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Wage & Hour – Development & Highlights To Highlight Recent and Noteworthy Developments In Cases And Regulations on Wage and Hour Laws That Affect Large and Small Businesses

Salary Deductions Can Make Workers Lose Exempt Status

Posted in Exemptions

Employers cannot only think of job duties when it comes to ensuring that exemptions are maintained. Improper deductions from salary can undermine exempt status and, even with the revised FLSA regulations in place, which allow for corrections to be made without jeopardizing exempt status, mistakes can still be made. The danger is that if a common or system-wide “policy” exists, then all exempt employees are in danger of having their exempt status destroyed.

For example, in Baden-Winterwood v. Life Time Fitness Inc., the Sixth Circuit Court of Appeals held that deductions made by a health and fitness center employer from the base salaries of department heads to recoup portions of paid bonuses when the employees’ performance fell below a certain prescribed level caused the workers to lose their exempt status under the Fair Labor Standards Act.

The Sixth Circuit affirmed the ruling of the lower court, which had concluded that that the employees were not paid on a salaried basis, due to the improper deductions made from their salaries during a two-month period in 2005. Thus, without any examination of whether their duties fit the duties prong of the exempt test, the employees were adjudged to be non-exempt, thereby entitled to overtime.

If the salary issue is the bone of contention and the employer loses on that, everything else becomes moot. The employee could hire and fire, prepare employee evaluations, determine who gets raises and promotions and who does not, in short, all manner of supervisory duties and the employee will still be non-exempt. Employers must be extra vigilant in ensuring not only that exempt employees receive the proper salary (under the FLSA at least $455, but individual states might be higher) and always watching out that improper deductions, meaning, primarily partial day deductions are not made. The consequences could be quite serious for failure to adhere to these guidelines, with but very little recourse by or defense for the employer.