Just as you cannot have a PBJ sandwich without peanut butter, you typically cannot have an exempt employee without paying that person on a salary basis.
The term salary basis under the Fair Labor Standards Act (FLSA) simply means that an employee receives a set amount of compensation for the pay period, regardless of the amount of hours worked. Sure, there are a few exceptions to this rule. For example, you don’t have to pay legal or medical professionals or outside sales employees on a salary basis. You can pay computer professionals on an hourly basis if they make at least $27.43 per hour. For most exempt positions, however, compensation on a salary basis is essential.
Here are some permitted variations in pay that will pass the salary basis test, according to the DOL Wage and Hour Division (WHD):
- You can reduce a person’s pay to zero for any week in which no work is performed
- You can deduct pay for personal days taken in whole day increments
- You can decrease pay for sickness or illness days in whole day increments pursuant to a bona fide plan, policy or practice
- Any FMLA time (intermittent leave taken in less than one day increments) can be deducted
- Employees can have time off due to safety or workplace conduct violations
- You can offset pay received from other sources for absences related to military service, jury duty or testifying as a witness
- You don’t have to pay the full salary on the first or last week of employment
Here are some things you cannot do and still pass the salary basis test:
- You cannot deduct for legal holidays or inclement weather where the employer is closed for work
- You cannot deduct for partial day absences, except as indicated above
- While you can offset pay as indicated above, you cannot deduct for absences related to military service, jury duty or testifying as a witness
The salary basis issue can be pivotal. In the recent case of McLean v. Garage Management Corp., the employer’s garage managers were ruled to be nonexempt because their pay fluctuated based on the number of hours worked. The fact that this was required by a collective bargaining agreement did not matter.
More information is available at the WHD Fact Sheet #17G. In our next exempt-nonexempt article, we will examine the professional exemption. What common mistakes have you seen employers make on the salary basis test? Please comment below.