Some employers discipline their employees by docking their pay or putting them on unpaid suspension for violating workplace rules. However, such a policy can create big problems if the employee whose pay is reduced is exempt from overtime -- that is, the employee is not entitled to overtime pay because he or she is paid on a salary basis and generally exercises a certain degree of responsibility and discretion in doing the job. (For more information on who is exempt from overtime rules, see Nolo's article When Must Employers Pay Overtime?)
To qualify as exempt, employees have to be paid a set amount each pay period, without any reductions based on the quantity or quality of work they do. If you dock their pay, you are treating them like nonexempt employees, and the law might classify them as such, which means they are entitled to overtime. As you might guess, the money you save by docking the employee's salary could be far exceeded by the money you have to pay out in overtime.
Under federal law, exempt employees -- those who are not entitled to overtime -- must earn at least $684 per week (or $35,568 per year). To be exempt, employees generally must be paid on a salary basis, although this requirement doesn't apply to outside sales employees, teachers, lawyers, doctors, and certain computer employees.
A salary basis means the employee earns a fixed amount per pay period that doesn't depend on how many hours the employee works, how much work the employee accomplishes, or the quality of the work. As long as employees do some work during the week, they are entitled to their full weekly pay, unless the time they take off falls into one of the exceptions described below.
Employers may make salary deductions (without jeopardizing the employee's exempt status) for one or more full days an employee takes off for the following reasons:
An employer that makes improper deductions from a salaried employee's pay can get into big trouble. However, the law contains a "safe harbor" provision, which offers employers some protection if they make improper deductions inadvertently.
An employer will be penalized if it has an "actual practice" of making improper deductions -- actions that show the employer didn't intend to pay employees on a salary basis. Among the factors a court or government agency will consider when making this determination are:
An employer with an actual practice of making improper deductions will lose the overtime exemption for all employees who work in the job classification(s) for which the deductions were made and work for the managers responsible for making the deductions. In other words, the employer will have to pay overtime (if earned by the employees) to everyone who holds the position from which improper deductions were taken.
An employer will not be subject to the penalties noted above if either of the following are true:
For a sample pay docking policy that will help your company navigate the safe harbor, see Create Your Own Employee Handbook, by Lisa Guerin and Amy DelPo (Nolo).