Salary Test

In order for an employee to be exempt from the minimum wage and overtime requirements, he or she must be paid, with only minor exceptions relating to persons paid a fee, on a "salary basis". DOL regulations at 29 C.F.R. 541.602(a) state that a person is paid a salary if he or she receives each pay period a set amount constituting all or part of the compensation, the amount of which is "not subject to reduction because of variations in the quality or quantity of the work performed." The minimum salary amount is $684 per week, up to 10% of which can consist of non-discretionary bonuses or commissions (or $455 per week if employed in the Commonwealth of the Northern Mariana Islands, Guam, Puerto Rico, or the U.S. Virgin Islands by employers other than the Federal government, or $380 per week if employed in American Samoa by employers other than the Federal government). Generally, an employee "must receive his full salary for any week in which he performs any work without regard to the number of days or hours worked". However, the regulation recognizes "the general rule that an employee need not be paid for any workweek in which he performs no work". Further guidance on the salary test is found in DOL's Field Operations Handbook, Section 22h08, and in DOL regulation 29 C.F.R. § 541.604(a), the relevant part of which states: "Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off." "Paid time off" would presumably mean compensatory time (which is not allowed in lieu of overtime pay for non-exempt employees).

Certain Salary Deductions Are Allowed

If a salaried exempt employee misses a day for personal business unrelated to a medical condition, there is no problem with docking their pay for a day's worth of salary. If the same employee misses a day for medical reasons, and the employer has a bona fide sick leave policy (at least five paid sick leave days per year – a minimum tenure requirement is permissible), the employer may deduct a day's worth of pay for such a reason, but if the employer has no policy in place providing paid leave for such absences, then such a deduction would not be allowed. If a salaried exempt employee misses an entire workweek for any reason, then the employer could deduct a week's worth of pay from the salary. Days missed over a period of time longer than a workweek cannot be aggregated and later deducted a week at a time. Although written authorization for such deductions is unnecessary (because 29 C.F.R. § 541.602 specifically allows them), obtaining prior written authorization from employees tends to help minimize complaints when deductions are actually made. Regarding such deductions from salary, see item 12 in the sample wage deduction authorization agreement in this book.

In the event of absences due to jury duty, witness duty, or temporary military duty, if an employee works any part of a week and misses the rest of the week for jury, witness, or military duty, he or she must receive the full salary for the workweek, but if they miss a full week, no pay is due for that week (see 29 C.F.R. 541.602(a)); however, partial-week deductions from leave balances are allowed. The same rule applies for unpaid holidays, furloughs, business closures, bad-weather days, and other occasions when work is unavailable to salaried exempt employees who are otherwise available for work: if the office is closed on a day that a salaried exempt employee would normally work, then partial-week deductions from pay are not allowed, but if the employee misses an entire week for such a reason, the salary may be reduced by that amount; partial-week deductions from leave balances are allowed. The salary may be prorated for initial and terminal workweeks, i.e., pay for partial workweeks is allowed for the beginning and ending workweeks of employment, and no written authorization is needed for such proration.

Almost No Partial-Day Deductions from Salary Allowed

Under DOL interpretation and the U.S. Supreme Court's decision in Auer v. Robbins, 117 S.Ct. 905 (1997), if an employer has a clear policy that creates a substantial likelihood that an exempt employee's salary will be docked under circumstances not allowed in 29 C.F.R. 541.602, the salary test is not met, and the employee would be considered an hourly employee potentially entitled to back overtime pay. The rationale behind this interpretation is that since salaried exempt employees often put in substantial overtime for no additional compensation, it is unfair to make them "subject to" monetary penalties for missing a nominal amount of work on isolated occasions, especially if, as is usually the case, the few hours missed are made up by extra hours within the same week. As noted above, deductions from the salary on a full-day basis are allowed under limited circumstances: a day missed for personal business, or a day missed for medical reasons, if the employer has a sick leave pay policy in place. Under the new salary definition regulation, a deduction for an unpaid suspension for violation of a disciplinary rule may be made on "any basis", i.e., on a partial-day basis or any other interval. For more details, see the discussion under "Changes in Deductions from Salary" in the article "Focus On The DOL White-Collar Exemption Regulations". Regarding the only other category of partial-day salary deduction allowed, see the "FMLA Exception to Salary Test" section below.

Special Rules for Governmental Employers

Special rules apply for governmental employers with personal leave and sick leave accrual policies; generally, due to principles of public accountability for tax money, governmental employers may dock salaried employees' pay for absences of less than a day without losing the salary basis for the exemption, as long as the absences are due to personal or health-related reasons, assuming that the employee is either out of paid leave, chooses not to use it, or has been denied permission to use paid leave (29 C.F.R. 541.710); DOL administrative letter rulings of January 9, 1987 and July 17, 1987).

FMLA Exception to Salary Test

In addition to disciplinary suspensions, one other category of partial-day deduction from salary is allowed for private employers. Under the Family and Medical Leave Act, 29 U.S.C. 2612(c), an employer may grant unpaid leave for FMLA absences, even on a partial-day basis, without affecting the status of employees who are exempt from overtime pay under 29 U.S.C. 213(a)(1). DOL's regulation on this question is found at 29 C.F.R. 825.206(a) and commendably makes clear that partial-day deductions for intermittent leave will be allowed only if the employer, the employee, and the situation in question are covered by the FMLA.

Deductions from Leave Balances

Employers may require salaried exempt employees who miss partial days or partial weeks to apply paid leave time to such absences. In a letter ruling dated April 9, 1993 (BNA, WHM 99:8003), DOL stated "where an employer has bona fide vacation and sick time benefits, it is permissible to substitute or reduce the accrued benefits for the time an employee is absent from work, even if it is less than a full day, without affecting the salary basis of payment, if by substituting or reducing such benefits, the employee receives in payment an amount equal to his or her guaranteed salary." DOL has affirmed this position in several letter rulings issued since then. That having been said, employers may want to consider flexibility toward paid leave deductions if, by the end of the week, the employee has made up the hours by working extra time. In such cases, there should be no need to deduct from leave balances, since the whole purpose of paid leave is to enable an employee to receive full pay for a workweek that would otherwise be short due to absences. In other words, an employee who has worked the full number of hours normally associated with a standard workweek has not really had a short workweek, so it should be unnecessary to apply paid leave during such a week.

Exemptions from the Salary or Fee Requirement

A special exemption from the salary or fee requirement for the professional exemption category applies to physicians, attorneys, and teachers (see 29 C.F.R. 541.303(d), 541.304(d), and 541.600(e)). Such employees may be paid on any basis (unless a specific state law applies; Texas has no such law). Thus, the wage agreement or employment contract will determine what the pay of a physician, attorney, or teacher should be, and the only limitations on wage deductions would be the ones that apply under the Texas Payday Law.

Texas Payday Law Still Applies

Despite the deductions from salary allowed under the FLSA on a partial-day, full-day, and weekly basis, as long as the interval of the pay period is longer than the time involved in the deduction, the employer would be facing a wage deduction situation that would be covered by the Texas Payday Law. Although TWC currently interprets the salary definition regulation to permit such deductions without the need for specific written authorization from an employee, that interpretation could potentially change at some point in the future. Accordingly, employers may wish to cover themselves by including such deductions in a standard wage deduction authorization agreement. For a sample wage deduction authorization form that addresses this issue, click here and see item # 12.

See also: Deductions from Exempt Employees' Salaries

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