It is going to cost me what? The Effect of Improper Deductions from Exempt Employee’s Salary.

I know, it’s been a while, but we are back. And last time we talked about the general rule for the “salary basis test” and the limited deductions you can make from an exempt employee’s salary and still keep the exemption. And last time I warned you to be very, very careful before you start making any deductions from an exempt employee’s salary. And why did I tell you to be very, very careful? Because the penalty, if you will, if you do make these improper deductions, is pretty darn bad.

(a) 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.

29 CFR §541.603(a).

You see, you lose the exemption altogether. That means you are liable for overtime. But that is not all. You aren’t just on the hook for the employee from whom you made the improper deductions.

(b) If the facts demonstrate that the employer has an actual practice of making improper deductions, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. Employees in different job classifications or who work for different managers do not lose their status as exempt employees. Thus, for example, if a manager at a company facility routinely docks the pay of engineers at that facility for partial-day personal absences, then all engineers at that facility whose pay could have been improperly docked by the manager would lose the exemption; engineers at other facilities or working for other managers, however, would remain exempt.

29 CFR §541.603(b).

Yep, that’s right, you do this wrong and you lose the deduction for everyone in the same job classification working for the same managers responsible for the improper deduction. Got 35 supervisors working for a manager that is making improper deductions for one of them? Lose the exemption for them all. And that can run into some real money.

But don’t worry too much. If it is just a mistake, you can fix it.

(c) Improper deductions that are either isolated or inadvertent will not result in loss of the exemption for any employees subject to such improper deductions, if the employer reimburses the employees for such improper deductions.

29 CFR §541.603(c).

And to cap it off, you can protect yourself even more. Have a policy that prohibits improper deductions and put it in your handbook. Give employees a way to report improper deductions and investigate it and do something about it if improper deductions occur.

(d) If an employer has a clearly communicated policy that prohibits the improper pay deductions specified in §541.602(a) and includes a complaint mechanism, reimburses employees for any improper deductions and makes a good faith commitment to comply in the future, such employer will not lose the exemption for any employees unless the employer willfully violates the policy by continuing to make improper deductions after receiving employee complaints. If an employer fails to reimburse employees for any improper deductions or continues to make improper deductions after receiving employee complaints, the exemption is lost during the time period in which the improper deductions were made for employees in the same job classification working for the same managers responsible for the actual improper deductions. The best evidence of a clearly communicated policy is a written policy that was distributed to employees prior to the improper pay deductions by, for example, providing a copy of the policy to employees at the time of hire, publishing the policy in an employee handbook or publishing the policy on the employer’s Intranet.

29 CFR §541.603(d).

But keep one thing in mind, and this is important for every policy you have. I think you need a policy like the one described in the regulation.  But that also means you have to enforce it.  It is better to have no policy than it is to have a policy you are not going to enforce. So when you put this policy in place and someone complains, do the investigation, and if there are improper deductions, fix them. If you don’t do that, again, you lose the exemption for the whole class of employees working for the same manager.