Can employers make partial day deductions from discretionary benefits due exempt employees?

The Fair Labor Standards Acts is a federal overtime law which may, or may not, apply to tribal employers.  If the FLSA applies to tribes, care in applying the rules to exempt (not overtime eligible employees) is a difficult and necessary aspect of compliance with an eye toward minimizing employer risk.

Employers recognize that since exempt employees are not entitled to overtime compensation, the bargain is that employers must not, in most instances, reduce the exempt employees pay when the employee works less than 40 hours in a workweek. Said another way, exempt employees get nothing extra when they work more than 40 hours in a workweek and receive nothing less when they work less than 40 hours in a workweek.  The label attached to this legal principle is the salary basis test.  The question posed by this edition of the newsletter and by many employers is whether a deduction in benefits (not pay) violates the salary basis test when exempt employees work less than 40 hours in a workweek?

The hypothetical involves an exempt employee who regularly works more than 40 hours each week but in the last week the employee worked 37 hours.  The employer may have a couple different reactions to the 37 hour week.

Some employers recognize that exempt workers regularly exceed 40 hour work weeks and when exempt employees work less the employer does not make a deduction from discretionary benefits because the employer is grateful for the hard work and strong performance during the other weeks in the year. That reaction does not violate the law.

Other employers choose to deduct pay from their exempt workers when they work less than 40 hours in a workweek and unless those deductions are made under the specific exceptions to the salary basis test, those deductions violate the law.  For example, employers may deduct pay from an exempt workers check if the exempt worker misses time protected under the Family & Medical Leave Act.  There are other statutory or legal deductions as well.

The third option to the 37 hour workweek is to pay the full salary but deduct time from discretionary benefits like PTO.  Under this option, the employer deducts 3 hours from PTO (or vacation, sick) and the question is whether the 3 hour deduction is lawful.  The answer is courts have said yes and no.  Even though the courts have not been consistent in responding to this practice, the Department of Labor, in a letter ruling, seems to approve of the practice:

“To respond to your specific concern about whether or not an exempt employee’s accrued PTO leave bank may be reduced for partial day absences, the answer is yes.”  DOL letter dated January 7, 2005.  The letter goes on to more fully explain the DOL’s reasoning:

“When an employer has a benefits plan (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.”  Importantly the DOL goes on to explain the consequences of this rule when the employee has exhausted their discretionary leave:

“Payment of the employee’s guaranteed salary must be made, even if an employee has no accrued benefits in the leave plan and the account has a negative balance, where the employee’s absence is for less than a full day.”

Recommendation:  First, evaluate whether the FLSA applies to you as a tribal employer. Second, get the exemption correct by applying the legal standards to the facts. Third, determine how you will respond to exempt employee partial day absences and reduce the policy to writing.  My preference is to give exempt employees the benefit of 37 hour workweeks by not deducting time from PTO since the employee is not getting the benefit of overtime for all of those 45 hour workweeks.

About the Author:

Richard McGee is a lawyer in Minneapolis, Minnesota who focuses his practice on gaming, gaming regulation, tribal employment and litigation in tribal, state and federal courts.  Richard has the privilege of working with tribes and tribal organizations on Human Resources matters including training.  Additionally, tribes ask Richard to address specific topics while incorporating the tribe’s related laws and policies into the sessions.  This is an invitation to engage Richard to produce and facilitate training for your tribe.