Safe Harbor for Improper Deductions Checklist
|SAFE HARBOR IN GENERAL||
The Fair Labor Standards Act (FLSA) rules state that if an employer makes an improper deduction but follows the safe harbor provisions, they can correct the error.
The employee and those with the same title DO NOT lose their exempt status.
|Safe Harbor does not protect employers who are frequent abusers [See below].|
|REQUIREMENTS OF THE SAFE HARBOR PROVISIONS||Company must comply with all three requirements.||1) Establish a clearly communicated policy prohibiting improper deductions and including a complaint mechanism;|
|2) Reimburse employees for any improper deductions in a reasonable time frame; and|
|3) Make a good-faith commitment to comply in the future.|
|SAFE HARBOR POLICY|
|Communicate policy to employees via employee handbook.|
The FLSA regulations set out the best evidence of a clearly communicated policy.
· A written policy.
· Distributed to employees before the improper pay deductions by:
o Providing a copy of the policy to employees at the time of hire,
o Publishing the policy in an employee handbook, or
o Publishing the policy on the employer’s intranet.
Salary Basis Rule
|The FLSA and California’s wage and hour laws state that in order to qualify for overtime exemption, an employee must be paid a pre-determined salary.||In other words, if the employer makes deductions from an employee’s predetermined salary— because of the company’s operating requirements—the employee is not paid on a “salary basis.”|
|The employer cannot reduce an exempt employee’s salary because of variations in the quality or quantity of this person’s work.|
|There are some specific some circumstances when the employer is permitted to deduct from an exempt employee’s salary.||
1. Absences of a full day or more for personal reasons.
2. Absences of full days for sickness or disability, where an employee is compensated for these absences under a sick/disability plan. (If the company does not have a plan, you can only deduct for illness if the absence exceeds one week.)
3. If the employee doesn’t perform any work in a week.
4. Days that aren’t worked in the employee’s first and final weeks of employment.
5. Time taken off under the state or federal family leave laws, including when less than a full day is missed.
6. Committing a major safety violation (this deduction is only permitted by the FLSA and doesn’t apply to private employees in California
|Also deductions for jury duty or military leave that exceed the amount an employee received for that service|
|A reduction in salary that is inconsistent with the rules is considered an improper deduction.||The Department of Labor states that, if not expressly permitted by the regulations, the deduction violates the salary basis test.|
|The employer will forfeit the exemption if it has an “actual practice” of making improper deductions from salary.||See definition of “Actual Practice” below.|
|An isolated or inadvertent improper deduction will not destroy the exemption if the employer reimburses the employee for the deduction.|
|The loss of the exemption means employer liability for overtime compensation.||Employers face civil penalties for repeat or willful overtime violations.|
|Deductions cannot be made when the employer is closed for inclement weather.||When the employer remains open, and an employee does not report for work for one or more full days, this is an absence for personal reasons—deductions may be made on a full-day basis.|
|If the employee is ready, willing and able to work, deductions cannot be made for time when work is not available.|
Failure to Return Property
|Deducting for replacement costs for lost or damaged property violates the prohibition on reducing compensation based on the quality of an exempt employee’s work.|
|NON-EXEMPT EMPLOYEES||An employer cannot make a deduction that would reduce the employee below minimum wage.||
An employer cannot lessen the overtime premium owed.
Employers should also understand state laws.
LOSING SAFE HARBOR
|If the Department of Labor finds an actual practice of making improper deductions, all employees in that specific job classification subject to the deductions could lose their exempt status for the period during which deductions were made.|
|Making improper deductions exhibits that an employer did not mean to pay employees on a “salary basis” and, therefore, disqualifies employees from the overtime exemption.|
|Defining “Actual Practice”||
Factors considered when deciding if an employer has an actual practice of making improper deductions include, but are not limited to:
· the number of improper deductions;
· the time period in which the employer made improper deductions;
· the number and geographic location of both the employees whose salary was improperly reduced and the responsible managers;
· whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.
|STATE LAW||If state law is different than the FLSA, an employer must comply with the standard most protective to employees.|
Public employers in California note that your employees are only covered by the FLSA, so the safe harbor can apply if you follow the above rules.
It is important to note that the FLSA safe harbor isn’t recognized under California law.
|This means that, if you’re a private employer and you make an improper deduction, the outcome may be more stringent as your employees are covered by the FLSA and the stricter California law.|
|Private California employers should adopt a formal safe harbor policy by putting in place the three-step program described above.||This policy may decrease liability if sued for making improper deductions and the employee seeks damages under both the FLSA and California law.|