Exempt Employees: What Deductions Are Permitted, Prohibited?

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Exempt Employees:  What Deductions Are Permitted, Prohibited?

The Federal Fair Labor Standards Act (“FLSA”) requires employers to pay most employees overtime pay for all hours worked in excess of 40 in a workweek (some states require overtime in additional situations).  The FLSA allows for exemptions from the overtime requirement for employees in certain jobs, including those who work in administrative, professional, and executive positions (known as “exempt” employees).  To be considered “exempt,” these employees must generally satisfy three tests:

  •      •Salary-level test: Employees must receive a salary of at least $684 per week to qualify for the executive, administrative, and professional employee exemptions;
  •      •Salary-basis test: With very limited exceptions, the employer must pay employees their full salary in any week they perform work, regardless of the quality or quantity of the work;
  •      •Duties test: The employee’s primary duties must meet certain criteria.


There is also a special exemption for “highly-compensated employees” who are paid a total annual compensation of at least $107,432 per year (at least the $684 must be paid on a weekly salary basis) and who customarily and regularly perform exempt duties or responsibilities of an exempt executive, administrative, or professional employee.  Employers may use nondiscretionary bonuses and incentive payments (including commissions) paid on annual or more frequent basis, to satisfy exempt status.  In order for an exemption to apply, an employee’s specific job duties and salary must meet all the requirements of the FLSA’s regulations.

There is a special rule for business owners:  an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which employed, regardless of the type of business organization (e.g.; corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive.

So, what does this mean for employers who get out of paying overtime to exempt employees but want to make deductions from an exempt employee’s salary because an employee is absent a lot or leaves early for personal reasons.  Deductions from an exempt employee’s salary are permitted in very “limited” circumstances under federal law.  For information regarding these exemptions go to www.dol.gov/agencies/whd/fact-sheets.

Employers with exempt employees should ensure they comply with federal and state rules for classifying and paying exempt employees.  Employers also should avoid improper deductions and other practices that may jeopardize the employee’s exempt status.

Here at Epps & Coulson, LLP we regularly help employers develop an exempt policy that is compliant with federal and state laws.  Please feel free to contact Dawn at: dcoulson@eppscoulson.com for any questions.

Information contained in this Memo is intended for informational and educational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.  It is likely considered advertising.  Epps & Coulson, LLP encourages you to call to discuss these matters as they apply to you or your business.

Attorneys admitted to practice in California, New York, Colorado, Texas, and Oregon