In California, many workers are entitled to receiving overtime and minimum wage protections. However, for several industries and types of employees, they do not receive the benefit of these protections. The Federal Labor Standards Act (FLSA) provides the “floor” for the minimum protections workers can expect to receive under the law.
California follows this statute, and therefore, its provisions will be most pertinent to the discussion at hand.
White Collar Workers
The salaried executive, administrative and professional employees are exempt. These are people such as doctors, lawyers, bankers, and other professionals. Three tests have to be satisfied before an employee can be considered exempt: the salary basis test, the duties test, and the salary level test.
If an employee is paid on a salary basis, it means that he or she receives on a weekly or less frequent basis a “set” amount of compensation which can’t be changed or reduced because of the variation in the quality or quantity work performed. In other words, it is someone who receives the same check every week or every 2 weeks as required. This amount must be at least $913 each week, exclusive of other benefits like room and board in order to qualify as an exempt employee under this section.
This amount will not be dependent on the number of hours or days worked, nor will it be deduced if work is not available even if the employee is ready to work. Of course, pay can be deducted in the event the employee is ill (for sick days or personal days), but their pay can be docked only for a full day – no partial day deductions are allowed. If the employer does deduct a partial day, then the employee does not pass the ‘salary basis’ test, and therefore is no longer exempt from overtime pay requirements.
This partial day deduction does not apply to vacation days the employee has banked already, though. Furthermore, an employer cannot deduct an employee’s pay for jury duty, court appearances or military duty, but they are entitled to offset amounts received by the employee from these fees against a particular week. This will not affect the salaried exemption of the employee.1
Employees on a salaried basis cannot be docked in their pay for arbitrary disciplinary reasons, although there are occasions when pay can be reduced for when workloads are expected to decrease, particularly in a seasonal business (such as tax accountants). This will not mean the employee is entitled to overtime pay, unless the changes to these future payments are so frequent and unpredictable that the salary is a sham.2
There are more exceptions, such as if a white collar worker returns to work on a temporary, part-time basis after coming back from medical leave. The employer can pay them on an hourly basis without jeopardizing their salaried status, and therefore leaving them exempt from the overtime or minimum wage requirements under the FLSA.
Another caveat to this test is for the IT-guy in your office – certain computer-related employees who are paid on an hourly basis rather than via salary can still be exempt as professionals.
There are certainly times when employers cannot deduct their salaried employees’ deductions, but this is not a hard and fast rule and there are, of course, exceptions. Deductions can be taken from an exempt employees’ pay for penalties imposed in good faith by the employer because of infractions for major safety rules.
Exempt employees can also be suspended for one or more full days because of violations of workplace conduct rules. The employers must be in good faith when issuing said suspensions, and it should be done in accordance with a written policy which is applicable to all employees.3
If the employee believes that the employer took deductions which were improper, and wants to avoid being an exempt employee (and thus earn the benefit of overtime and minimum wage protections), the employee has a burden to prove that the employer had an actual practice of making improper deductions.
This is a fairly heavy burden, because the employee has to show actual deductions, not just a significant likelihood these deductions will occur (which the former law allowed. It is not enough for employees to believe they could be subject to improper deductions – they have to actually experience this before a claim could be successful.
There is no specific rule to determine what ‘actual practice’ of making improper deductions constitutes. There are some general guidelines and principles, however. The number must be sufficient to infer that the employer intended to treat an entire class of employees as hourly rather than salaried.4
Some cases accepted ‘actual practice’ as existing when there were improper suspensions over a 6 year period which showed a pattern or practice of violations, which then demonstrated the requisite intent to not pay employees on a salaried basis. Therefore, the employer’s intent is relevant to this theory.
The effect of this is that the employee’s exempt status is affected only during the specific time period during which actual improper deductions were made. Furthermore, employees who are in the same job classification and working for the same managers who were responsible for the improper deductions will also lose their exempt status.
Therefore, improper deductions by the employer can end up costing far more than anticipated, if multiple employees will be able to claim overtime pay for a certain period of time.
Window of Correction
The rule is not quite so draconian as you’d expect. Even if there is an improper deduction, the law will not remove the exemption if the deduction was an isolated or inadvertent event and the employer reimburses the employee, or employees, for the improper deduction.
This is called the window of correction, which allows employers to fix their behavior and avoid the additional costs of overtime protection if they return their employees to status quo.
The only problem with this defense is that some courts do not allow this doctrine to correct a pattern or practice of impermissible docking because it shows that the employers never intended to pay their employees on a salaried basis, but still reap the benefits of exemption. It could be used to evade the employer’s responsibilities under the law.
Regardless, the defense of window of correction will apply to all deductions for all employees within the same job class who work for the same manager responsible for pay-docking, just as the damages for improper docking applied to the same individuals.
The window of correction will only apply if the employer has a clearly communicated policy that forbids improper pay deductions, includes a complaint mechanism, and the employer reimburses the employees for the deduction with a good faith commitment to avoid infractions in the future.
In general, exempt employees do not get to enjoy any protection for overtime or minimum wage; however, if there is evidence that their employer is abusing the system and wrongfully deducting payments, the courts will find that, for that period of time, the employee was not exempt, and overtime payments could be available to that employee and all of his colleagues similarly placed working for the same manager.