How to Correctly Handle Overtime and Unexcused Absences under the Fair Labor Standards Act

As part of my labor and employment practice I often advise clients on issues involving the federal Fair Labor Standards Act (“FLSA”). I have found two particular issues to be the source of frequent employer mistakes. These concern compensatory time off (“comp time”) for FLSA non-exempt employees in lieu of overtime payments and salary deductions for the unexcused absences of FLSA exempt employees.[1] The following advice is intended to help employers deal with these situations.

Compensatory Time

Let me make this clear from the beginning: compensating non-salaried employees for overtime work by providing them with comp time in lieu of wages is not permitted in the private sector.  Under the FLSA, non-exempt employees must be paid at the overtime rate of 1.5 times the employee’s regular wage rate for all hours worked beyond the 40 hour threshold.

If an employee works, say 2 hours extra outside of his or her regular hours on one day, comp time of two hours on another of his or her regular work days can be used within the same work week to keep the overall hours at or below 40 that week. However, comp time cannot be stored and used in a subsequent work week to offset overtime hours in that week.

Also, unless you have a company policy or collective bargaining agreement to pay employees at time and a half for additional time worked between their regular hours and 40 hours, you are not required to do so. Therefore, if your company’s non-exempt employees have a regular work week of 37.5 hours, it is perfectly legal to pay those employees at their regular rate for “overtime” hours worked between 37.5 and 40 in a work week. However, when that non-exempt employee works more than 40 hours, the answer is simple, pay at time and a half or risk big trouble.

Unexcused Absences

Exempt, primarily salaried, employees are treated differently than non-exempt employees under the FLSA for salary deductions due to work absences. Absent an applicable company leave policy or collective bargaining agreement, a company need not pay non-exempt, primarily hourly, workers for missed work time. That is not always the case with exempt employees.

The general rule is that an employer may deduct from an exempt employee’s salary, in full day increments, for absences from work of one or more full days for personal reasons, other than sickness or accident. Thus, if an exempt employee is absent for two full days for personal reasons, the employer may deduct two full days of salary. However, if an exempt employee is absent for one-and-a-half days for personal reasons, the employer may deduct only for the one full-day absence. No deductions may be made if the absence is due to sickness or accident under the general rule, unless the employee performs no work during a work week.

The rules change if the employer offers a “bona fide benefits plan” (e.g. a PTO or vacation/sick leave plan). The FLSA does not require an employer to provide a PTO plan, so employers are given flexibility in the administration of their plans as long as they are administered impartially. When an employer has a PTO plan in place, the employer is free to deduct from an employee’s leave bank for any absences, no matter the duration or cause, as long as the employee’s salary payment remains the same. Further, an employer with a PTO plan can make deductions from an employee’s salary for absences of one or more full days because of sickness or disability before the employee has qualified under the plan and after the employee has exhausted his or her PTO.

An employer may also make a deduction from an exempt employee’s salary for full day absences due to disability (including work related disability) if the deduction is made in accordance with a “bona fide plan of providing wage replacement benefits” for such absences. For example, if an employer maintains a short-term disability insurance plan that provides salary replacement for 12 weeks starting on the fourth day of absence, the employer may make deductions: (1) for the three days of absence before the employee qualifies for benefits under the plan; (2) for the twelve weeks in which the employee receives salary replacement benefits under the plan; and (3) for absences after the employee has exhausted the 12 weeks of salary replacement benefits. Deductions may be made in the same manner if wage replacement benefits are provided under a state disability insurance law or workers’ compensation law.

Employers who fail to comply with the FLSA risk losing the exempt classification of that employee. If an exempt employee is reclassified, employers may become liable for unpaid overtime, back pay, and other statutory remedies. An employer who reaps the advantage of not paying overtime to salaried employees cannot then penalize such employees when they work less than their regular hours. The employer’s remedy for excessive, unexcused absences is through the company disciplinary policy, not a pay reduction.

Conclusion

Navigating the requirements of the FLSA can present many difficult challenges to employers. The above advice should help to clarify some common issues. Remember, if you are in doubt seek legal advice before you act, as proper action in the present will save you from trouble and unnecessary costs down the road.

[1] Exempt employees are typically paid a salary and non-exempt employees are typically paid hourly, although that is not the determinative factor. If you are unsure whether your employees should be classified as non-exempt or exempt under the FLSA, please consult me or another attorney who practices employment law for guidance. Proper classification is a crucial element in complying with the FLSA.