Want to Read More? To continue reading this article, please Log in or Register Now

Salary Basis Policy

Authors: Michael Cardman, XpertHR Legal Editor, and Allen S. Kinzer, Vorys, Sater, Seymour and Pease LLP

When to Use This Policy

An employer that makes improper deductions from the pay of an employee classified as exempt under the Fair Labor Standards Act (FLSA) will violate the salary basis test and forfeit the employee's exemption. As a result, the employee usually will need to be reimbursed for any overtime that accrued during the period during which the improper deductions were made. However, an employer can shield itself from this liability through the FLSA's "Safe Harbor" provision. To take advantage of this provision, an employer must:

  • Have a clearly communicated policy that prohibits any pay deductions other than those that are specifically permitted;
  • Adopt a complaint mechanism;
  • Reimburse employees for any improper deductions; and
  • Make a good faith commitment to comply in the future should an improper pay deduction inadvertently occur.

An employer that takes these steps will not lose the exemption for any employees unless it willfully violates its own policy by continuing to make improper deductions after receiving employee complaints. The US Department of Labor has provided employers a sample policy that fulfills the first requirement of the "Safe Harbor" provision.

NOTE: The US Department of Labor (DOL) has proposed regulations that would, if finalized, increase the minimum salary for most overtime-exempt employees from $455 per week to $679 per week (or from $23,660 per year to $35,308 per year). The proposed regulations also would allow employers to count nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level test, as long as they are paid annually or more frequently. The DOL projects the regulations will take effect January 2020.

Customizable Policy