Exempt Employees and Partial Day Absences

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					                                                                                                                                  June 10, 2006

                                  Exempt Employees and Partial Day Absences
                                                        by Jennifer Brown Shaw
For the past several years, the California        the employer must still pay the employee for     The vacation policy required exempt em-
Division of Labor Standards Enforcement           the full day.                                    ployees to use their accrued vacation time
(DLSE) has taken the position that employ-                                                         for any absences of four or more hours in a
                                                  Under the federal Fair Labor Standards Act,
ers may not deduct partial-day absences                                                            single workday. According to the employees,
                                                  while employers may not make deductions
from exempt employees’ accrued vacation                                                            this constituted an impermissible “deduc-
                                                  from an exempt employee’s wages resulting
leave banks. Recently, however, the First                                                          tion” in the amount of compensation they
                                                  from the employee’s partial-day absence for
District Court of Appeal ruled in Conley v.                                                        received based on the quantity of work they
                                                  personal reasons, employers may deduct
Pacific Gas & Electric Co. that such deductions                                                    performed, and therefore violated the salary
                                                  time for such absences from the employee’s
are lawful in certain circumstances.                                                               basis test. They cited the California Supreme
                                                  accrued but unused vacation. If the em-
                                                                                                   Court’s decision in Suastez v. Plastic Dress-Up
Background                                        ployee does not have any accrued vacation
                                                                                                   Co. to support their position.
                                                  time, however, then the employer may not
State and federal law contain overtime pay
                                                  dock the employee’s wages for partial days       In Suastez, the court ruled that a policy
exemptions for executive, administrative,
                                                  missed.                                          whereby the employer refused to pay
and professional employees who meet the
                                                                                                   employees for their accrued vacation time if
applicable “salary basis” and duties tests.       By contrast, in California, the DLSE histori-
                                                                                                   they were terminated prior to their anni-
Under state law, which is generally provides      cally has ruled that because accrued vacation
                                                                                                   versary date violated California Labor Code
more protections to employees than federal        time is a form of vested wages under the
                                                                                                   section 227.3. Section 227.3 requires that
law in this area, employees must spend a          California Supreme Court’s decision in
                                                                                                   accrued vacation time be treated as vested
majority of their time (i.e., more than 50%)      Suastez v. Plastic Dress-Up Co., employers
                                                                                                   “wages” upon an employee’s separation of
on exempt work to satisfy the duties test. In     cannot make any deductions to exempt em-
                                                                                                   employment for any reason which must be
addition, to meet the salary basis test, em-      ployees’ accrued vacation time for partial-day
                                                                                                   paid out at the employee’s then regular rate
ployees must receive a salary equivalent to       absences. The Conley decision rejected this
                                                                                                   of pay. In other words, California employers
at least two times the state’s minimum wage       interpretation and adopted the federal rule.
                                                                                                   cannot impose “use-it-or-lose-it” policies
for full-time work ($28,080 per year in
                                                  The Conley v. Pacific Gas & Electric             that are lawful in other jurisdictions.
2006) which is not subject to change based
                                                  Decision
on the quantity or quality of the employees’                                                       The employees in Conley attempted to
work. This rule is based on the concept that      In Conley, several classes of exempt employ-     extend the Suastez decision by arguing
exempt employees are paid for the work they       ees sued the organization, asserting they        that if PG&E could not make deductions
perform, and not the hours they work.             were improperly classified as exempt and         to exempt employees’ pay for partial-day
                                                  therefore entitled to overtime compensation      absences, the organization could not make
There are a variety of regulations under state
                                                  under state law. To support their claims, the    deductions to exempt employees’ accrued
and federal law regarding the salary basis
                                                  employees argued PG&E’s vacation policy          vacation balances either, since accrued vaca-
test. For example, under both federal and
                                                  violated the salary basis test (i.e., that the   tion is a form of vested wages (i.e., pay.) The
state law, an employer cannot made deduc-
                                                  employee regularly receives on a weekly or       court rejected the argument, finding that
tions from an exempt employee’s wages for
                                                  less frequent basis a predetermined amount       Suastez did not support any such conclusion.
personal absences of less than a full work
                                                  constituting all or part of the employee’s       Under PG&E’s vacation policy, exempt em-
day. In other words, if an employee only
                                                  compensation, which amount is not subject        ployees received all of their accrued vacation
works three hours in a workday and takes
                                                  to reduction because of variations in the        time—they were simply required to use that
the rest of the day off for personal reasons,
                                                  quality or quantity of work performed).          time for partial-day absences.
The court held that because PG&E’s policy             In its advice letter, the DLSE concluded that       Practical Tips for Employers
only required deductions to be made from              “state law does not permit the deduction of
                                                                                                          The Conley decision was not appealed to
exempt employees’ accrued vacation bal-               accrued vacation or PTO when the employer
                                                                                                          the California Supreme Court and remains
ances if the employees missed at least four           already has an independent obligation to
                                                                                                          binding precedent. Employers should
hours of work in the workday, the policy did          pay the exempt employee’s salary.” This
                                                                                                          therefore review their vacation policies and
not prevent vacation pay from vesting as it is        reasoning constituted the foundation for the
                                                                                                          practices to ensure consistency with the
earned and was consistent with federal law.           DLSE’s finding that, in contrast to federal
                                                                                                          decision, keeping in mind the DLSE’s seem-
In the court’s view, the organization’s policy        law, exempt employees in California could
                                                                                                          ingly contrary interpretation.
simply regulated the timing of exempt                 not be allowed or required to use accrued
employees’ use of their vacation time, which          vacation in partial-day increments.
the Court in Suastez ruled was within the
                                                      As discussed above, in Conley, the First
lawful discretion of the employer.
                                                      District Court of Appeal disagreed with the
What About the DLSE?                                  DLSE’s interpretation and declined to follow
                                                      the August 30, 2002, advice letter. The court
On August 30, 2002, the then California
                                                      addressed an internal memorandum written
Labor Commissioner issued a controversial
                                                      by former California Labor Commissioner
advice letter regarding the state’s salary basis
                                                      Donna Dell in May 2005, withdrawing the
requirements applicable to exempt employ-
                                                      August 30, 2002, letter. Ms. Dell’s May 31,
ees. The opinion letter examined, in part,
                                                      2005, memorandum recognized that an
whether an exempt employee may be re-
                                                      exempt employee cannot be subject to a
quired to use accrued vacation for a partial-
                                                      partial-day deduction of salary for hours not
day absence, and whether the employee’s
                                                      worked without jeopardizing the employee’s
salary can be deducted for the hours missed
                                                      exempt status. However, the memorandum
if no accrued vacation is available.
                                                      also opined that employers can lawfully
The DLSE agreed with the U.S. Depart-                 deduct accrued vacation time from exempt
ment of Labor’s interpretation that no                employees for partial-day absences.
salary deduction is permitted for partial-day
                                                      Interestingly, the recently revised DLSE
absences if the employee’s eligibility for
                                                      “Enforcement Policies and Interpretations
vacation has not vested, or the employee has
                                                      Manual” seems to be at odds with Ms. Dell’s
exhausted all accrued vacation. However,
                                                      memorandum and the Conley decision. The
the DLSE deviated from the federal rule
                                                      Manual provides that deductions cannot be
regarding the use of accrued time by opining
                                                      made for partial-day absences from “vested
that employees could not be required to
                                                      wages,” and explicitly prohibits the use of
use vacation time in partial-day increments
                                                      accrued vacation to “pay for” partial-day
without violating the state’s salary basis test.
                                                      absences.



Reprinted by permission of The Daily Recorder.




                           Jennifer Brown Shaw is a partner
                           at Shaw Valenza LLP. Her practice
                           includes providing regular advice
                           and counsel to private and
                           public sector employers. She also
                           develops and presents seminars              300 Montgomery Street, Suite 788        520 Capitol Mall, Suite 630
                           on legal issues in the workplace            San Francisco, California 94104         Sacramento, California 95814
                           for management and non-super-               Tel: (415) 983-5960                     Tel: (916) 326-5150
                           visory employees.                           Fax: (415) 983-5963                     Fax: (916) 497-0708
   jshaw@shawvalenza.com
                                                                       www.shawvalenza.com

				
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