On November 23, 2009, the Chief Counsel of the California Division of Labor Standards Enforcement ("DLSE") issued an Opinion Letter on behalf of the Labor Commissioner, Angela Bradstreet, in which the DLSE modified its enforcement stance on the issue of making deductions from exempt employee accrued vacation to cover partial-day absences. In the Opinion Letter, the DLSE opined that there is nothing in California law that would prevent an employer from implementing a policy that provides for hour-for-hour deductions from accrued vacation leave for partial-day absences taken by exempt employees.

This change in the DLSE enforcement policy brings California law more in line with the federal Fair Labor Standards Act ("FLSA") regarding the "salary basis test" and deductions from exempt employee paid time-off accounts for partial-day absences.

Question Presented to the DLSE

The employer presented the DLSE with a series of factual scenarios in which it proposed different reductions in vacation and/or sick leave balances for full- or partial-day absences of exempt employees and asked whether the proposed reductions were permissible under California law.

The employer who sought the DLSE's guidance maintains a policy pursuant to which employees accrue vacation time to be used for absences for vacation and personal reasons, as well as for absences due to illness (when sick leave has been exhausted). The employer's policy also provides for the accrual of sick leave. The employer's vacation policy requires that employees use accrued vacation hours for illness when the employees do not have any sick leave left. In addition, employees must use all accrued vacation and sick leave before any unpaid time off is approved.

One of the questions presented to the DLSE was whether the employer's policy of deducting from exempt employee accrued vacation time to cover partial-day absences is consistent with the "salary basis test" for exempt employees under California law.

DLSE's Analysis

In order to qualify for an exemption from the overtime and minimum wage requirements of California law, an employee must meet both the "duties test" and the "salary basis test." For the purposes of the Opinion Letter, the DLSE assumed that the employees in question met the duties test for the "white collar" (executive, administrative and professional) exemptions described in the California Wage Orders.

At issue was whether the apportionment of accrued vacation to the partial-day absences outlined in the employer's factual scenarios violated California's salary basis test. One of the hallmarks of exempt status is the payment of a fixed, predetermined salary to employees for any day in which the employees perform any work. Improper reductions in exempt employees' salaries results in the loss of exempt status.

In one case, a California court held that the state salary basis test prohibits employers from making deductions from exempt employees' salary for a partial-day absences. See, Conley v. P.G.& E., 131 Cal.App.4th 260 (2005). However, the Conley court did allow the employer to deduct vacation time in four-hour increments to cover partial-day absences of exempt employees. In its Opinion Letter, the DLSE rejected the four-hour limitation placed on the employer's ability to deduct time from exempt employees' accrued vacation to cover partial-day absences, concluding that the holding in Conley is inconsistent with California and federal law.

The DLSE concluded that there is no state or federal regulation or law that provides for a "four or more hours" limitation for deductions from accrued vacation. The DLSE found that the applicable federal regulations and interpretations by the federal Department of Labor ("DOL") support the conclusion that an employer may reduce exempt employee vacation banks on an hour-for-hour basis to cover partial-day absences.

Specifically, the DLSE looked at 29 CFR § 541.602, which sets forth the general rule that exempt employees must be paid their pre-determined salary for any week in which they perform work and DOL opinion letters interpreting this regulation. The federal regulations also make clear that employers may not "dock" (reduce the dollar amount of exempt employees' salaries) exempt employees for taking partial days off. On the other hand, if exempt employees take partial days off, the DOL has opined that employers may apportion exempt employees' compensation for those days between regular salary, vacation pay and sick pay, so that the employees receive full pay for those days. The DLSE found that these federal guidelines are consistent with state law.

Therefore, the DLSE concluded, while it is impermissible for an employer to deduct from exempt employees' salaries for partial-day absences, employers may deduct from accrued vacation balances in connection with absences due to vacation or sickness of less than a full day under an express policy providing for such deductions without the employees losing their exempt status. The DLSE's conclusion is premised on the fact that the employer's policies provide for such deductions so that the employees are aware of how partial-day absences will be handled.

What This Means To Employers

While the DLSE Opinion Letter is not legally binding precedent in civil litigation, it should be given significant weight by the California courts. However, the Opinion Letter is binding precedent in any DLSE proceeding and signifies a favorable shift in the DLSE's enforcement policy in favor of giving employers more flexibility by allowing employers to implement vacation and sick leave policies that apportion paid time to partial-day absences of exempt employees.