Employers May Deduct from Exempt Employees Vacation and Sick Leave Balances (Versus Salary) for Partial Day Absences Without The Employee Losing His or Her Exempt Status
In California, while it is impermissible to deduct from a salary of an exempt employee for partial day absences, employers may deduct from leave time balances in connection with absences due to vacation or sickness of less than a full day under a bona fide plan providing for such leaves without the employee losing his or her exempt status. See Department of Labor Standards Enforcement (“DLSE”), Opinion Letter (Nov. 23, 2009).[1]
A proper analysis of this issue requires a brief overview of the following three areas: 1) exempt status from California’s overtime laws; 2) the salary basis test; and 3) deductions from “leave banks.”
Exempt Status
One of the hallmarks for exempt status under both the federal Fair Labor Standards Act (“FLSA”) and California law which relieves an employer from overtime compensation requirements is that an employee must satisfy both a “salary” test and an applicable “duties” test (executive, administrative, or professional). The issue concerning deductions from exempt employees for partial day absences only impacts the “salary” basis test, and accordingly is the only test addressed herein.
Salary Basis Test
An employee will be considered to be paid on a “salary basis” for purposes of the overtime exemption if he or she receives on regularly scheduled paydays a predetermined amount constituting all or part of his or her compensation which totals at least two times the California minimum wage per month which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Labor Code §§ 515(a) and (c). An exempt employee must receive his or her full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Failure to meet the salary test results in the employee no longer being considered exempt and an actual practice of making improper deductions demonstrates that the employer did not intend to pay employees on a salary basis. 29 CFR § 541.603(a).
The prohibition against deductions from an employee’s wages under the salary requirement is subject to several exemptions stated in 29 CFR § 541.602(b). The clear language in these federal regulations, however, allows for deductions form a salary only in increments of one full day. A corollary recognized by the courts and the federal Department of Labor (“DOL”) is that an exempt employee’s salary cannot be subject to reduction for absences less than a full day under the federally recognized exceptions. See Abshire v. County of Kern, 908 F.2d 483, cert denied, 498 U.S. 1068 (1991) (deducting an employee’s salary for absences less than one day violates FLSA salary basis test); Conley v. P.G. & E., 131 Cal. App. 4th 260, 267 (2005); DOL Opinion Letter FLSA2007-6 (Feb. 8, 2007) (partial day absences not expressly recognized by Part 541 regulations may render an employee’s compensation not on a salary basis, thereby jeopardizing exempt status). Thus, interpreting these federal rules to allow deduction from a salary for a partial day absence by an exempt employee would plainly contravene the hallmark characteristic of the salary basis test, namely that exempt employees receive a predetermined amount of compensation not subject to reduction because of variations in the quality or quantity of work performed. If an employer, in fact, docks employees’ wages improperly, “then the employees do not meet the salary basis test, and are nonexempt for purposes of overtime pay.” Conley, 131 Cal. App. 4th at 267.
Deductions from Leave Banks
The above general rules regarding the salary basis test are often confused with and misapplied to a related but different rule applicable to deductions from leave balances for partial day absences of exempt employees under the FLSA.
Federal courts have found that a reduction in paid leave time (versus salary) does not affect the employee’s status as a salaried employee. Barner v. City of Novato, 17 F. 3d 1256, 1261-62 (9th Cir. 1994) (deductions from accumulated paid leave time does not result in loss of exemption); see also Webster v. Public School Employees of Washington, Inc. 247 F. 3d 910, 917 (9th Cir. 2001) (extending Barner to apply to deductions where the accumulated leave is convertible to cash); DOL Opinion Letter FLSA2006-32 (Sept. 14, 2006).
It must be noted that in California, vacation is afforded the status of a type of deferred compensation which is a wage and not a benefit as characterized the by DOL. See Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 774 (1982). In Conley, however, which involved a vacation leave policy implemented by the utility, PG & E, the California Court of Appeal specifically addressed the issue of deductions from an employee’s vacation leave bank for partial day absences and concluded “that nothing in California law precludes an employer from following the established federal policy permitting employers to deduct from exempt employees’ vacation leave, when available, on account of partial-day absences from work.” Conley, 131 Cal. App. 4th at 263. The court noted that PG & E’s policy was entirely consistent with the California Supreme Court’s interpretation in Suastez, that Labor Code § 227.3 “does not purport to limit an employer’s right to control the scheduling of its employees’ vacations.” The court stated: “[c]learly, therefore, Suastez does not preclude PG & E from requiring its exempt employees to use their vacation leave, if available, when they want or need to take a partial day absence.” Id.
Although the courts treat vacation similar to a sick plan for purposes of determining or maintaining exempt status when making deductions for full or partial day absences, any vacation policy or sick leave plan which is used as a basis for reduction of leave balances will be subject to review under state law requirements for determining the validity of such plans. Conley, 131 Cal. App. 4th at 263. And, an employer remains, as always, obligated to compensate the employee with his guaranteed salary for any day in which the employee performs work, even in the absence of a sufficient amount of banked vacation leave from which a deduction for partial day absence can be applied.
[1] The new DLSE opinion is here: http://www.dir.ca.gov/dlse/opinions/2009-11-23.pdf
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