Recently, the United States Department of Labor (DOL) issued
its final revisions to the white-collar exemptions under the federal Fair Labor
Standards Act (FLSA). Included is a new and important incentive for all covered
employers to maintain a written policy encouraging exempt employees to complain
about improper pay deductions.
Under the previous FLSA white-collar exemptions, in order
to claim one of the white collar exemptions (i.e., executive, administrative
or professional), an employer was required to satisfy not only the “duties”
test but also demonstrate that it paid a true salary. In other words, it also
had to satisfy the “salary” basis test. The failure to satisfy
either of these two tests resulted in the exemption being lost and the employer
being held for potential minimum-wage and overtime payments.
Whether a wage payment satisfied the “salary” test
was the subject of significant regulations and considerable litigation. Prior
to the new FLSA regulations, if improper salary deductions were actually made
or if there was even a “significant likelihood” that such improper
deductions could be made, then the salary basis test could be lost for the
entire tenure of the employee (damages limited only by any applicable statute
of limitations). This was true, even if the employer made an improper salary
deduction for only one pay period. This obviously created a trap for the unwary
The new FLSA white-collar regulations seek to eliminate this
trap. The regulations contain two very significant changes to the salary basis
test. First, if an “employer has an actual practice of making improper
deductions, the exemption is lost during the time period in which the improper
deductions were made for employees in the same job classification working for
the same managers responsible for the actual improper deductions.” This
significantly reduces the potential monetary exposure in unpaid overtime.
Second, the new FLSA white-collar regulations create a “safe
provision to the salary basis test. This provides a new affirmative defense
for employers. Basically, if an employer has a clearly-communicated policy
that prohibits improper pay deductions, includes a complaint mechanism, reimburses
the employee(s) for any improper deductions and makes a good-faith commitment
to comply in the future, an employer will not lose a claimed exemption unless
it willfully violates its policy by continuing to make improper deductions
after receiving employee complaints.
This safe harbor provision essentially allows the employer
to repay the employee for the improper deduction and still maintain the exemption –
even for the time period in which the improper deduction occurred.
According to the DOL, the “best evidence of a clearly-communicated
policy is a written policy that was distributed to employees prior to the improper
pay deductions by, for example, providing a copy of the policy to employees
at the time of hire, publishing the policy in an employee handbook or publishing
the policy on the employer’s Intranet.”
The DOL explained in its preamble to the new FSLA white-collar
regulations that the safe harbor provision encourages employers to adopt “proactive
management practices”. Citing the Supreme Court cases of Faragher v.
City of Boca Raton and Burlington Industries, Inc. v. Ellerth, the DOL stated
that the safe harbor provision is “generally consistent with trends in
employment law”. The DOL emphasized that while “a written policy
is not essential,” the policy “must be communicated to employees
prior to the actual impermissible deduction”.
It is important to note that after receiving a complaint,
an employer must evidence its good faith commitment to complying with the FLSA
in the future. According to the DOL, this could include but is not limited
to any of the following: “adopting or re-publishing to employees its
policy prohibiting improper pay deductions; posting a notice including such
a commitment on an employee bulletin board or employer Intranet; providing
training to managers and supervisors; reprimanding or training the manager
who has taken the improper deduction; or establishing a telephone number for
In sum, the new FLSA white-collar regulations encourage employers
to give their employees one more reason to complain. Employers who have not
adopted an employee handbook or have not had competent counsel revise their
employee handbook for some time should do so. Attorneys involved in reviewing
and drafting employee handbooks and counseling employers’ with respect
to their obligations under the FLSA should review these new regulations carefully.
Howard B. Hoffman maintains a law office in Rockville, Maryland, where he
concentrates in employment law. A significant portion of his practice includes
counseling employers regarding risk management issues, including maintaining
compliance with the FLSA.