To properly classify an employee as exempt, an employer must satisfy the salary-basis test by paying a salary, “without deduction,” regardless of how many or how few hours the employee works during the pay period. Courts and agencies, however, have allowed employers to deduct from an employee’s vacation or sick leave balance in fullday increments without violating the test. Then, in Conley v. PG&E (2005), a California court of appeal approved an employer policy that called for partial-day deductions from an employee’s vacation for absences of four hours or more. Now, the California Labor Commissioner, through a November 2009 Opinion Letter, has opined that employers may deduct from an employee’s vacation or sick leave balance in less than half-day increments so long as the employee receives full pay for the day in any combination of vacation/sick pay and/or salary (for e.g., two hours of vacation pay and six hours of salary). However, if the employee does not have sufficient vacation or sick leave accrual to cover a partial-day absence, the employer must ensure that the employee receives full salary for that day in order to satisfy the salary basis test.

The Labor Commissioner also opined that where an employee is absent for personal reasons for a full day but lacks sufficient accrued vacation to cover the entire day (e.g., the employee has only two hours of accrued vacation), the employer may require the employee to exhaust the two accrued hours and not pay the employee any salary for the remainder of the day. However, where an employee is absent a full day due to sickness but lacks sufficient accrued sick leave to cover the entire day (e.g., the employee has only seven hours of accrued sick time), the employer may reduce the employee’s sick leave balance to zero but must not reduce the employee’s salary for the remaining hour, i.e., the employer must pay the employee full salary for the day.

The letter addresses, in unusual detail, several scenarios along these lines. While the Opinion Letter is expressly limited to the specific facts and circumstances described in the letter and does not have the force of law, it does signal that the California Labor Commissioner will afford employers greater latitude in the administration of their leave policies. To take advantage of this increased flexibility, employers should modify leave policies to allow for deductions from vacation and/or sick leave accruals in one-hour or greater increments.