This Freeman Law Insights blog provides an overview of select wage deduction scenarios that a covered employer under the Fair Labor Standards Act (“FLSA”) may – by policy or practice – desire to apply to an exempt or non-exempt employee’s wages or salary. face and, upon review, may be surprised to learn about. The bottom line is that covered employers should carefully evaluate any wage deduction scenario because what may be thought of as a common-sense application of equitable principles among an employer and an employee may instead be a violation of the FLSA or applicable state law.
Summary of FLSA Wage and Salary Requirements
The Fair Labor Standards Act (“FLSA”) generally requires an employer to pay its employees a minimum of one and a half times their rate of pay for all hours worked in excess of 40 hours during a week. 29 U.S.C. § 207(a)(1). The FLSA’s overtime pay requirement does not apply to those employees employed in a bona fide executive, administrative, or professional capacity, provided such employee is paid on a “salary” basis of at least $684 per workweek. See id. at § 213(a)(1); 29 C.F.R. § 541.600(a).
An employee will be considered to be paid on a “salary basis” if the employee regularly receives each pay period, 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). Subject to specific exceptions, a salaried 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. [Salaried] employees need not be paid for any workweek in which they perform no work.” Id. at § 541.602(a)(1) (emphasis added).
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 . . . : the number of improper deductions, . . . ; 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.
Id. § 541.603(a) (emphasis added).
Deductions for Damage to or Loss of Equipment
Exempt Employees – A covered employer is likely not permitted to deduct the salary of an exempt employee to account for any loss or damage to or fine for company equipment. This applies even if the employee signs an agreement to permit the deduction. The employer should also not require that an exempt employee enter into an agreement to repay the employer for the loss or damage to company property, but this prohibition may not apply for the repayment of funds, such as restitution for credit card misuse.
It is a common misconception that an employer may make deductions from salary due to lateness, violations of company policy, loss of company funds, or damage to company equipment without possibly violating the “salary basis” requirements applicable to exempt employees, even if the exempt employee signs a wage deduction agreement or acknowledges a company policy on the subject.
While applicable state law (including, for example, the Texas Labor Code section 61.018) may permit an employee’s wage deduction agreement to suffice for state law wage-payment purposes, the Department of Labor’s Wage & Hour Division’s interpretation of the FLSA illustrates that deductions in this category are not lawful under the FLSA.
Non-Exempt Employees – Under the FLSA, a covered employer is likely permitted to lawfully deduct a non-exempt employee’s wages for damage to or loss of company equipment provided that (1) the deduction(s) do not take the employee below minimum wage (unless an exception applies) and (2) the deductions are made with the employee’s written authorization.
State Law – There may be state statutes under which such a deduction would not be permitted, including for fines for violating a company policy. Some states have specific requirements that must be met before a deduction may be lawfully made, and an employer is wise to account for those state law specifics when applicable to any deduction situation.
Resources – DOL Field Operations Handbook Chapter 22 – Exempt Employees – at § 22h05(e)(3) (“Shortages, damages, and loss of equipment. Deductions for . . . equipment damage, or loss of equipment are impermissible as they do not fall under one of the seven listed permissible categories [in 29 C.F.R. § 541.602(b)].”) (emphasis added) (citing WHD Opin. Ltr. FLSA2006-7 (March 10, 2006)). The Wage & Hour Division’s opinion letter FLSA2006-7 addressed an employer’s intention to fine exempt employees for an amount equal to the repair or replacement cost for lost or damaged company equipment, including laptop computers, and whether those fines could be deducted from the exempt employees’ salary. Key takeaways:
- “This is in response to your letter requesting an opinion regarding whether your client may deduct from the salaries of exempt employees or require them to reimburse the company for damage to or loss of company equipment without jeopardizing the employees’ exempt status under the Fair Labor Standards Act (FLSA) exemption for executive, administrative, or professional employees. It is our opinion that such deductions or reimbursements would violate the salary basis requirements of FLSA . . . [.]”
- “The WHD [Wage & Hour Division] takes the position in its enforcement of the FLSA that deductions from the salaries of otherwise exempt employees for the loss, damage, or destruction of the employer’s funds or property due to the employees’ failure to properly carry out their managerial duties (including where signed “agreements” were used) would defeat the exemption because the salaries would not be “guaranteed” or paid “free and clear” as required by the regulations.” (emphasis added).
- “Accordingly, any employer policy that requires deductions from the salaries of its exempt employees to pay for the cost of lost or damaged tools or equipment issued to them would violate the salary basis requirement, thereby necessitating an evaluation under 29 C.F.R. § 541.603 to determine the effect of the improper deduction. It would not matter whether an employer implements such a policy by making periodic deductions from employee salaries, or by requiring employees to make out-of-pocket reimbursements from compensation already received.” (emphasis added).
- Note: DOL opinion letters are not binding on any employer except the employer to whom the opinion letter was addressed. However, they are indicative of how the DOL may address, apply, and/or interpret the FLSA. This particular opinion letter indicates that the DOL may take a similar approach with respect to any deductions for violations of company policy or for any situation viewed as a penalty and not permitted by 29 C.F.R. § 541.602(b).
See below 29 C.F.R. § 541.602(b) – Exceptions to the Prohibition of Deductions from Pay in the Salary Basis.
Deductions for Personal Credit Card Charges
Exempt Employees – A covered employer is likely not permitted to deduct the salary of exempt employees to account for misuse of a company credit card. Stated another way, the employer may violate the “salary basis” requirement for the exempt employee (and perhaps others similarly situated), should the employer reduce salary to account for personal credit card charges. This applies even if the employee signs an agreement to permit the deduction from salary. See WHD Opin. Ltr. FLSA2006-7.
That WHD opinion letter did not expressly indicate that an employer is prohibited from requiring an employee to repay unauthorized credit card charges by means other than wage deductions, and in this regard, money is not necessarily “other facilities” (a technical term under the FLSA), such as tools of the trade or equipment provided to an employee for the convenience of the employer.
However, WHD Opin. Ltr. FLSA2006-7 includes “funds” in the prohibition for wage deductions of exempt employees – “. . . deductions from the salaries of otherwise exempt employees for the loss, damage, or destruction of the employer’s funds or property due to the employees’ failure to properly carry out their managerial duties (including where signed “agreements” were used) would defeat the exemption because the salaries would not be “guaranteed” or paid “free and clear” as required by the regulations.” (emphasis added).
Non-Exempt Employees – A covered employer is likely permitted to lawfully deduct a non-exempt employee’s wages for charges made by the employee by use of a company credit card and that primarily benefit the employee, provided that the deductions are made with the employee’s written and valid authorization. The deductions in this category may – under the FLSA – even bring the employee’s rate of pay for a particular pay period below minimum wage, but the employee’s state law rights should be evaluated before doing so.
State Law Considerations – A covered employer is wise to account for applicable state law specifics when applicable to any deduction situation in this category.
Full-Day Suspensions Without Pay for Violation of “Workplace Conduct” Rules
A covered employer may discipline an exempt employee by deductions from pay for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of “workplace conduct” rules. Such suspensions and full-day deductions from an exempt employee’s salary must be imposed pursuant to a written policy applicable to all employees. See 29 C.F.R. § 541.062(b)(5).
There is a dearth of judicial opinions on this subject. However, the courts indicate that the term “workplace conduct” is not to be construed expansively. Instead, it covers only serious workplace misconduct, such as sexual harassment, violence, drug or alcohol violations, or violations of state or federal laws. The term should not be applied to performance or attendance issues. A written policy need not include an exhaustive list of specific violations that could result in a suspension, but it should be sufficient to put employees on notice that they could be subject to an unpaid disciplinary suspension for “workplace misconduct.” See Watkins v. City of Montgomery, Ala., 775 F.3d 1280, 1284 (11th Cir. 2014).
Deductions for a Negative PTO Bank
Exempt Employees – A covered employer is likely not permitted to deduct the salary of exempt employees to account for a negative balance of paid time off (“PTO”), unless the deduction is to account for full-day absences due to sickness or disability and pursuant to an established policy or practice.
Deduct from Future PTO – At least one federal court of appeals has found that deductions from future accrued PTO does not violate the salary-basis requirements of the FLSA. Thus, a covered employer may be permitted to deduct future accrued PTO to account for past negative balances, and such deductions may be in full-day or partial-day increments. See Higgins v. Bayada Home Health Care Inc., 62 F.4th 755, 761 (3d Cir. 2023) (“An employer does not violate the FLSA’s exempt employee salary conditions “by deducting from an employee’s PTO because, when an employer docks an employee’s PTO, but not her base pay, the predetermined amount that the employee receives at the end of a pay period does not change.”) (emphasis added); see also DOL Opin. Ltr. FLSA, 2009 WL 649020, at *2 (“Employers can . . . make deductions for absences from an exempt employee’s leave bank in hourly increments, so long as the employee’s salary is not reduced. If exempt employees receive their full predetermined salary, deductions from a leave bank, whether in full day increments or not, do not affect their exempt status.”).
Bona Fide Plan for PTO for Sickness or Disability
Exempt Employees – Deductions from an exempt employee’s salary may be made for absences of one or more full days occasioned by sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. If a covered employer allows an exempt employee to take PTO in excess of accrued PTO because of sickness or disability, the employer may deduct the employee’s future salary for full-day absences for which the employee received compensation under the PTO plan, policy or practice. Deductions for such full-day absences may be made before the employee has qualified under the PTO plan, policy or practice, and after the employee has exhausted the leave allowance thereunder. See 29 C.F.R. § 541.602(b)(1)-(2).
Non-Exempt Employees – A covered employer is permitted to deduct from non-exempt employees’ wages an amount to account for a negative PTO balance, provided that the employee has a valid written wage deduction acknowledgement for this purpose.
Last Wages – For last wages owed to an employee who is separated from employment, the employer may recoup the advanced PTO pay, even where such recoupment cuts into the minimum wage or overtime pay required under the FLSA, provided the employee has been made aware of and acknowledged the deduction policy. However, for exempt employees, the regulations do not specifically state whether deductions for paid leave advances can be made from an exempt employee’s final paycheck. Because of that, the employer should carefully consider whether or not to make such deductions from an exempt employee’s final salary.
Rate of Pay for PTO Deductions – The covered employer should not make any assessment for administrative costs or charge any interest payment that brings a non-exempt employee’s wages below the minimum wage. Also, the hourly rate of pay deducted from the final paycheck of a non-exempt employee must be the rate the employee was paid at the time of the advanced PTO, rather than a higher rate of pay the employee may earn at the time he or she leaves employment.
State Law Considerations and Wage Deduction Agreements
While a deduction may be permissible under the FLSA, state law may dictate a different result. Some states have specific requirements that must be met before a wage deduction may be lawfully made. A covered employer is wise to account for applicable state law specifics when addressing any potential deduction situation.
A valid authorization for an employer to deduct wages generally must clearly explain the reason for the deduction. The written authorization or agreement should list the type of damage or mistake for which a deduction may be made, the amount that will or might be deducted, and when the deduction will take place. A blanket policy that says “employer can deduct pay for any damage to company property due to negligence, mistake, or other cause” may be insufficient authorization.
An employee’s acknowledgement of a policy or manual that includes specific deductions could count as written agreement of the employee. Ideally, the employee must have understood all the terms relative to the deduction protocol. At least one state (Colorado) requires that the employee agreement to permit wage deductions must provide that it is revocable. Each state’s laws may vary as to the requirements for employee authorization. See, e.g., Colo. Rev. Stat. § 8-4-105(d) (requiring that, for lawful wage deductions for damage or loss of company property and many other categories of possible deduction scenarios, the employee’s authorization must be revocable) (emphasis added); id. at § 8-4-105(e)(I)-(IV) (requiring notice and other procedures before deducting an amount to cover the cost of property entrusted to a former employee who did not return the property upon termination of employment); 40 Tex. Admin. Code § 821.28(b) (“Written authorization for deductions shall be specific as to the lawful purpose for which the employee has accepted the responsibility or liability. Written authorizations shall be: (1) sufficient to give the employee a reasonable expectation of the amount to be withheld from pay; and (2) a clear indication that the deduction is to be withheld from wages.”); id. at § 821.28(b) (addressing use of a handbook, policy manual or other similar document for deduction authorization).
Exceptions to the Prohibition of Deductions from Pay in the Salary Basis – 29 C.F.R. § 541.062(b)-(c)
Under the FLSA, the exceptions to the prohibition against deductions from pay in the salary basis requirement are stated as follows:
- 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.
- Deductions for absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. The employer is not required to pay any portion of the employee’s salary for full-day absences for which the employee receives compensation under the plan, policy or practice. Deductions for such full-day absences also may be made before the employee has qualified under the plan, policy or practice, and after the employee has exhausted the leave allowance thereunder.
- The employer can offset any amounts received by an employee as jury fees, witness fees or military pay for a particular week against the salary due for that particular week.
- 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. A deduction from pay as a penalty for violations of major safety rules may be made in any amount.
- 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.
- An employer is not required to pay the full salary in the initial or terminal week of employment. Rather, an employer may pay a proportionate part of an employee’s full salary for the time actually worked in the first and last week of employment.
- 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. An employer may pay a proportionate part of the full salary for time actually worked.
When calculating the amount of a deduction from pay allowed under any of the above, the 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.
See also DOL Field Operations Handbook, Ch. 22 at § 22h05.
