One of the most significant employment law risks currently facing employers are collective action lawsuits brought by current or former employees claiming they were not paid overtime. These lawsuits are often the result of misclassifying employees as salaried, exempt employees and not paying them for hours worked over 40 in a workweek.

Even if an employer has correctly classified an employee as exempt, that status can be forfeited if an employer does not correctly administer its leave policies. This most commonly comes up when an exempt employee has exhausted any paid time off benefits, takes a day or part of a day off, and the employer deducts the time off from the employee’s salary. Doing so can forfeit the employee’s exempt status and result in the employer having to pay the employee overtime for hours over 40.

The general rule of thumb is that you cannot deduct pay from a salaried, exempt employee if the employee works any portion of a week. There are three critical exceptions to this rule:

  • When an employee is absent from work for one or more full days for personal reasons other than sickness or disability;
  • For absences of one or more full days due to sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness;
  • If it is for unpaid leave under the Family Medical and Leave Act (“FMLA”)

Thus, under (2), if the employee has PTO benefits available then the employer may “deduct” a day’s pay for the absence because it is effectively reimbursing that employee with PTO benefits. And under (3), if the employee is taking leave pursuant to the FMLA, then an employer can deduct days or partial days for such leave from the employee’s salary. But what happens when an employee is out of PTO benefits and the absence does not qualify for FMLA leave? An employer cannot deduct pay from the employee’s salary without the risk of losing that employee’s exempt status.

An employer still has options though. If there are regular hours that an employee is expected to work, then the employer can require the employee to make up that time. For instance if an employee has to leave two hours early, an employer can require the employee to come into work early, work through lunch, or otherwise make up the time. An employer can also discipline an employee for violating an attendance policy, up to and including termination. Before administering any discipline or terminating employment, make sure the reason for leave does not constitute a disability under the ADA, because that may trigger an obligation to engage in the interactive process and determine if there is any reasonable accommodation that can be afforded to the employee.