The answer to our July 11 Quick Quiz is, "One And One-Half Days' Worth".

To qualify for the federal Fair Labor Standards Act's executive, administrative, or professional exemption, employees usually 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 based upon either the amount of time the employee works or how well he or she performs the work.  The circumstances under which this salary can be reduced for part-days missed are even more restricted.

One exception to this so-called "no-docking rule" is that deductions may be made from the salary for absences of one or more full days caused sickness, disability, or work-related accidents, if the deduction is made under a bona fide plan, policy, or practice that provides compensation for such absences.  As a practical matter, this usually means that, so long as an exempt employee has a paid-time-off allotment to cover the absence, he or she is paid the normal salary, and the absence is charged against the PTO balance.

The sick-day exception also permits proportional deductions to be made from the salary itself for whole-workday absences of this kind during the period:

♦   Before the employee qualifies for PTO, and

♦   After the employee exhausts the PTO allowance.

However, the sick-day exception does not authorize salary deductions for part-days missed.^*

But this part-day restriction does not prevent charging these absences against PTO allotments.  As the U.S. Labor Department has said, "Where an employer has a benefits plan (e.g., vacation time, sick leave), it is permissible to substitute or reduce the accrued leave in the plan for the time an employee is absent from work, whether the absence is a partial day or a full day, without affecting the salary basis of payment, if the employee nevertheless receives in payment his or her guaranteed salary."  Opinion Letter of Acting Wage-Hour Administrator FLSA2005-7 (January 7, 2005).  Consequently, Alice's employer is permitted to subtract the three half-days she missed, that is, the full one and one-half days' worth, from her PTO balance.

If Alice had no PTO balance remaining, then her employer could not dock her salary for any of the sick-time missed.  This is true because she would not have been absent for a whole day on any of the three days she was out sick.

Of course, employers should also review these matters under any applicable wage laws of a state or other jurisdiction.  For example, a state might take a more-restrictive position under the "salary basis" rules applying to exemptions from its own overtime requirements.

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^*  A different exception for an employee's absences covered by the federal Family and Medical Leave Act might permit part-day salary deductions under the proper circumstances.

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Alice performs work meeting the duties requirements for the federal Fair Labor Standards Act's administrative exemption.  She usually works 50 hours in five days each workweek.  She is paid a weekly salary of $950.  Alice is eligible for five paid days off each year, and she has three days left.

In one particular workweek, Alice has the flu and is sick for half-days on Monday, Tuesday, and Thursday.  She works only 31½ hours in that workweek.  How much of Alice's sick time may her employer apply against her paid-time-off allotment under the U.S. Labor Department's FLSA "salary basis" principles?

Please use the poll buttons to the right to register your answer.

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)

Courts and litigants have struggled over how to figure overtime due to an employee who was misclassified as exempt and who was paid a fixed salary for his or her hours worked.  The federal Fair Labor Standards Act requires that non-exempt employees be paid 1.5 times their regular hourly rates for hours worked over 40 in a workweek.

However, for a misclassified salaried employee, satisfying this requirement necessitates a couple of threshold determinations.  First, the regular hourly rate must be derived indirectly and after-the-fact, because the employee was not paid on an hourly basis.

Second, a court must decide how this rate will be used in computing back-pay for hours worked over 40 in a workweek:  Is the employee due 1.5 times this rate for those overtime hours, or is the correct approach to calculate overtime premium by multiplying those hours times one-half of the regular rate?  The answer depends upon whether the employee's salary is seen as having been his or her straight-time pay only for the first 40 hours, or instead for all hours worked. If the salary covered only the first 40 hours, the employee has received no pay for the overtime hours and is owed 1.5 times the rate.  But if the salary was the employee's straight-time compensation for all hours worked in a workweek, including overtime hours, then the employee is due only the half-time overtime premium.  How this gets resolved can have tremendous significance in situations – such as class actions – involving large numbers of overtime hours.

The U.S. Court of Appeals for the Seventh Circuit (Illinois, Indiana, and Wisconsin) recently weighed-in on this in Urnikis-Negro v. American Family Property Services, 2010 WL 3024880 (August 4, 2010)(opinion below).  The plaintiff was misclassified as exempt under the FLSA's administrative exemption, was paid a fixed salary, and worked varying numbers of hours each workweek (usually far exceeding 40).  In fashioning its overtime award, the lower court followed an approach taken by several federal appellate courts and relied upon the U.S. Labor Department's longstanding interpretive rule known as the fluctuating workweek calculation ("FWW") (29 C.F.R § 778.114(a)).  See, e.g., Clements v. Serco, Inc., 530 F.3d 1224, 1230-31 (10th Cir. 2008); Valero v. Putnam Assoc. Inc., 173 F.3d 35, 39 (1st Cir. 1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135, 1138-39 (5th Cir. 1988).  The lower court figured a regular rate by dividing the employee's weekly salary by her total hours worked in the workweek, and then calculated her overtime premium by multiplying one-half of that rate times her overtime hours worked in the workweek.  The employee asked the Seventh Circuit to overturn this, contending that the FWW method was inappropriate to her situation.

The Seventh Circuit agreed that the lower court was wrong to rely upon the Labor Department's FWW method as the basis for calculating overtime owed in a misclassification case, concluding that the interpretive rule is forward-looking and is not a remedial measure.  It noted the rule's reference to "a clear mutual understanding" between the employer and the employee, which contemplates a before-the-fact agreement on this method where the employee is paid a fixed salary.  The circuit also observed that the rule speaks of the employee contemporaneously receiving overtime compensation.  In a misclassification situation, the parties have no such mutual understanding, and there is no contemporaneous overtime payment, because the employer has treated the employee as exempt.

Nevertheless, the Seventh Circuit concluded that the lower court reached the correct outcome.  It said that, in the case of a misclassified employee paid a fixed salary to work varying numbers of hours, the regular rate is determined by dividing all of the hours worked in the workweek into the salary for that workweek.  Because the resulting regular rate represents straight-time pay for all the workweek's hours (including overtime ones), the employee is owed the product of multiplying one-half of the regular rate  (i.e., the "half" of "time and one-half") times the total overtime hours.  The circuit relied upon the U.S. Supreme Court's decision in Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942), in which the Supreme Court used this approach under analogous circumstances.  The Supreme Court noted in Missel that its method was consistent with longstanding Labor Department guidance.

Urnikis-Negro represents a principled approach to determining overtime for a misclassified employee.  It avoids the temptation to utilize FWW as a justification, even though the Labor Department's interpretive rule uses the correct arithmetical computation.  Rather, the decision is grounded upon binding Supreme Court precedent, which itself relied upon longstanding, historical guidance from the Labor Department.  In following this clearly correct approach, the circuit was adhering to the guiding general principle on the regular rate, which states: "The regular hourly rate of pay of an employee is determined by dividing his total remuneration for employment (except statutory exclusions) in any workweek by the total number of hours actually worked by him in that workweek for which such compensation was paid."  29 C.F.R. Section 778.109.  Urnikis-Negro provides useful clarification and guidance for employers on a computational issue of potentially enormous practical impact in assessing potential exposure in misclassification cases.

EDITOR'S NOTE:  Urnikis-Negro also cited with approval the Labor Department's Opinion Letter No. FLSA2009-3 (Jan. 14, 2009), which was a response to a 2007 Fisher & Phillips opinion request.  Fisher & Phillips did not invoke FWW in its request, but the Labor Department nonetheless predicated its favorable answer upon those principles.  Our request and the reply can be accessed below.

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2007 Opinion Request.pdf (69.15 kb)

Back-Pay Opinion Letter 01 14 09.pdf (310.29 kb)

Urnikis-Negro v. American Family Property Services.pdf (252.87 kb)