Do Leave Bank Deductions for Partial-Day Absences Destroy Exempt Status?

Executive, administrative, and professional "white collar" employees who meet the "salary basis test" and the "duties test" are exempt from the overtime pay requirements of the Fair Labor Standards Act, and therefore, they do not have to be paid overtime when they work more than 40 hours in a workweek. While no major court decisions have addressed the duties test recently, several cases decided in 1997 have tested the limits of the salary basis test.

By way of background, the basic parameters of the salary basis test are:

1. An employee is considered to be paid on a salary basis if he or she regularly receives a predetermined amount each pay period. This amount cannot be "subject to reduction" because of variations in the quality or quantity of the work performed.
2. An employee's salary can be reduced on an hour-by-hour basis only for intermittent or reduced-schedule FMLA leave.
3. )A salary can be reduced or prorated for complete days of absence due to vacation, personal business, or in some circumstances, sickness, but not for partial days.
4. Deductions are not permitted for partial weeks of absences due to jury duty, attendance in court as a witness, or temporary military leave. Employers can make partial week deductions for violation of "major safety rules," but other disciplinary deductions for less than a full workweek are not allowed.
5. Of course, employees need not be paid for entire weeks in which they perform no work.

InAuer v. Robbins, the U.S. Supreme Court held that the "mere possibility" of a pay deduction for a part-day absence for personal reasons or for variations in the quantity or quality of work performed does not change the status of an otherwise exempt salaried employee. However, the Supreme Court also noted that if an employer had an "actual practice" of making such pay deductions, or if the employee could show a "substantial likelihood" that such deductions would be made, the employer would lose the overtime exemption and incur liability for back overtime for all salaried exempt administrative, executive, or professional employees who were subject to the deductions.

A few months later, in Aiken v. County of Hampton, a federal court in Charleston addressed the issue of whether a salaried employee subject to deductions from a sick and annual leave bank for partial day absences is entitled to overtime.

Hampton County had a policy of deducting from sick and annual leave accounts when salaried, exempt employees missed work for part of a day. In the lawsuit, numerous current and former deputies and jailers sought compensation for all overtime hours that they had worked during the three years before the lawsuit. Because they were subject to reductions in pay through the County's deductions from their sick and annual leave accounts, the employees argued, they could not be considered exempt from overtime under the FLSA.

The court disagreed. After noting a split of judicial authority on this issue, the court distinguished a reduction from a leave allowance from a reduction in pay. Although the South Carolina Payment of Wages Law includes vacation, holiday, and sick leave payments in its definition of "wages," the court noted that sick and annual leave benefits can only become "payable" upon termination of employment. The FLSA focuses on the predetermined pay that a salaried exempt employee receives each workweek, rather than on amounts that might eventually be payable upon termination of employment. According to the court, paid leave time is a fringe benefit, and reduction of a fringe benefit cannot be considered a reduction in pay that would affect an employee's exempt status as a salaried employee. The Aiken decision is currently on appeal before the Fourth Circuit Court of Appeals in Richmond, Virginia.

Although the Auer decision prevents employers from reducing their salaried, exempt employees' regular pay for part-day absences or for variations in the quality or quantity of work performed, the Aiken decision affirms that employers still have authority to use benefit-reducing financial sanctions to insure that their salaried employees maintain acceptable performance and attendance levels.

Accordingly, while there is contrary authority in other states, South Carolina employers may use policies providing for reductions in vacation, sick leave, and other fringe benefits to enforce attendance policies for both exempt and nonexempt employees. Nevertheless, we encourage employers to resist the temptation to rely solely on the threat of financial sanctions to insure compliance with attendance standards. Consistent documentation of shortcomings and adherence to progressive discipline policies are still necessary courses of action when salaried exempt employees fail to live up to their employers' performance and attendance standards.