Disciplinary Deductions from Wages? Depends on Employee Classification

Employment Law Update

By Jonathan D. Bletzacker

Under the Fair Labor Standards Act, may an employer assess a monetary penalty, based on a written policy, against an employee for a non-safety infraction and withhold the penalty from the employee’s wages? For example, may an employer deduct $15 from an employee’s paycheck every time that employee is late to work? The answers to these questions depend entirely on the employee’s classification.

Summary

Employers are restricted from deducting wages from exempt executive, administrative, and professional employees. Deductions must be based on excessive absences (defined in the regulations), or health and safety violations of a serious nature. Employers cannot dock pay for disciplinary infractions which are not connected to serious health and safety violations. Courts have stated that the salary basis test for exempt executive, administrative, or professional employees is designed to distinguish the true nature between exempt and non-exempt employees. Specifically, exempt employees are not disciplined by piecemeal deductions from their pay because the salary requirement is premised on the notion that exempt employees are not paid by the hour and have discretion to manage their time.

However, the salary requirements, and related impermissible deductions from salaries, do not apply to exempt outside sales employees. Thus disciplinary deductions may be assessed to outside sales employees. Likewise, non-exempt employees may be subject to disciplinary deductions, a fact which distinguishes non-exempt employees from exempt executive, administrative, and professional employees.

The specifics of each classification is discussed in detail below.

Exempt Executive, Administrative and Professional Employees

The general rule is that exempt employees receive pay of a “predetermined amount” that is “not subject to reduction because of variations in the quality or quantity of the work performed.” 29 C.F.R. § 541.602(a). Exceptions to the general rule are enumerated in subsection (b) to Section 541.602. The majority of the exceptions relate to deductions to wages based on excessive absences.

Notably, exception No. 4 states, “Deductions from pay of exempt employees may be made for penalties imposed in good faith for infractions of safety rules of major significance. Safety rules of major significance include those relating to the prevention of serious danger in the workplace or to other employees, such as rules prohibiting smoking in explosive plants, oil refineries and coal mines.” 29 C.F.R. § 541.602(b)(4). The infractions proposed by our client are likely not in the category of “safety rules of major significance” or “prevention of serious danger.”

Next, exception No. 5 states, “Deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to a written policy applicable to all employees. Thus, for example, an employer may suspend an exempt employee without pay for three days for violating a generally applicable written policy prohibiting sexual harassment. Similarly, an employer may suspend an exempt employee without pay for twelve days for violating a generally applicable written policy prohibiting workplace violence.” 29 C.F.R. § 541.602(b)(5). The proposed infractions in our matter are based on less serious violations and result in smaller monetary fines, not daily suspensions.

The U.S. Supreme Court in Auer v. Robbins discussed whether an employer may assess disciplinary wage deductions from exempt employees and whether such assessments may jeopardize the exemption classification. The Court stated that the Secretary of Labor presented its view in an amicus brief that “employees whose pay is adjusted for disciplinary reasons do not deserve exempt status because as a general matter true ‘executive, administrative, or professional’ employees are not ‘disciplined’ by piecemeal deductions from their pay, but are terminated, demoted, or given restricted assignments.” Auer v. Robbins, 519 U.S. 452, 457 (1997). Additionally, the Court stated that the Secretary of Labor “interprets the salary-basis test to deny exempt status when employees are covered by a policy that permits disciplinary or other deductions in pay ‘as a practical matter.’ That standard is met, the Secretary says, if there is either an actual practice of making such deductions or an employment policy that creates a ‘significant likelihood’ of such deductions.” Id. at 461.

After Auer (1997), the relevant regulations regarding improper deductions were amended in 2004. Currently, 29 C.F.R. §541.603(a) states,

An employer who makes improper deductions from salary shall lose the exemption if the facts demonstrate that the employer did not intend to pay employees on a salary basis. An actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis. The factors to consider when determining whether an employer has an actual practice of making improper deductions include, but are not limited to: the number of improper deductions, particularly as compared to the number of employee infractions warranting discipline; the time period during which the employer made improper deductions; the number and geographic location of employees whose salary was improperly reduced; the number and geographic location of managers responsible for taking the improper deductions; and whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.

The regulations also provide a safe harbor when an employer “has a clearly communicated policy that prohibits the improper pay deductions” and includes a mechanism for complaint and reimbursement. Exemption is only lost for willful violations. See 29 C.F.R. § 541.603(d).

The revised regulations eliminated the “significant likelihood” test from Auer and now requires an “actual practice” of making improper deductions. See e.g. Swartz v. DJ Engineering, Inc., --- F. Supp. 3d ---, WL 2015 4139376 (D. Kan., July 9, 2015) (stating that “The Secretary of Labor’s revised regulations, which took effect on August 23, 2004, expressly reinterpreted the salary-basis test” and “eliminated the significant likelihood test from Auer and, instead, require a plaintiff to prove that an employer engaged in an ‘actual practice of making improper deductions’”).

Nonetheless, citing Auer and the subsequent amendments to the regulations, multiple federal district and appellate courts continue to rule that a practice of “docking” pay for disciplinary infractions cannot be used in relation to exempt employees. In Ergo v. Int’l Merch. Servs., Inc., the Federal District Court in Illinois stated that “exemption is unavailable if the employer deducts from the employee’s pay for violations of non-safety-related rules or partial-day absences.” 519 F. Supp. 2d 765, 770-71 (N.D. Ill. 2007) (citations omitted). The Court granted Summary Judgment in favor of the Plaintiffs because it was undisputed that the employer “maintained a practice of subjecting Plaintiffs and other nominally exempt employees to improper deductions for discipline or partial-day absences.” Id. The Court noted that the employer’s “handbook – which applies to all IMS employees, making no distinction between exempt and nonexempt employees, sets forth a ‘progressive discipline’ policy that provides for ‘suspension (with or without pay)’ as one of five steps IMS may take in disciplining employees.” Id. Notably, the Court found that the employee handbook “articulates at least three specific circumstances meriting suspension without pay, none of which involve violations of major safety rules: making personal use of IMS phones, serial tardiness, and failure to comply with IMS’s dress code.” Id.

The policy reasoning behind not docking an exempted employee’s pay for non-safety reasons is predicated on the nature of an exempt employee. The Fourth Circuit Court of Appeals stated that the salary basis test for an exempt employee is meant “to distinguish ‘true’ executive, administrative, or professional employees from non-exempt employees, i.e., employees who may be disciplined by ‘piecemeal deductions from . . . pay.’” Kulish v. Rite Aid Corp., 538 F. App’x 263 (4th Cir. 2013). Moreover, the “salary requirement is premised on the notion that such employees ‘have discretion to manage their time’ and ‘are not paid by the hour or task, but for the general value of services performed.’” Id. (citations omitted). Thus “[i]n other words, payment of a salary basis is a ‘mark of the status of an exempt employee.’” Id. (citations omitted).

Exempt Outside Sales Employees

Although outside sales employees must satisfy both a duties test and a location test, outside sales employees do not have the same salary requirements as executive, administrative, and professional employees. Specifically, 29 C.F.R. § 541.500(c) states, “The requirements of subpart G (salary requirements) of this part do not apply to the outside sales employees described in this section.” Subsection G of Section 541 includes the following Sections:

541.600 – Amount of Salary Required
541.601 – Highly Compensated Employees
541.602 – Salary Basis
541.603 – Effect of Improper Deductions from Salary
541.604 – Minimum Guarantee Plus Extras
541.605 – Fee Basis
541.606 – Board, Lodging or Other Facilities

Therefore, the analysis above regarding Sections 541.602 and 541.603, and the case law interpreting those Sections, do not apply to outside sales employees.

Non-exempt Employees

As with the exempt outside sales employees, the regulatory sections regarding salary and improper deductions do not apply to non-exempt employees. However, the DOL Field Operations Handbook states that “Disciplinary deductions, of course, may not cut into the MW and OT pay required by the Act.” See Field Operations Handbook, 32b04b(b) (June 30, 2000). As shown above, the key difference between salaried exempt employees and non-exempt employees is that the latter may be subject to piecemeal deductions. See e.g. Anani v. CVS RX Services, Inc., 788 F. Supp. 2d 55, 61 (E.D. N.Y. 2011) (stating that the “exemption for bona fide executive, administrative and professional employees is consistent with the purpose of the salary basis test . . . to distinguish true executive, administrative, or professional employees from non-exempt employees, i.e., employees who may be disciplined by piecemeal deductions from . . . pay”) (citations omitted) (internal quotations omitted) (emphasis added); see also Jastremski v. Safeco Ins. Companies, 243 F. Supp. 2d 743, 748 (N.D. Oh. 2003) (stating that “an employee may be classified as non-exempt if he or she is subject to disciplinary or other deductions from pay ‘as a practical matter’”) (citing Auer).

Practitioner Points

Employee handbooks or employment contracts that specify disciplinary deductions should state that such deductions do not apply to executive, administrative, or professional employees as outlined in 29 C.F.R. §§ 541.602 and 541.603.