Corporate Payroll Services

Unlike non-exempt, hourly employees, where you pay only for hours worked, salaried employees are paid the same whether they work 20 hours or 60 hours in a workweek.  If you pay that salaried employee based on hours worked, you may run into trouble. You are treating her as a non-exempt employee and may owe overtime pay at time and one-half.  Are there any situations where you can deduct pay from a salaried exempt employee?

What characterizes a salaried, exempt employee?

First, let’s lay out the basics defined by the Department of Labor (DOL).  When you classify an employee as salaried exempt, as in exempt from overtime pay, you must meet certain criteria.  The DOL’s Fair Labor Standards Act (FLSA) sets out guidelines for the correct employee classification based on three factors:

  • Job duties,
  • Salary level and
  • Salary basis.

Regarding job duties, exempt employee roles must fall under one of the exemption categories specified by the FLSA, such as management, computer professional or outside sales.  In these types of roles, your employees are expected to work the necessary hours to accomplish the objectives set out in their job descriptions.  You don’t measure their role in hours worked, but in goals achieved.

Next, if your employee’s salary level is at least $455 per week or $23,600 annually, you may be able to classify them as exempt from overtime.  Otherwise, your employee is considered hourly and is eligible for overtime pay at time and one half when they work more than 40 hours in a workweek.

Lastly, the salary basis indicates whether an employee is paid the same amount each pay period, regardless of the number of hours worked.  As discussed above, you can’t dock an exempt employee’s pay because they skip a day, come in late or take long lunches.  On the flip side, that same employee doesn’t get paid overtime when he puts in 70 hours in a workweek to meet a project deadline or close a sale.

When is it acceptable to deduct pay from an exempt employee?

Under the FLSA, there are certain situations where you can deduct pay from a salaried exempt employee.

Vacation time

Let’s say your accounting manager, Isabelle, used up her accrued vacation on a honeymoon trip last month.  If she wants to take off another day for personal reasons, other than sickness or disability, and she is absent from work for all 8 hours of that scheduled workday, you can reduce her pay.  Of course, whether you allow her to take the personal day off is up to you.

Other personal (sick or disability) time

Similarly, if Carlos, your branch manager already has used up all of his sick time and now needs to take a sick day, you can reduce his wages.  However, you can only do this if you have a bona fide sick leave plan in place.  Based on guidance from the Department of Labor, that means you offer at least five paid leave days per year after one year of service.

Jury duty or military time away

You can take a deduction to offset amounts received by your computer programmer, Kelly, as a juror or witness at a trial.  In many jurisdictions, jurors receive a stipend for the days they serve on jury duty.  You can reduce Kelly’s wages for the pay period by the amount she was compensated for each day she was on jury duty.  Similarly, if your marketing manager, Darrell goes on military reserve duty periodically, you can reduce his wages for the amount of military pay received.

First or last week of work

You only have to pay exempt employees for the days worked during their first and last week.  For example, say your business generally is open Monday through Friday from 8 am to 5 pm.  If your new employee starts on a Wednesday, you only have to pay her for Wednesday, Thursday and Friday.  And if her last day is a Tuesday, you only have to pay her for Monday and Tuesday.

Court-ordered deductions

While this is a different scenario, it does fall under the discussion of deductions from exempt employee pay.  When a court orders you to withhold an amount for child support, alimony, debt repayment, etc., you must deduct the amount and remit it to the designated party.  The employee technically earns their standard rate of pay.  However, you should make it clear to your employee that the deduction is court-ordered and you’re required by law to follow their instructions.

Family Medical Leave (FMLA)

When your exempt employee is out on qualified Family Medical Leave, you do not have to pay him.  If he is gone for full days, it’s easy to determine the deduction.  However, what about intermittent FMLA?  You can deduct a portion of pay for the hours taken.

Can you deduct pay for part of a day using a Paid Time Off (PTO) bank?

One potential solution for deducting partial days off is to offer Paid Time Off or PTO.  Rather than offering separate vacation, sick and personal leave policies, you might combine these into a single PTO “bank.”  Then you can take 4 hours from an exempt employee’s PTO bank to account for that half-day of vacation or sick time.

To help you determine the correct classification of your employees, download the Exempt vs. Non-Exempt Employee Classification Checklist.

Department of Labor Free Checklist