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Under California and federal law, employees classified as exempt from overtime compensation must be paid on a salary basis, and their paychecks cannot be subject to deductions for absences of less than a full day. Pursuant to state and federal law, employers are required to pay an exempt salaried employee his or her predetermined salary each pay period even when the exempt employee works less hours than required or expected. Recently however, the federal courts have held that while employers may not deduct wages from an exempt employee's paycheck for partial-day absences, they may deduct time from an exempt employee's accrued Paid Time Off ("PTO") or accrued vacation time for such partial day absences without altering the employee's exempt status. Until mid005, no California court had addressed this issue and the California Division of Labor Standards Enforcement ("DLSE") had consistently taken the position that partial-day PTO and vacation deductions rendered an otherwise exempt employee non-exempt thus entitling such an employee overtime pay.
Deduction From Accrued Vacation / PTO is Okay.
On July 21, 2005 the law changed. In Conley, et. al. v. Pacific Gas & Electric, the court ruled that while a California employer cannot deduct wages from an exempt employee's paycheck for a partial day absence, the employer may deduct time for a partial day absence from the exempt employee's accrued but unused vacation time or PTO. The holding in Conley should be limited to partial-day absences in excess of at least four hours; California employers may require an exempt employee to use accrued PTO for partial-day absences in excess of four hours. California employers should NOT, however, deduct wages to cover a partial-day absence if the exempt salaried employee does not have sufficient accrued PTO to cover the absence.
Caution Is Advised.
Employers must only deduct from accrued vacation or accrued PTO. If an exempt employee misses 4 hours of work but does not have any accrued vacation or PTO, the employer may not dock the employee's wages for such a partial day absence. Employers should also be cautious about disciplinary measures. While an employer may require exempt employees to work a specified number of hours in excess of 40 hours per week and may require an exempt employee to make up work time lost due to a partial day absence, disciplining an exempt employee because s/he failed to work a certain required number of hours or failed to make up the time may jeopardize that employee's exempt status and entitle that employee to overtime pay.
Exempt From Overtime?
Pursuant to California law, an employee can only be considered "exempt" from overtime pay if the employee: (1) is compensated on a salary basis; (2) receives a salary of at least $2,340 per month ($28,080 per year); and (3) spends more than 50% of his or her time on "exempt duties" (discussed below). If the employer deducts wages from an exempt employee's paycheck for personal absences of less than a full day's work, the employ will no longer be considered "salaried." In other words, if a salaried exempt employee comes in to work from 8am to Noon and then takes the remainder of the day off, the employer must not dock the employee's paycheck for the 4 hours missed unless the employer also desires to pay that employee "overtime."
Exempt Duties Test.
Since 2001 there has been an explosion in wage and overtime litigation, including a multitude of class action lawsuits covering an entire class of employees such as "managers," "assistant managers" and "salespersons." Plaintiff's lawyers love these cases because the Fair Labor Standards Act ("FLSA"): (1) requires the employer prove the employee is exempt and (2) presumes the employee is entitled to double his or her actual damages (unpaid overtime pay for up to 4 years).
Determining whether an employee is exempt from overtime is a multi-part test that focuses not only on the simple amount the employee is paid and how the employee is paid, but also the complex facts surrounding the employee's actual job duties. Under California law, exempt employees: (1) supervise at least two full-time employees; (2) exercise discretion and independent judgment in the management of a recognized department/subdivision; (3) have the authority to hire or fire, or ability to make strong recommendations as to hiring, firing, advancement, promotion, or other change in status of at least 2 other full time employees; and (4) spend more than 50 percent of their time on the above-mentioned exempt work.
Safeguard For Mistakes.
Currently, if an employer improperly deducts from an exempt employee's salary (for example, for a partial day absence), the employee may be deemed nonexempt during the pay period in which the deduction occurred. However, new federal regulations provide that if an employer has a clearly communicated policy that: (i) prohibits improper pay deductions; (ii) provides a mechanism for employees to complain about a deduction; (iii) reimburses employees for improper deductions; and (iv) shows a good faith effort to avoid future improper deductions, the exemptions will not be jeopardized unless the employer willfully violates the policy. All employers should ensure that they have adopted such written policies and communicated them to their employees.
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Update:On November 25, 2009, the Department of Labor Standards and Enforcement (DLSE) issued an Opinion Letter clarifying how and when a California employer may deduct for a full and partial day absence from an exempt salaried employee’s accrued paid time off (vacation and sick leave bank). Pursuant to California law, an exempt employee must receive his or her full salary for any week in which the employee performs any work without regard to the number of days, or hours worked. See, DLSE Manual § 51.6.8-51.6.9 and 29 CFR §541.602(a). Thus, under California law, it is illegal to dock the pay of an exempt employee for a partial day absence. However, under both federal and California law, the employer is permitted to dock the pay of an exempt salaried employee when the employee is absent from work for one or more full days for personal reasons other than sickness, or disability (29 CFR § 541.602(b)(1); DLSE Manual §51.6,14,3.) and for absences of one or more full days caused by sickness, or disability (including work-related accidents), if the deduction is made from a bona fide plan, practice, or policy of providing compensation for such sickness or disability (29 CFR § 541.602(b)(2); DLSE Manual § 184.108.40.206.)
So what is an employer to do about partial day absences. California employers may deduct time for a partial day absence from an exempt employee’s accrued paid time off, if the Company's vacation policy requires its employees use their vacation hours for illness when the employee does not have any more accrued sick days. According to the DSLE Opinion Letter, while a partial day absence cannot be deducted from an exempt employee’s salary, such an absence may be deducted from accrued paid time off, accrued vacation time, or fringe benefits without affecting the employee’s status as a salaried exempt from overtime employee. See, Barner v City of Novato 17 F.3d 1256, 1261 (91h Cir. 1994) [deductions from accumulated paid leave time does not result in loss of exemption]; see also, Webster v, Public School Employees of Washington, Inc., 247 F.3d 910, 917 (91h Cir. 2001) [extending Barner to apply to deductions where the accumulated leave is convertible to cash]; see also, Conley v. P.G.& E., 131 Cal.App.4th 260, 263 and 270 (2005), in which the Court concluded that California law allows the employer to deduct partial day absences from an employee's accrued vacation leave bank.
It should be noted that an employer is prohibited from docking a salaried exempt employee’s pay for a partial day absence even if the employee has no accrued leave, and doing so may lead either the court or the Labor Commissioner to conclude that the employee is not exempt from overtime.
You can read the full 13 page opinion letter here.
© 2005 Melissa C. Marsh. All Rights Reserved.
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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.