Properly Prorating Salary for Exempt Employees

Posted by Bill Pokorny on November 05, 2012

Thumbnail image for CalculatorIf you are a regular reader of this blog, you are hopefully familiar by now with the notion that exempt employees generally must be paid their full weekly salary for all workweeks in which they perform any work. There are certain limited exceptions to this rule. For example, if an exempt employee starts or ends employment mid-workweek, the employer may prorate the employee's salary accordingly. This calculation is easy fairly easy if the employer uses a weekly pay period - just take the regular weekly salary, divide by the number of days that salary usually covers (e.g., 5), and multiply by the number of days the employee was employed. 

But what if an employer pays salaried employees semi-monthly? In that scenario, the employer divides the employee's salary into 24 semi-monthly pay periods. However, because the pay period is no longer tied to the workweek, different pay periods can have different numbers of working days. There are at least a couple of different ways an employer could prorate an employee's pay under these circumstances: 

1. Calculate a day rate for each pay period by dividing the semi-monthly salary by the number of working days during the pay period. Then, multiply the day rate by the number of days worked during the pay period to calculate the employee's salary.

2. Alternatively, an employer could calculate a day rate by dividing an employee's annual salary by the 52 weeks in the year, then dividing by the number of working days per week. The day rate is then multiplied by the actual number of days worked.

Which method is correct?

That was the issue addressed in a recent decision by a federal district court in Washington State in Kirchoff v Wipro Inc. The plaintiff in that case alleged that his employer violated the Fair Labor Standards Act and the Washington Minimum Wage Act by using method 1, effectively shorting him by $41.31 for his first week of employment, and $73.43 for his final week. 

The court's conclusion? The FLSA does not mandate one specific method for prorating an exempt employee's salary in situations where deductions are permitted. Rather, 29 C.F.R. § 541.602(c) says that an employer may "use the hourly or daily equivalent of the employee's full weekly salary or any other amount proportional to the time actually missed by the employee." 

Because the deduction calculated using method 2 is proportional to the amount of time actually missed during a given pay period, the court held that method was permissible under the rules. 

Insights for Employers

  1. Yes, the plaintiff in this lawsuit literally made a federal case out of a $114.74 shortage. Why did he bother? And why would his employer pay its lawyers to take the case to summary judgment, rather than just writing the guy a check? Two words: class action. This case wasn't about one employee, it was about however many salaried exempt employees the employer had hired over the preceding three years, and even more so, about the fees the plaintiffs' attorneys could recover if they won or extracted a favorable settlement. Even small wage and hour issues can add up to big dollars. 
  2. Although Kirchoff dealt with prorating salary at the beginning and end of employment, the court's conclusion appears to apply equally to prorating an exempt employee's salary for other reasons permitted by the regulations, such as when an employee is absent for personal reasons. 
  3. Remember, this a decision by one district court. While the court's conclusion appears sound and should apply elsewhere, at least for purposes of federal law, results may vary in your jurisdiction. Consult your wage and hour lawyer before relying on this decision. 

Paying On a "Salary Basis" Requires Actual Payments

Posted by Bill Pokorny on April 26, 2012

Pay stub with salary seen through glasses iStock_000014646227XSmall.jpgAs we have discussed before, to be considered an exempt executive, administrative, or professional employee, most employees must be paid on a "salary basis," meaning that they receive a fixed salary for each workweek regardless of the number of hours worked or the quality or quantity of work performed. In a ruling that at first blush seems fairly obvious, the Sixth Circuit Court of Appeals ruled earlier this year that actually paying an employee's salary is a necessary condition to meeting this standard. Orton v. Johnny's Lunch Franchies, LLC. 

Background

According to court papers, John Orton went to work for Johnny's Lunch Franchise ("JLF") in September 2007 as the company's Vice President of Real Estate and Site Selection with a base salary of $125,000. In August 2008, JLF encountered financial trouble and, according to Orton, ceased paying him any wages. Orton continued working until he and the entire executive staff were formally laid off on December 1, 2008. Orton filed suit in federal court, claiming that JLF and Anthony Calamunci, one of the company's owners, violated both state law and the FLSA by failing to pay him for his work from August through December 1, 2008. 

The district court dismissed Orton's complaint, finding that he was not entitled to sue under the FLSA because he admitted that he was an exempt employee and failed to allege that JLF had taken any improper deductions due to variations in the quality or quantity of work performed. Having dismissed Orton's federal claims, the court declined to exercise jurisdiction over Orton's claims under state law. Orton appealed to the Sixth Circuit Court of Appeals.

Ruling

Reversing the district court's judgment, the Sixth Circuit observed that the district court incorrectly relied upon language from the pre-2004 version of the regulations defining the salary basis test, which provided that an employee is considered to be paid on a salary basis "if under his employment agreement he regularly receives pay each pay period." 29 C.F.R. § 541.118(a)(1973). In 2004, the Department of Labor revised the pertinent regulation to read as follows:

An employee will be considered to be paid on a "salary basis" within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.

29 C.F.R. § 541.602(a). Thus, under the new rule, the focus was changed from the terms of the employee's agreement with the employer to the salary actually received by the employee. The court of appeals also noted that the district court erred by failing to acknowledge that exempt status is an affirmative defense under the FLSA, which JLF had the burden of proving. The allegations of Orton's complaint were not sufficient to clearly establish as a matter of law that Orton was an exempt employee. Accordingly, the district court erred by dismissing his complaint. 

Insights for Employers

  • It seems like this should go without saying, but if you are going to claim that you pay an employee on a salary basis, you must first actually pay the employee. As this case illustrates, this was less clear under the pre-2004 regulation, but at least in the 6th Circuit and very likely elsewhere the fact that you promised to pay but never did so is not sufficient. 
  • Leaving the Fair Labor Standards Act issues aside, many states have wage payment laws that require employers to regularly pay earned compensation, even for exempt employees. Many of these statutes carry significant penalties. Even if your employees are willing to work without compensation for a period of time, this may not be allowed by your state's laws. 
  • Additionally, both the FLSA and many state laws allow employees to sue not just the company, but individual owners and managers for failure to pay compensation required by law. In some cases there are even criminal penalties for not paying employees. Individual owners and managers need to be aware that they may be on the hook for unpaid wages if the company fails to pay.

Do I Have To Pay An Exempt Employee Who Answers E-Mail Or Phone Calls While On FMLA Leave? [Wage & Hour FAQ]

Posted by Bill Pokorny on March 05, 2012

You've Got mailQ. A salaried, exempt employee who recently returned from a week of unpaid FMLA leave claims that he is entitled to be paid his full salary for entire week because he responded to a number of work-related e-mails and telephone calls while he was out. Do we have to pay?

A. Wage and hour law is confusing enough on its own, but it becomes even more so when it intersects with other complicated legal issues, like the Family and Medical Leave Act. On our FMLA Insights blog, my colleague Jeff Nowak explains how to deal with this situation from the perspective of counting the employee's time as FMLA leave. But that leaves open the question of whether and how much the employee is entitled to be paid. 

As we explained in a recent post regarding unpaid disciplinary suspensions, in most cases employees who are classified as exempt executives, administrators, and professionals under the Fair Labor Standards Act must be paid on a "salary basis," meaning that they must receive a fixed salary each workweek that does not vary regardless of the number of hours worked or the quality or quantity of work performed. 

However, the FLSA regulations provide certain exceptions from this general rule. Salary deductions are allowed when an exempt employee misses one or more full workdays for personal reasons other than sickness or disability. Deductions are also permitted for full-workday absences due to sickness or disability if the employer has a "bona fide plan, policy, or practice of providing compensation for loss of salary occasioned by such sickness or disability," such as paid sick days or a short-term disability insurance plan. 

In the case of FMLA leave, however, the regulations go one step further. Here is the relevant text (29 CFR § 541.602(b)(7)):

An employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act. Rather, when an exempt employee takes unpaid leave under the Family and Medical Leave Act, an employer may pay a proportionate part of the full salary for time actually worked. For example, if an employee who normally works 40 hours per week uses four hours of unpaid leave under the Family and Medical Leave Act, the employer could deduct 10 percent of the employee's normal salary that week.

So, turning to our hypothetical question above: 

Much depends upon exactly how much time the employee is spending on e-mail and telephone calls while he is away from work. If all the employee does is spend a couple of minutes over the course of the week responding "OK" to e-mails or taking a quick phone call or two, the time at issue may be de minimus and not an issue. If, on the other hand, the employee is spending significant time working while on FMLA leave, the employee might arguably be entitled under the FLSA to a percentage of his regular salary proportionate to the time actually worked, but not his full salary for the entire workweek. 

That takes care of federal law, but what about state law? As noted in our discussion of disciplinary suspensions, Illinois rejected the 2004 amendments to the FLSA regulations that added the language quoted above. However, as stated in the preamble to the 2004 FLSA regulations, the exception for FMLA leave incorporated into the 2004 FLSA rules merely codified existing federal law. Indeed, the exception is written into the FMLA itself at 29 U.S.C. § 2612(c):

Except as provided in subsection (d) of this section, leave granted under subsection (a) may consist of unpaid leave. Where an employee is otherwise exempt under regulations issued by the Secretary pursuant to section 213(a)(1) of this title, the compliance of an employer with this subchapter by providing unpaid leave shall not affect the exempt status of the employee under such section.

Insights for Employers:

  1. FMLA leave is the one situation in which an employer can take deductions from an exempt employee's salary in increments of less than one full work day. 
  2. However, if an exempt employee is actually performing work during FMLA leave and the time involved is more than de minimus, the employee might be entitled to a pro rata portion of his or her salary for the time spent on work activities. 

 

Can We Suspend An Exempt Employee Without Pay? [Wage & Hour FAQ]

Posted by Bill Pokorny on February 17, 2012

Man with dunce cap on stoolQ. One of our salaried exempt employees appears to have violated our sexual harassment policy. We would like to suspend him without pay for 3 days. Is this allowed under the FLSA?

A. Maybe, but check your state's laws as well. 

With a few specific exceptions, employees whose duties qualify them as executive, administrative and professional employees under the Fair Labor Standards Act can be considered exempt only if they are paid on a "salary basis." This means for each week in which the employee performs any work, he or she must receive a fixed weekly salary that does not vary regardless of the number of hours worked or the quality or quantity of work performed. Taking improper deductions from an exempt employee's salary can potentially result in loss of exempt status not only for the affected employee, but for all employees in the same job classification. 

There are, however, certain exceptions to the rule against salary deductions. For example, if an employee is absent for one or more full workdays for personal reasons other than sickness or disability, the employee's salary can be reduced proportionately. Likewise, an exempt employee's salary can be reduced for full-day absences due to sickness or disability if the employer provides paid sick leave or other disability compensation. 

With respect to this specific question, the regulations also allow for salary deductions for "unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules" "imposed pursuant to a written policy applicable to all employees." In the example cited above, the sexual harassment policy is (hopefully) in writing, and (hopefully) applies generally to all employees in the organization. Consequently, suspending the employee for three full days without pay under these circumstances likely would not violate the FLSA.

But that's not the end of the story. While most states follow the U.S. Department of Labor's rules regarding exempt status, this is not universally so.  In our great state of Illinois, for one, the General Assembly specifically rejected the 2004 updates to the FLSA regulations that allowed for disciplinary suspensions for violations of written workplace conduct rules. Thus, in Illinois, an exempt employee can be suspended without pay for disciplinary reasons  only for violating a "safety rule of major significance," such as rules "prohibiting smoking in explosives plants, oil refineries, and coal mines."

So what can an employer in Illinois do if it wants to impose discipline that will hit an exempt employee's pocketbook without terminating the individual's employment? There are a few options:

  • Suspend the employee for a full week. Provided that the employee does not perform any work during the week, no salary is due. However, no work means no work. Requiring the employee to participate in a conference call or respond to e-mails during the suspension could obligate the employer to pay the employee's full salary for the week, converting a disciplinary suspension into a paid vacation. 
  • Require the employee to use available paid vacation or PTO while on suspension. So long as the employee's take-home pay is not reduced, deducting from the employee's bank of paid leave time does not result in loss of the employee's exempt status. 
  • If the employee is eligible for any sort of discretionary bonus or other compensation in addition to their salary, consider reductions in those amounts if that is consistent with any applicable policies, plans or agreements. 
  • Factor the infraction in to future compensation adjustments. While after-the-fact salary deductions are not permitted, bona fide prospective salary adjustments are allowed. 

Does An Exempt Employee Who Calls In Sick The Day Before Thanksgiving Get Holiday Pay? [Wage & Hour FAQ]

Posted by Bill Pokorny on November 22, 2011

Turkey iStock_000001827125XSmall.jpgQ. Our holiday pay policy says that employees must be at work the day before and the day after a holiday. Our office is closed Thursday and Friday for Thanksgiving. If an exempt employee works Monday and Tuesday but calls in "sick" on Wednesday, can we deny the employee holiday pay?

A. Many employers have policies like this one. The intent behind them is to discourage employees from extending their holiday weekends through strategic use of unscheduled sick time or personal days. With hourly employees, the issue is relatively simple from a wage & hour perspective: follow your policy (and any applicable union contract or employment agreement) and make sure the employee is paid for any time actually worked. 

For exempt employees, the problem is a bit more complicated. Remember that to qualify for the most commonly used exemptions - the "white collar" exemptions for executive, administrative, and professional employees - employees must (with some exceptions) be paid on a "salary basis." This means that an exempt employee must receive his or her full salary for any workweek in which he or she performs any work, regardless of the number of hours worked or the quality or quantity of work performed. Deductions are permitted for some disciplinary suspensions, purely personal absences and, if the employer has a policy providing for paid sick leave, for absences due to personal injury or illness. However, employers cannot take deductions for absences occasioned by the employer or resulting from the operating requirements of the employer's business. In other words, the fact that the employer is closed for business on a holiday does not permit the employer to deduct from an exempt employee's salary, even if the employee would not be eligible for "holiday pay" under the employer's policies. 

So if you cannot take a salary deduction, what can you do to curb abuse of sick or personal leave by exempt employees around the holidays? One solution would be to deduct an additional day or two, as applicable, from the employee's available paid vacation or personal leave time. This is permissible under the FLSA, as the exempt employee still receives his or her full salary for the week. However, if an employee has exhausted all available paid leave the full salary must still be paid.

Other alternatives for managing this situation include requiring the employee to make up the extra hours (or possibly even work on the holiday), or imposing discipline without any adjustment to pay. Of course, if those alternatives seem too punitive for the holiday season, you could also simply let the issue go, though if you do so you should be sure that all similarly-situated employees are treated in the same manner.