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Legal Clinic

Discretionary Pay

This month's questions include whether employers must pay exempt employees when operations close for a day as well as whether employers may compensate exempt workers when they are required to put in overtime hours.

Monday, January 28, 2008
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We have turned the page on the New Year, but, particularly in the present economic environment, managers are struggling to assess their financial obligations with regard to employee compensation.

What is the financial exposure from payroll in the event an employer closes its operation for a day? And when an employer asks its exempt employees to put in extra hours, is additional compensation required?

Federal law sets certain parameters with regard to the compensation of exempt employees, but in this area employers also retain a fair amount of discretion.

Question: If the company closes for two days for the Christmas and New Year holidays but only one day (the actual holiday) is a paid holiday, must the company pay the exempt-salaried employees for the other day? Can the company require them to take vacation time for the days that are not paid holidays?

Answer: Employees who are exempt from the Fair Labor Standards Act's overtime-pay provisions must, among other things, be paid on a "salary basis." This means that the employees must be paid full compensation in a predetermined amount for any week in which they perform any work, regardless of the number of days or hours worked. 29 C.F.R. § 541.602(a) (2008). The exempt employees generally do not have to be paid for any week in which they perform no work for the employer.

There are certain limited circumstances in which an employer may pay an exempt employee less than the employee's full weekly salary. For example, deductions can be made for time that the exempt employee is absent from work for one or more full days for personal reasons or as a result of sickness or disability if the employee has exhausted applicable paid-leave banks. 29 C.F.R. § 541.602(b)(1)-(2).

If, however, the exempt employee is "ready, willing, and able" to work, but the employer either closes its facility (e.g. for a holiday) or has no work for the employee to perform, then the employer cannot deduct that time not worked from the exempt employee's pay.

An employer that makes such an improper deduction risks jeopardizing the employee's exempt status. 29 C.F.R. § 541.603(a)-(b). Thus, the employer that closes its offices for two days but considers only one a paid holiday would, nevertheless, be required to pay its exempt employees their standard weekly salaries for that week.

The FLSA does not address paid time off, such as vacation time. Rather, whether the company in this example could require exempt employees to take vacation time for the days that are not paid holidays would be governed by state law.

In most states, an employer could lawfully require its exempt employees to use their vacation time in the event of an office closing, provided this was consistent with the terms of the employer's vacation and related policies and any applicable employment contracts.

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However, because the permissibility of such a mandate is fact-specific, it is advisable to consult local counsel before proceeding with such an approach.

Question: We have exempt employees who are sometimes mandated to work overtime. Can we pay them a straight hourly rate for these hours without losing the exempt status? Can we distinguish between overtime that is mandated or pre-authorized versus overtime that is a normal part of the job?

Answer: Under the FLSA, an employee who is properly classified as exempt is not entitled to be paid overtime for hours worked beyond the standard 40-hour workweek.

An employer may, however, pay an exempt employee money in addition to the standard salary for hours worked beyond the typical workweek without jeopardizing the employee's exempt status.

The FLSA regulations provide that such additional compensation may, but need not, be paid as a straight-time hourly amount. Other alternatives for supplemental compensation include a flat sum, a bonus payment, time and one-half, paid time off, or any other basis. 29 C.F.R. § 541.604.

Moreover, the employer retains the ability to set the rate for such additional compensation irrespective of whether the overtime is "mandated," "pre-authorized" or a "normal part of the job."

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