Sample Safe-Harbor Policy for Improper Deductions From Salaried Employees

The Fair Labor Standards Act (FLSA), is the hottest law in employment litigation today.  And for good reason–the potential liability can multiply exponentially if more than one employee is found to have improperly paid.  A single claim quickly becomes a collective action. 

If an unauthorized deduction is made, that deduction could convert the employee’s status to non-exempt for the period during which the deductions occurred.  This means that the employer would be required to pay an employee for all hours work plus time and a half for any hours over forty (40) per week.  The loss of exempt status applies when there is another employee for whom improper deductions were made in the same job classification and working for the same managers or supervisors responsible for the improper deductions.  Therefore, improper deductions have the potential to become costly.

The U.S. Department of Labor’s (DOL), regulations provide employers with an affirmative defense if improper deductions are erroneously made by the employer.  An employee will not lose his exempt status if the employer has a clearly communicated policy that prohibits improper deductions and sets forth a clear complaint procedure.  This “safe-harbor” policy is considered “clearly communicated” if it is published in an Employment Handbook or located on the company intranet.  The employer must also include information that indicates how an employee should report the violation, such as to notify the human resources department, supervisor or owner in writing.

I’ve written here before about the dangers of improperly deducting the salary of exempt employees.  (See  The Effect of Improper Deductions on Exempt Status Under the FLSA).  The topic came up again last week during a seminar I taught with Scott Holt–Advanced Issues under the Fair Labor Standards Act.  In discussing the potential dangers of improper deductions, I mentioned the need for employers to check their handbooks and confirm that they have included a “Safe-Harbor” provision.  A lot of eyebrows were raised over that statement and so I agreed to send the attendees a sample policy for their reference.  And, because I’m a firm believer in sharing, I’m posting it here, as well:  

The Company complies with the salary basis requirements of the Fair Labor Standards Act (FLSA). The Company does not make improper deductions from the salaries of exempt employees. Exempt employees are those employed in a bona fide executive, administrative, or professional capacity and who are exempt from the FLSA’s overtime pay requirements.

What Deductions Are Permitted?
There are certain circumstances where deductions from the salaries of exempt employees are permissible. Such circumstances include:

  • When an exempt employee is absent from work for one or more full days for personal reasons other than sickness or disability; 
  • When an exempt employee is absent for 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;
  • To offset amounts received as witness or jury fees, or for military pay; or 
  • For unpaid disciplinary suspensions of one or more full days imposed in good faith for workplace conduct rule infractions. 

Also, an employer is not required to pay the full salary in the initial or terminal week of employment; for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act or; for penalties imposed in good faith for infraction of safety rules of major significance. In these circumstances, either partial day or full day deductions may be made.

What to Do If an Improper Deduction Occurs
If you are an exempt employee and believe that an improper deduction has been made to your salary, you should immediately report this information to your direct  supervisor, or to the manager of the Human Resources Department.
Reports of improper deductions will be promptly investigated. If it is determined that an improper deduction has occurred, you will be promptly reimbursed for any improper deduction made.

Worried that you’re not up to speed on all of the requirements of the FLSA?  Don’t worry, you’re not alone.  Catch up on the FLSA basics with some of the materials from our HR Summer School series:

Top 5 FLSA Topics

Executive Exemptions and the Fair Labor Standards Act (FLSA)

5 Words of Warning about Improper Deductions and the FLSA

FLSA FAQ: Overtime and Unpaid Leave

FLSA 101: Who Is Covered Under the Fair Labor Standards Act?

FLSA 102: Minimum Wage Requirements of the Fair Labor Standards Act

FLSA 103: Defining What Constitutes “Hours Worked”

FLSA 104: Overtime and the Fair Labor Standards Act

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