Issue 4 - 2005

Most employers know that in order to be exempt from overtime premium requirements, employees must meet two tests - they must perform exempt duties more than 50% of their working time, and they must be paid on a "salary basis." The "salary basis" test has been as confusing to employers as is the duties tests. Generally, an employee must receive his or her full salary for any week in which he or she performs any work without regard to the number of days or hours worked. An employee need not be paid, however, for any work week in which he performs no work.

There are certain permissible exceptions to the requirement that an employee receive his or her full salary for any week in which he or she performs work. Deductions may be made: when the employee absents him or herself from work for a full day or more for personal reasons; pursuant to a sick leave policy, if the employee is absent for a full day or more, and for penalties imposed in good faith for infractions of safety rules of major significance.

But what if an exempt employee comes to work, stays only an hour and leaves for personal business the rest of the day - can you dock time from his/her vacation leave accrual bank? Since 2001, the federal rule has allowed exempt employees to use partial vacation and sick leave days so long as there was no loss of pay on payday. That is, if an exempt employee takes a half day off, the half day of accrued leave can be docked from the accrual bank - never from the paycheck. The total gross compensation paid for that pay period (the "salary") will not have been reduced. If the employee does not have sufficient leave accrual, he/she can not actually receive a lower paycheck because of the partial day missed. That federal policy did not help employers in California, however, because the Labor Commissioner had a different policy. The Labor Commissioner enforcement policy only allowed employers to dock leave accruals for partial day leave absences due to illness, but not for absences due to personal reasons, i.e., vacation.

In good news for California employers, in late July, the Court of Appeal (located in the San Francisco Bay Area), has ruled that docking salaried employees' vacation banks for a partial-day absence does not compromise the exemption status. In Conley v. Pacific Gas and Electric Company, the court held that "nothing in California law precludes an employer from following the established federal policy permitting employers to deduct from exempt employees' vacation leave, when available, on account of partial-day absences from work." The decision contradicts a three-year old DLSE Opinion Letter cited by the appellants, and recently depublished by Labor Commissioner Donna Dell, that asserted that salaried employees could not be docked pay or benefits for any partial-day absences.

The court observed that docking leave accruals for partial day absences does not result in employees forfeiting vacation accrued, it merely "regulate[s] the timing of exempt employees' use of vacation time by requiring them to use it when they want or need to be absent from work for partial-days." The appellate court clarified partial-day to mean an "absence of four or more hours in a single day."

Based on this new appellate court opinion, employers may dock leave accruals for exempt employees' partial day absences due to illness or personal/vacation time. Employers should not, however, dock accrual balances for absences of less than four hours - the appellate court would not consider an absence of less than four hours to be a "partial day." Finally, if there is not sufficient leave accrued for a partial day absence, the employee's actual paycheck must not be reduced for that partial day absence.

Even with this new court guidance, these questions may still be complicated. When in doubt, consult employment law counsel. The attorneys of Simpson, Garrity & Innes, PC, are available to help you with these issues.

Company X has a policy requiring that all overtime be approved in advance by a supervisor. Jack, an office maintenance employee, submits his timecard showing he worked 45 hours for the week, but he admits he did not get prior approval to work overtime. Must Company X compensate him for the five hours overtime?

Even though Jack ignored company policy by not getting prior approval, the employer may be liable for overtime. An employer is liable for overtime if it "knew or should have known of" the overtime hours worked, i.e., has actual or constructive knowledge that an employee worked overtime.

The Division of Labor Standards Enforcement ("DLSE") Enforcement Manual (Section 47.6.2) provides where an employer has constructive knowledge of the fact that employees are working overtime, the wages must be paid. In one federal case, the employer had a policy of compensating for all overtime reported. However, the employer's front line supervisors required that employees' reported overtime hours be kept to a stated minimum. The employees worked an average of thirteen hours of overtime each week, but most of this time was not reported because of pressure from the frontline supervisors. The court stated that it "believe[d] the company had constructive knowledge" of the overtime hours worked because, "an employer exercising reasonable diligence would have acquired knowledge of the fact that its employees worked an average of 13 overtime hours each week [for a period of three years prior to the lawsuit]." The court went on to state that "[b]ecause the immediate supervisors were primarily responsible for the employees' failing to report all overtime, we believe they may have had actual knowledge of the unpaid overtime. The company cannot disclaim knowledge when certain segments of its management squelched truthful responses."

However, there may be no recovery where the employee prevents an employer from obtaining knowledge of overtime worked. The DLSE Manual (Section 47.6.3) provides that, if an employee deliberately prevents the employer from obtaining knowledge of the overtime worked, the employee cannot claim recovery for such overtime. In a federal case, the worker admitted that he did not mention any unpaid overtime work to any store manager prior to filing his complaint. The court found that he "deliberately omitted the inclusion of those hours from his time sheet even though he knew that he would have been paid for those hours." In sum, the employee prevented the employer from complying with the law.

Employers who use releases of claims at the time of termination should understand that they are not a panacea. Some courts have held under certain laws, claims cannot be waived. For example, in a recent Fourth U.S. Circuit Court of Appeals decision ( Taylor v. Progressive Energy Inc.), the Court found that Family and Medical Leave Act ("FMLA") claims could not be waived by a release. In this case, the employee received severance benefits in exchange for signing a general release of claims. She then sued under the FMLA. The employer contended that she had waived her claim by signing the general release and accepting the severance pay. The Court disagreed basing its decision on one sentence of the 1995 Department of Labor Regulation providing: "Employees cannot waive, nor may employers induce employees to waive, their rights under FMLA."

Employers should consult with counsel at the time of seeking releases as to the protections that they will provide.