.  Alex's employer is unable to contact the customer.

A written company policy that is given to all Managers when they are hired requires Alex to pay for the loss that workweek through payroll deduction, in cash, or by personal check.  As the policy requires, the District Manager has Alex sign a memo saying that he agrees to make the payment.  Alex adds a notation that he prefers to pay in cash.  He works exactly 45 hours that workweek.  Under the FLSA, how much can the employer recover from Alex that workweek?

The "Salary Basis" Principle

To qualify for the FLSA's executive, administrative, or professional exemption, most employees must be paid on a "salary basis".  This means that the employee must regularly receive each pay period a predetermined amount (of not less than $455 per week) constituting all or part of his or her compensation.  With limited exceptions, this fixed amount cannot be subject to reduction because of variations in the quantity or quality of the work performed.  Officials at the U.S. Wage and Hour Division have said that deducting a cash loss from an exempt employee's salary destroys the "salary basis" of pay required for exempt status.  See, e.g., Opinion Letter of Deputy Wage-Hour Administrator Dated April 1, 1999 (cash missing from a locked bank bag)(link below).  The rationale is that such a deduction is based upon the "quality" of the employee's work.  Cf. Opinion Letter of Wage-Hour Acting Administrator FLSA2006-7 (March 10, 2006)("salary basis" impaired by policy of deducting from salary for cost of lost or damaged tools or equipment).

So The Answer Is . . .

The employer may not directly or indirectly recover any of the loss from Alex's salary in that workweek or in any future workweek, at least not if the employer wants to preserve Alex's exempt status under the FLSA.  As with non-exempt employees, this is true even though the employer published a policy in advance, and even though Alex signed something saying that he would make the payment.  Furthermore, it makes no difference whether Alex pays in cash, or by check, through payroll deduction, or in some other manner.  It might be possible to recover the loss from commissions or bonuses Alex is due separately from his salary, provided that this (1) is done in a way that carefully avoids impairing the salary, (2) is permitted under all other applicable laws, and (3) is consistent with the terms of the commission or bonus plan.

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Opinion of Deputy Administrator 04 01 99.pdf (22.46 kb)

The answer to our March 14 Quick Quiz is "$110".  The federal Fair Labor Standards Act does not prohibit the employer from recouping some of the loss in that workweek, but it does restrict the amount.

So What Are The Limits?

The employer may not require or allow Alex to restore the loss to the extent that this would (1) cut into the required minimum-wage rate for his first 40 hours worked in the workweek, or (2) cut into any of the time-and-one-half overtime pay due for his hours worked over 40 in the workweek.  These limitations apply even though the employer published a policy in advance, and even though Alex signed something saying that he would make the payment.  Furthermore, it makes no difference whether he pays in cash, or by check, through payroll deduction, or in some other way.

Therefore, the maximum his employer can recover that workweek under the FLSA is [($10 − $7.25) × 40 hrs.] = $110.  Alex must be paid the full [($10 × 1.5) × 5 OT hrs.] = $75 for his overtime work; none of that amount can be deducted or otherwise directly or indirectly turned over to the employer in that workweek.  The balance of ($150 − $110) = $40 may only be recouped in one or more future workweeks, subject to the same restrictions.

These FLSA rules also apply to many other kinds of deductions, payments, or repayments affecting non-exempt employees.  For example, Alex's employer could neither deduct nor accept payment from Alex for bank fees or charges relating to the dishonored check to the extent that this cuts into his FLSA-required pay.  Other illustrations include cash shortages, damage to or loss of the employer's tools or equipment, the costs of required uniforms, and unreturned employer property.

USDOL Says There Are Additional Requirements

In a June 2000 enforcement policy (link below), and in a February 2001 opinion letter, the U.S. Labor Department sought to impose further conditions and restrictions upon overtime-workweek deductions even to the narrow extent discussed above.  Among them are that:

♦   There must be an advance agreement or understanding (to which the employee affirmatively agrees or assents) specifically covering the items for which deductions will be made and how the amounts will be determined.
  
♦   The deductions must be bona fide and "legitimate" ones, including that they must fall within the agreement or understanding and must not be prohibited by federal, state, or local law.

♦   Permissible deductions may not cut into the highest applicable minimum wage (such as where a state's minimum is greater than the FLSA's).

♦   The deductions may not otherwise evade the FLSA's overtime requirements (such as if the deductions were made only in overtime workweeks, or if the deduction amount was increased in overtime workweeks).

One may question whether DOL is empowered to adopt or enforce a number of the edicts in these detailed advisory materials, but nonetheless its positions are what they are.

Don't Forget About Other Laws

Applicable state or local laws might further limit what an employer is permitted to do, or they might even prohibit these kinds of deductions or payments altogether.  The parameters could also be different under specialized federal or state wage-hour laws that might apply to public construction, to providing services to government entities, to certain government supply contracts, or to other publicly-funded work.

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 FOH 32j08 06 30 00.pdf (187.19 kb)

Store Associate Alex is paid on an hourly basis at the rate of $10 per hour.  On Monday, he accepts a $150 check in payment for merchandise.  He was so busy that he forgot to get the necessary customer information, and now the check has been returned because the account is closed.  Alex's employer is unable to contact the customer.

A written company policy that is given to all employees when they are hired requires Alex to pay for the loss that workweek through payroll deduction, in cash, or by personal check.  As the policy requires, the Store Manager has Alex sign a memo saying that he agrees to make the payment.  Alex adds a notation that he prefers to pay in cash.  He works exactly 45 hours that workweek.

Under the federal Fair Labor Standards Act, how much can the employer recover from Alex?

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