Exempt Employee Pay Deductions

Exempt employees get hired to do the job, not punch a clock — so they earn the same amount each paycheck. What happens if they don’t work a full day or even part of a day? Or what if the employee’s error costs your organization a fine or other monetary penalty?

Employers can take some actions, but should exercise caution.

Partial Day Deductions — Vacation and PTO

If an exempt employee works any portion of a work day, he/she must be paid the full salary for that day. However, if an employee works for an hour and then leaves for a personal day or vacation, the employee can be required to use vacation or paid time off (PTO) to make up the difference between the hour worked and the seven hours (of a “typical work day”) not worked. Indeed, employers can require employees to use their accrued vacation or PTO leave in any time increment without jeopardizing the employee’s exempt status (Rhea v. General Atomics, 227 Cal.App.4th 1560 (2014)).

Rhea affirmed Conley v. Pacific Gas & Electric Co., 131 Cal.App.4th 260 (2005), which allowed employers to make partial day deductions from exempt employees’ vacation leave banks for absences of at least four hours. The California Division of Labor Standards Enforcement (DLSE) adopted Conley in a 2009 Opinion Letter, but clarified that the absences do not need to be four hours or more; the absence and coordinating deduction from the vacation or PTO bank can be in any increment.

It must be emphasized that employees continue to receive full salary for the partial day absence. For example, Jack is an exempt employee who works two hours on a Wednesday, then leaves to go to a concert out of town. An exempt employee is assumed to work a forty hour workweek, or eight hours a day, for purposes of proper payment. Jack’s paycheck will not change for this pay period.

However, six hours of accrued vacation or PTO may be deducted from Jack’s vacation or PTO bank because of his absence. If Jack does not have at least six hours of accrued vacation or PTO in his bank, he will get paid his full salary because, as an exempt employee, Jack must be paid a full day. If Jack has less than six hours of accrued time, you may still deduct whatever amount of time he does have from his bank — so long as he gets paid for the full day.

Full Day Deductions — Vacation and PTO

If an exempt employee performs no work in a workday for personal reasons such as vacation or personal time off (PTO) and has no accrued vacation or PTO, then his/her salary can be deducted in a full-day increment. No work means no work — no emailing; no nothing!

You arrive at that number by determining the exempt employee’s daily rate of pay:

  • Take the employee’s salary and divide it by 52 (the number of weeks in a year).
  • Divide the resulting number by five or six (depending on the number of days in the employee’s regular workweek).
  • Then multiply that number by the number of days the employee worked in the workweek to determine the amount owed.

If the exempt employee performs no work in a workweek for personal reasons and does not have vacation or PTO to compensate him/her for the time off, then you may make a full week deduction from the employee’s pay.

In both instances, if the employee has accrued vacation or PTO but not enough to cover his/her full absence(s), you may still pay the employee for the amount of vacation or PTO and deduct the remaining time off from the employee’s salary, as noted above.

Please note: Deductions from an exempt employee’s salary may not be made for partial day or week absences caused by jury duty, attendance as a witness, or temporary military leave. These absences do not count as “personal” time off. Rather, the employee is absent due to a legal obligation.

Deductions for Sick Time

California employers must provide mandatory paid sick leave (PSL) benefits (effective July 1, 2015, pursuant to AB 1522/the Healthy Workplaces, Healthy Families Act). Exempt employees are entitled to PSL under this law. If the exempt employee needs to take time off for one of the eligible reasons under the Act, you can’t deny the exempt employee the right to use accrued mandatory PSL and you must allow use of accrued paid time off for a covered absence. If an exempt employee takes a full or partial day absence under the mandatory PSL law, it can be charged to the exempt employee’s accrued mandatory paid sick time.

The mandatory PSL law provides specific details on determining accrual and payment for exempt employees and sets forth record keeping requirements.

You may make deductions for absences of one full day or more caused by sickness, an accident or a disability if you have a bona fide plan, policy or practice of providing compensation salary loss due to sickness, accidents or a disability. If a plan exists, you can make a deduction from an exempt employee’s salary for a full day of absence before the exempt employee qualified for the sick or disability pay and after the employee exhausted benefits under the plan.

Your organization must have a policy in place that addresses how and under what circumstances you will make a deduction from an exempt employee’s salary for sickness, accidents or a disability.

Employers may also deduct the corresponding amount from an exempt employee’s sick pay bank for a partial day’s absence due to illness or injury if the employee has enough time available when the absence occurs. If the employee does not have sufficient time in his/her sick pay bank to cover the entire absence, the amount in the bank may still be deducted but the employee must still be paid a full day’s salary.

Deductions for Disciplinary Issues — Fines?

Although federal law allows deductions from exempt employees’ salaries for disciplinary reasons, California law prohibits such deductions. See DLSE Opinion Letter 1997.04.28 for more information on federal versus state law and supporting citations.

In general, any deduction not specifically authorized by law will not be allowed in California. Deductions that are specifically authorized by law include insurance premiums, wage garnishments, retirement plan contributions and taxes.

This begs the question: Can an employer “charge” or “fine” an employee for disciplinary reasons or because the employee made an error that cost the employer a specific amount of money? It is clear that an employer can’t deduct a “charge” or “fine” amount from the employee’s wages.

According to the Labor Commissioner, “the courts in California and the United States Supreme Court have held that deductions from wages in effect allow an employer a self-help remedy which is illegal (Sniadach v. Family Finance, 395 U.S. 337 (1969); California Code of Civil Procedure section 487.02(c)).

Instead of making the deduction from salary, can the employer instead require the employee to cut the employer a check as a fine? There is significant authority and precedent to recommend against this practice. This will also likely be looked at as a self-help remedy.

Further, Labor Code section 221 prohibits an employer from recovering, or “repaying” itself, wages already paid or due to the employee. Indeed, California employers can’t require employees to purchase anything of value from the employer to be employed (Labor Code section 450). Even if the employer did not intend on recouping the money through a payroll deduction, requiring the employee to pay the employer in any format would very likely violate California law.

Shortages and other losses that occur without fault of the employee or as a result of simple negligence are generally considered a part of doing business and you must bear these losses. You can discipline employees whose carelessness causes you a loss but you still have to bear the cost. If a dishonest or willful act or gross negligence is involved, you may be able to recoup the loss. In such situations, it is a best practice to first consult legal counsel.

Deductions for First and Last Week of Work

You do not have to pay an exempt employee for a full workweek in the first or last week of employment unless the employee worked the full workweek. You can calculate the amount owed to an employee for a partial workweek by taking the employee’s annual salary, dividing it by 52 (for number of weeks in a year), then dividing that number by five or six (depending on the number of days in the employee’s regular workweek) and then multiplying the result by the number of days the employee worked in the workweek.

Best Practices

  • Employers can’t dock an exempt employee’s salary for a partial day absence. If the employee’s vacation/PTO bank does not have enough time to cover the missed partial day, the full day’s salary is still due.
  • The employer can replace salary by charging the time to the employee’s vacation/PTO bank or to the employee’s accrued sick leave if the employee has enough time available when the absence occurs.
  • Make deductions from sick leave balances only if the absence is due to sickness and you have a policy in place.
  • Review the requirements regarding mandatory paid sick leave in California as applied to exempt employees to ensure accurate payment and record keeping.

Consider how partial-day deductions fit with your company’s philosophy. Companies may choose not to make partial-day deductions, especially in those situations where employees routinely work long or varying hours.

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