Monetary vs. Nonmonetary Discipline of Salaried Employees

One alternative some employers are utilizing to prevent any disturbance to a salaried employees exemption status is to discipline salaried employees by docking paid time off. Even though the reduction of paid time off is only one step removed from threatening monetary discipline, courts have been lenient in allowing employers latitude in this regard.

The Code of Federal Regulations exempts employees from the minimum wage and overtime pay regulations so long as the employee is a salaried employee. As a general rule, “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. Subject to the exceptions provided in paragraph (b) of this section, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.” 29 CFR 541.602(a)

Some of the more utilized exceptions to the general rule include the following:

1. Exempt employees need not be paid for any workweek in which they perform no work. 29 CFR 541.602(a)
2. Deductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability. NOTE: If an employee is absent for 1 ½ days the employer can only deduct for the one full-day absence. 29 CFR 541.602(b)(1)
3. “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 CFR 541.602(b)(5)

In Shannon Blue v. The Chubb Group, an employee overcame summary judgment by showing a factual dispute existed regarding whether she (the employee) was paid on a salary basis since she claimed that she was told by her supervisors that if she left work prior to 2:00 p.m., she would be docketed a half day’s pay. The Court stated that “an employee is paid on a salary basis if under his employment agreement he regularly receives each pay period a predetermined amount constituting all or part of his compensation, which amount is not subject to reduction because of variations in the quality or the quantity of the work performed. If an employer docks an employee’s pay for partial day absences, violations of rules other than those of safety, or based on the quantity or quality of the employee’s work, the employee is not considered to be on a salary basis. The salary-basis test denies exempt status when employees are covered by a policy that permits disciplinary or other deductions in pay as a practical matter. The salary basis test is not met if there is an actual practice of such deductions or if there is an employment policy that creates a significant likelihood of such deductions, so long as the policy is clear and particularized so as to effectively communicate that deductions will be made in specified circumstances.” 2005 U.S. Dist. Lexis 14253 p. 29-30 (N.D. of Illinois). The court further explained that “the regulations prohibit monetary discipline of exempt employees. Nothing in the regulations suggests that an employee loses his exempt status simply because his employer disciplines him in a non-monetary fashion for failing to work his scheduled time.” Id at 31. “The Department of Labor has repeatedly opined that deductions from leave time for partial-day absences does not render an employee non-exempt as long as the employee receives his guaranteed salary.” Id. at 32.

In Kennedy v. Commonwealth Edison Co., the Seventh Circuit held that an employer who reduced the employee’s number of personal days by one if an employee failed to make it to work during a snowstorm, but did not reduce the employee’s salary satisfied the salary test. 410 F. 3d 365 (2005) WL 132485 at 5. However, if an employer docks an employee’s pay for partial day absences, violations of rules other than those of safety, or based on the quantity or quality of the employee’s work, the employee is not considered to be on a salary basis. Being subject to a reduction in pay for missed work is sufficient to prevent an employee from being considered “salaried”. The phrase “subject to” does not require proof that an employer has actually reduced an employee’s wages; an employment policy that creates a significant likelihood of a deduction will suffice. Id.

The court in Webster v. Public School Employees of Washington, Inc. stated, “leave time is not salary” and held that deductions from sick leave or vacation allowance in fifteen-minute increments for partial day absences does not defeat employee’s exempt status, even though accumulated leave is or may be convertible to cash. The court also recognized that “deductions may be made, however, when the employee absents himself from work for a day or more for personal reasons, other than sickness or accident.” 247 F.3d 910, 917 (9th Cir. 2001).

As long as companies carefully craft their policies, there are certain circumstances in which employers may threaten or enforce monetary punishment against their salaried employees. However employers have much greater liberty to enforce (or threaten to enforce) nonmonetary discipline in the form of docking paid time off. The Courts have recognized that even though accumulated leave is similar to pay, docking accumulated leave does not remove the employee’s exemption status.