Understanding the differences between exempt and non-exempt employees is crucial regarding payroll. The distinction between the two is significant when considering adjusting pay.
Below, we break down what you need to be aware of when it comes to adjusting pay for exempt and non-exempt employees. Some workers may refer to this as docking pay.
Exempt vs Non-Exempt
It’s important to understand what exempt and non-exempt mean. The terms come from the Fair Labor Standards Act (FLSA), and similar state wage and hour laws. The FLSA sets federal rules for minimum wage and overtime as well as child labor laws and recordkeeping requirements.
- Exempt employees usually receive a fixed salary regardless of how many hours they work. Most are not eligible for overtime pay. Positions like executives, professionals and certain administrative roles as defined under federal and state laws and regulations often fall into this category.
- Non-exempt employees are eligible for overtime. They can be paid on an hourly, piece, or other basis but must be compensated for all hours worked and paid at one and one-half times the regular rate of pay for hours worked over 40 in a workweek.
Adjusting Pay for Exempt Employees
Adjusting pay for exempt employees should be approached carefully because it can affect their exempt status.
Adjusting an exempt employee's pay is typically not permitted. They are generally protected from having their pay changed because of variations in the quality or quantity of work.
The United States Department of Labor (DOL) offers examples of when employers cannot deduct pay from an exempt employee’s salary.
It’s important to be aware of and follow these rules closely to figure out if a salary deduction is allowable under federal wage and hour laws. State laws should also be consulted.
Before making deductions from exempt employees' pay, employers should consider state law and consult with a trusted advisor such as an attorney specializing in employment law.
There are a few situations when you can make deductions from an exempt worker’s salary, including but not limited to if the exempt employee does not perform any work at all in the workweek or if it is their first or final workweek.
Full-Day Absence
If an exempt employee takes a full day off for personal reasons (not sickness or disability), you typically can deduct it from their salary.
Disciplinary Suspensions
An exempt employee’s salary may also be reduced if they are suspended in good faith for a day or more due to workplace violations.
First or Last Week of Employment
You can typically make deductions from an exempt employee’s pay when an exempt employee starts or ends their job mid-week.
Adjusting Pay for Non-Exempt Employees
Different rules apply to adjusting pay for non-exempt employees.
According to the DOL’s Handy Reference Guide to the Fair Labor Standards Act, deductions from wages for items such as cash or merchandise shortages, employer-required uniforms, and tools of the trade, are prohibited if they reduce the wages of employees below the minimum rate required by the FLSA or reduce the amount of overtime pay due under the FLSA.
State law should also be considered when determining what deductions may be made from a non-exempt employee's pay.
Here are some common scenarios.
Partial-Day Absences
Employers typically only need to pay non-exempt employees for time worked and not for time not worked. State law may provide paid time off an employee can use when not working.
Time Off
If a non-exempt employee takes unpaid leave, they do not need to be paid for those hours. State law should be consulted to verify.
Proceed with Caution
Make sure you adhere to the federal and state guidelines when adjusting pay (or docking pay) for exempt and non-exempt workers. Incorrectly adjusting an employee’s pay could lead to costly penalties.
If you are uncertain about the rules, it’s a good idea to consult with HR or legal experts.
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