The Fair Labor Standards Act (FLSA) exempts employees with certain executive, administrative, or professional job duties from the requirement that they receive overtime pay for hours worked over 40 in a workweek. Determining whether one or more of these “white collar” exemptions apply to a particular employee requires a fact-intensive analysis of the employee’s job duties. But there is another, sometimes overlooked, requirement: the employee must be compensated on a “salary basis” at a rate of not less than $684 per week. 29 C.F.R. § 541.600(a). An employee is paid on a salary basis if the employee regularly receives, on a weekly or less frequent basis, a predetermined amount which “is not subject to reduction because of variations in the quality or quantity of the work performed.” 29 C.F.R. § 541.602(a). Employers who make improper deductions from their employees’ salaries will lose the ability to claim that the executive, administrative, and professional exemptions apply if the facts demonstrate that they did not pay the employee on a salary basis. 29 C.F.R. § 541.603.
There has been a substantial amount of litigation regarding the types and frequency of deductions from an otherwise exempt employee’s salary that will cause an employer to lose the ability to claim that the white collar exemptions apply. One area of contention has been whether an employer’s policy stating that it will make improper deductions from an employee’s salary is sufficient to defeat exempt status, or whether there must be an actual practice of making such deductions for the employer to lose the exemption. Previously, courts followed the Secretary of Labor’s view that, if an employer’s policy created a “significant likelihood” of improper salary deductions, this could result in a loss of exempt status. Auer v. Robbins, 519 U.S. 452 (1997). But the Department of Labor has since promulgated regulations stating that the focus is on “an actual practice of making improper deductions.” 29 C.F.R. § 541.603.
Recently, the Fifth Circuit confirmed that the Department of Labor’s post-Auer regulations control, explaining that “the ultimate inquiry is now just ‘practice.’” Escribano v. Travis County, Texas, 947 F.3d 265, 274 (5th Cir. 2020). Thus, the Fifth Circuit found that the plaintiffs in Escribano were properly paid on a salary basis since “[t]here [was] no evidence of an impermissible reduction practice for [plaintiffs].” The court further explained that “[e]ven if there were a policy authorizing such deductions, that would not be sufficient evidence by itself to cause the exemption to be lost if a manager has never used that policy to make any actual deductions.” In other words, the focus is “on how the [employees] were actually paid,” rather than a policy that did not actually result in improper deductions from the employees’ pay.
While the above decision shifts the focus away from policy language and onto the application of the policy in practice, employers should nevertheless carefully scrutinize their policies to ensure that they do not authorize improper salary deductions for employees classified as exempt that, if implemented in practice, could result in the inability to claim that the white collar exemptions apply. Authorizing improper salary deductions in a policy may make it more likely that managers will implement such deductions in practice. Employers should also consider implementing a clearly communicated policy that prohibits such improper pay deductions and includes a complaint mechanism that reimburses employees for any improper deductions. In addition, employers should train managers on common issues arising under wage and hour laws – including improper deductions from the salary of exempt employees – to ensure that those issues do not unintentionally arise in practice in the workplace.