Can I Dock an Exempt Worker for Missing Work?

Here’s the scenario, my staff accountant (an exempt worker under the FLSA Administrative Exemption) has an attendance problem.  He’s used up all of his vacation and sick time and continues to miss work.  Can I dock his pay for the time he’s missed?

Well, like all good questions, the answer is – maybe.  Let’s start with the ground rules.  Here’s what the DOL says.

“Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.  The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.  Subject to exceptions listed below, an exempt employee must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.”

So, if he works any time in that week, he needs to be paid for that week – the full week.  But, there are some exceptions.  Here’s what the DOL says on that (with emphasis added by me):

“Deductions from pay are permissible when an exempt employee: is absent from work for one or more full days for personal reasons other than sickness or disability; for absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness (you can reduce their pay because you are instead paying them sick time); for penalties imposed in good faith for infractions of safety rules of major significance; or for unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions.  Also, an employer is not required to pay the full salary in the initial or terminal week of employment, or for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.”

As usual, the DOL does a good job of explaining things in a manner that doesn’t always answer the question and then leaves it up to the courts to clarify. So, here’s a summary of do’s and don’ts.

1 – Don’t ever reduce an exempt employee’s pay by less than a full day.

2 – If you have established plans for sick and vacation pay, you can allow an exempt employee to use vacation or sick time in half-day increments, but if they run out, don’t dock them for missing time. You can discipline them, but don’t reduce their pay.

3 – Before you elect to suspend an exempt employee without pay, make sure that reason is significant.  If you want to suspend them because you want them to have time to “think about if they want to continue to work for your organization”, then make it a paid suspension.

Now, I can hear you thinking, “What’s the risk”.  The risk is that if the DOL’s Wage and Hour Division finds out what you’re doing (i.e. docking an exempt employee’s time for using too much sick time) you run the risk of losing that exemption.  That employee now becomes hourly and you owe him any overtime he works in the future, and possibly in the past two years.  Also, all other employees in that category could be reclassified as nonexempt and you have the same overtime penalties.   That whole issue could also get the DOL to audit all of your exempt employees and they might find other jobs that you’ve classified as Exempt but they rule are nonexempt. Let me tell you, you don’t want the DOL mad at you.

So, establish an effective attendance policy, and discipline all employees consistently based on their attendance – but don’t reduce the pay of an exempt employee.  Typically if someone is missing too much work, then they are not getting their work done and you can clearly fire them for that.

The WHD Gets Inside Employee’s Pockets

It’s very sneaky, if you ask me. The Department of Labor’s Wage and Hour Division (WHD) has launched a new strike on employers who don’t pay their workers properly. That’s not really news – they’ve been doing that for years, and even more so in the Obama administration. But, this time they’re being sneaky – and technologically savvy – about it.

The WHD has introduced their own iPhone app – called DOL-Timesheet. The free app (available through iTunes) allows employees to track their hours on their phone and the app will calculate what they should be paid. You can enter your start and stop times manually, or simply press “Start Work” and “Stop Work” to automatically record your time. It also has features to track your breaks – both meal breaks and shorter rest breaks. The app can’t yet track things like holidays and sick time but they say that’s coming in the next release. So far it only runs on the iPhone, but the DOL says that Android and Blackberry versions are in development. Here’s a link to the DOL’s press release. I have install the app on my phone and played around with it.

It’s an interesting tactic that theoretically makes sense. If an employee can accurately estimate their pay, they can then compare that to their paycheck and know if they are being paid correctly. If only it were that simple. I can see this app causing way more problems than it might solve. For example, most companies don’t pay by the minute, they round to quarter hours and every company has different rounding rules. So, if you start work 8 minutes early, do you get paid an extra quarter hour or not? If you start 7 minutes late, do you get paid for that quarter hour? Is it okay to clock in more than 7 minutes early? The WHD app appears to round – but it doesn’t have the flexibility to meet every company’s rules.

Did you know that if you pay a nonexempt employee a productivity related bonus (for example: a $100 quarterly perfect attendance bonus) that the bonus needs to be included in the base wages for calculating overtime? So, in this case, you need to take the employee’s total base earnings for the quarter, then add in the $100, then divide that amount by the number of base hours worked to get an adjusted base rate. Then, recalculate any overtime worked during that quarter using 1 ½ times the newly adjusted base rate. I’ll bet the WHD Timesheet’s not doing that (but then neither are lots of companies who should be).

I can think of 10 other ways that the pay might be off, maybe by a little, maybe by a lot. Each one of these might be challenge to reconcile. Clearly I’m not an advocate of companies paying wages incorrectly, but I’m not sure this is the best way to go about it. Conceptually it’s a very interesting idea. In practicality it sounds like pain for payroll departments around the country. Even though software is full of disclaimers, it also has a glossary of relevant wage and hour terms and a page with info about how to contact the WHD. Sounds like trouble looking for a place to happen.

On the plus side, this app might be a great tool for a small company to use as it’s time keeping system. Employees could track their hours on their phones and the app has feature included to email the timesheet.  The owner can then print the time card and pay the employee. It could work.

So, if your employee comes in next week and complains that you didn’t calculate his overtime correctly, check is his pockets. The WHD might be hiding in there.

Exempt or Not Exempt – That is the Question

The battle rages on between management (aka the oppressors) and labor (the oppressed) about who should be paid overtime.  Management does not want to pay overtime.  They feel that time tracking and reporting slows down business, people like to be recognized for what they do – not how many hours they work, and it saves money.  Labor wants everyone to be paid overtime, to be compensated for the labor they put into the business.  They want what’s right!  Making the rules is the federal government and depending on which party is in power they are either seen as defending the oppressed or supporting fair competition.  There are no winners in this battle royal.

Okay, so that may be a bit over the top, but the base arguments are there.  So the question is:  who should be paid overtime?  The governing legislation is the Fair Labor Standards Act (FLSA) adopted in 1938 and amended many times since.  The FLSA governs minimum wage, overtime, child labor laws, and record keeping. It is enforced by the Department of Labor – Wage and Hour Division.  Enforcing the FLSA is one of the Obama administration’s high priorities and the enforcement division has recently been expanded with more investigators (to defend the oppressed).

The FLSA contains a provision stating that in general, individuals should be paid at 1 ½ times their normal pay rate for any hours worked in excess of 40 hours in one work week (aka overtime).  However, there are other provisions that allow some workers to be “exempted” from the overtime provisions of the FLSA – hence the term “Exempt” – while those who do not meet the qualifications to be exempted are called Nonexempt.   Frequently the terms “Salaried” and “Hourly” are used as synonyms for “Exempt” and “Nonexempt” but they do not necessarily mean the same thing.  There are salaried jobs that are nonexempt and exempt jobs who closely track their hours.

The FLSA contains several different “tests” that can be used to determine if a job can be classified as exempt.  There are income tests and education tests. There are management level tests and inside/outside test (for sales people).  All in all I believe it is one of the most poorly written pieces of federal legislation HR professionals deal with. It is wholly subject to interpretation and similar jobs are often evaluated differently in different companies.

But there is one “simple” test that I use when talking to managers that really cuts to the chase.  Does this job (the person doing the job) regularly make independent decisions on matters of significance?  If yes, they are probably exempt.  If no, then they are probably not.  Unfortunately, that “simple” test doesn’t sound too simple.  We have to agree on the definitions of regularly, independent and significance.  Regularly doesn’t have to mean daily, but it can’t mean monthly.  Independent does not have to mean full authority to do whatever they want, but it does mean really exercising discretion and not following a pre-ordained policy nor having every “decision” affirmed by a superior.  A matter of significance does not have to mean life or death, but it is not ‘where should we go for lunch’.

An exempt employee should regularly use their education, experience and judgment to perform tasks that will materially affect the success of the company. That could mean hiring or firing staff, deciding on the proper accounting treatment of a transaction, or negotiation the purchase or sale of product or materials, establishing budgets and marketing plans, or any number of other things. The key is that if these things are not done well there could be a real impact on the company.

So I encourage you to lay down your arms and set away from this battle field.  There are no bright lines, no clear right or wrong, and hopefully no real oppressed or oppressors.  There is only a vaguely written piece of legislation and lots of interpretation in the offing.  Good luck to you – and God speed.