Many employers have chosen to designate some of their employees as exempt for purposes of overtime requirements as permitted by federal and state overtime laws. In most situations when an employer designates an employee as exempt, they must pay the employee on a salary basis. One of the costs of paying an employee on a salary basis is that the employer has limited ability to reduce the weekly salary of the employee when the employee does not perform work for part of the workweek. One of these limited exceptions involves personal leave. This exception for personal leave and how it works with paid vacation leave policies is discussed below.
The Fair Labor Standards Act, as well as all states, exempt certain employees from their overtime requirements. The three most common exemptions include administrative employees, executive employees, and professional employees. For an employee to qualify for one of these exemptions, the employee must meet a minimum set of criteria. Although the criteria differ for each exempt classification, they each have at least one criteria in common: they require that a qualifying employee be paid on a salary basis.
The salary basis form of compensation requires an employer to pay covered employees a predetermined, fixed amount of income that does not vary based on the number of hours the employees work. The salary must be based on a period of time no shorter than a workweek. 29 CFR 541.602(a) Moreover, except in a very few limited circumstances, employers must pay salaried employees their full salary for any workweek in which work is performed.
Salary basis and personal leave (not including sick or disability leave)
One of the few exceptions to the requirement that an employer pay a salaried employee his or her entire salary for any workweek in which the employee performs work involves personal leave. Employers may deduct the equivalent of one day’s pay for any day in which an employee does not perform any work for personal reasons, not including sickness or disability which is covered by a different exception. The key here is that, when an employee does not work for personal reasons, an employer may only make a deduction for whole day absences. If the employee works any portion of the day, the employer may not deduct the missed time from the employee’s pay. For example, if a salaried, exempt employee works for four hours in the morning on a Friday and then leaves work to get an early start on a weekend vacation, the employer must still pay the employee for the entire Friday.
Salary basis, personal leave, and paid vacation benefits
Although an employer must pay a salaried, exempt employee for the entire day in which the employee performs any work, this does not mean that the employer may not make partial day deductions from the employee’s accrued or promised paid vacation leave. See US DOL Opinion Letter FLSA2007-6 The reason for this is that federal and state laws only require the employer pay the employee his or her entire day’s pay when work is performed. It does not dictate how the employer accounts for this pay. In the situation involving paid vacation leave, the employer accounts for an employee’s pay for partial day absences by reducing the employee’s available paid leave.
Using the example from above, the employee worked four hours in the morning and then left work to get an early start on a weekend vacation. Let’s assume the employer has a vacation leave policy that provides the employee with 80 hours of paid leave each year and the policy allows employees to take leave in one-hour increments. In this situation, the employer ensures the employee is paid his full day’s pay but does so by reducing the employee’s vacation leave allotment by four hours.
Salaried employees who have exhausted their paid vacation leave
Employers may reduce a salaried, exempt employee’s vacation leave allotment for partial-day absences, but what happens when an employee has used up their entire vacation leave allotment? Unfortunately, in these situations, an employer’s hand are tied and they must still ensure the employee receives his or her full day’s pay. The law does not relieve an employer of this requirement even in situations where an employee may have been reckless or unwise in using paid vacation leave. See US DOL Opinion Letter FLSA2005-41 Employers may implement policies that discipline salaried, exempt employees for taking more personal leave than is covered by allotted vacation leave amounts, but they may not reduce the employee’s pay for partial-day absences after paid vacation leave has been exhausted. Doing so may have the effect of converting the employee into a non-exempt employee making them eligible for overtime pay.
Once again using the example from above, let’s assume that the employee that only worked for four hours on a Friday before leaving for a weekend vacation had previously used all 80 hours of his paid vacation leave allotment. In this situation, the employer would still be required to pay the employee his entire salary for the workweek because the employee worked for part of the day on Friday. This is true even though the employee has exhausted his paid vacation leave allotment. The employer could discipline the employee or perhaps deduct time from future vacation leave allotments, but it may not reduce the employee’s pay for the week without running the risk of losing the employee’s exempt status.
One of the costs of designating an employee as salaried and exempt is that the employer may only reduce the employee’s weekly pay in a limited number of circumstances. One of these exceptions occurs when an employee does not perform any work for an entire day for a personal reason. As discussed, this exception is limited to whole-day absences and does permit an employer to reduce an employee’s weekly salary for partial-day absences. The rule does not, however, limit an employer’s ability to reduce a salaried, exempt employee’s vacation leave allotment, although once an employee has exhausted his or her leave allotment, the employer remains obligated to ensure that the employee is fully compensated even on days of partial absence.