Find out when you can reduce a salaried employee’s pay -- without running afoul of wage and hour laws.

Some employers discipline their employees by docking their pay or putting them on unpaid suspension for violating workplace rules. However, such a policy can create big problems if the employee whose pay is reduced is exempt from overtime -- that is, the employee is not entitled to overtime pay because he or she is paid on a salary basis and generally exercises a certain degree of responsibility and discretion in doing the job. (For more information on who is exempt from overtime rules, see When Do I Have to Pay Overtime?)

How Does Pay Docking Cause a Problem?

To qualify as exempt, employees have to be paid a set amount each pay period, without any reductions based on the quantity or quality of work they do. If you dock their pay, you are treating them like nonexempt employees, and the law might consider them as such -- and thereby entitle them to overtime. As you might guess, the money you save by docking the employee’s salary could be far exceeded by the money you have to pay out in overtime.

Who Qualifies as a Salaried Employee?

Under federal law, exempt employees -- those who are not entitled to overtime -- must earn at least $455 per week (or $23,660 per year). To be exempt, employees must be paid on a salary basis. This means that the employee’s salary is a fixed amount that doesn’t depend on how many hours the employee works, how much work the employee accomplishes, or the quality of the work. As long as employees do some work during the week, they are entitled to their full weekly pay, unless the time they take off falls into one of the exceptions described below.

What Are Permissible Salary Deductions?

Employers may make salary deductions (without jeopardizing the employee’s exempt status) for one or more full days an employee takes off for the following reasons:

• to handle personal affairs
• to go on unpaid family or medical leave under the Family and Medical Leave Act (FMLA)
• for disability or illness, if the employer has a plan (such as disability insurance or sick leave) that compensates employees for this time off
• to serve on a jury, as a witness, or on temporary military leave, but the employer may deduct only any amount that the employee receives as jury or witness fees or as military pay
• during the employee’s first or last week of work, if the employee does not work a full week
• as a penalty imposed in good faith for infractions of safety rules of major significance (rules that prevent serious danger in the workplace or to other employees)
• to serve an unpaid disciplinary suspension imposed in good faith for infractions of workplace conduct rules, but only if the employer has a written policy regarding such suspensions that applies to all employees.

Penalties for Improper Deductions

An employer that makes improper deductions from a salaried employee’s pay can get into big trouble. However, the law contains a “safe harbor” provision, which offers employers some protection if they made improper deductions inadvertently.

Actual Practice of Improper Deductions

An employer will be penalized if it has an “actual practice” of making improper deductions -- actions that show the employer didn't intend to pay employees on a salary basis. Among the factors a court or government agency will consider when making this determination are:

• the number of improper deductions
• the time period during which the employer made improper deductions
• how many employees were subjected to improper salary deductions and where those employees worked
• how many managers were responsible for taking improper deductions and where those managers worked, and
• whether the employer has a clearly communicated policy that either permits or prohibits improper deductions.

An employer with an actual practice of making improper deductions will lose the overtime exemption for all employees who work in the job classification(s) for which the deductions were made and work for the managers responsible for making the deductions. In other words, the employer will have to pay overtime (if earned by the employees) to everyone who holds the position from which improper deductions were taken.

Safe Harbor Protections

An employer will not be subject to the penalties noted above if either of the following are true:

• Any improper deductions were either isolated or inadvertent, and the employer reimburses the employees for the money improperly withheld.
• The employer has a clearly communicated policy prohibiting improper deductions (including a complaint procedure), reimburses employees for the money improperly withheld, and makes a good faith effort to comply with the law in the future.