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May 2001
01
May 01, 2001

Employer's Policy of Unpaid Disciplinary Suspension for Management Employees Destroys Exempt Status

The Fair Labor Standards Act ("FLSA") contains several "white collar" exemptions to its overtime requirements. To qualify under these exemptions, the employee must be paid a minimum salary and must satisfy both a duties test and the "salary basis" test. Employees who meet these requirements are not entitled to overtime compensation even if they work more than 40 hours in a workweek. Employees not meeting the tests must be paid overtime. An employee is paid on a salary basis when s/he receives "a predetermined amount constituting all or part of his compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed." Except in very limited circumstances, an employer is not permitted to make a disciplinary deduction from an otherwise exempt employee's pay. In Takacs v. Hahn Automotive Corp., No. 99-4431 (6th Cir. Apr. 13, 2001), the employer found out just how expensive it can be to make such deductions. The employer had a policy which specifically allowed for disciplinary suspensions without pay for members of the management staff. In fact, several managers were actually suspended without pay under the policy and several more were threatened with unpaid suspensions. A group of management employees sued the employer claiming that because they were subject to suspension without pay, they were not paid on a salary basis and therefore were not exempt under the FLSA. Finding that the employer had a policy that created a "significant likelihood" of disciplinary pay deductions for members of the management staff and an "actual practice" of making such deductions, the court agreed with the employees. It then affirmed the judgment of the lower court holding the employer liable for unpaid overtime compensation for up to two (2) years plus the employees' attorneys' fees and costs. Although some types of deductions are permitted, this case shows that employers should be very careful before making a deduction from an otherwise exempt employee’s pay.

For more information, contact Rob Dubault at rdubault@wnj.com or call him directly at 231.727.2638.
 

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