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Compliance
FLSA 'Safe Harbor' Policy
Q: What happens if my employer makes an illegal deduction from an exempt employee's pay?
A: An employer can rectify improper pay without penalty as long as the employer follows the Fair Labor Standards Act (FLSA) “safe harbor” rules.
Under the old FLSA regulations, if the employer made improper deductions to an exempt employee's pay, that employee and all other exempt employees in the same job classification would lose exempt status for that pay period. This meant the employer would have to pay that employee and all others in the same class any overtime pay they would have earned if they were nonexempt.
Under the newer FLSA rules, if the employer makes an improper deduction to an exempt employee's salary but follows the FLSA safe harbor provisions, the employer is required to correct the pay of the employee, but the employee and all other employees in the same class will not lose their exempt status for that pay period.
The newer rules, which took effect on Aug. 23, 2004, permit employers to protect themselves under the safe harbor provision by:
- Establishing a clearly communicated policy prohibiting improper deductions and including a complaint mechanism.
- Reimbursing employees for any improper deductions in a reasonable time frame.
- Making a good-faith commitment to comply in the future.
Employers are free to distribute this policy in written form either directly to the employee or through the employee handbook or company intranet. If the employer follows safe harbor rules, the FLSA provides a window of time in which the employer can correct the employee's pay, and the employer will not lose the exemption for an entire class of employees, as long as the improper calculation to the single employee's pay was isolated or inadvertent.
If an employer willfully violates the policy, for example, by continuing the improper deductions after receiving employee complaints, or has an “actual practice” of making improper deductions, the employer could jeopardize the exempt status of an entire class and might be required to pay all hours plus overtime pay to those affected. To determine whether an employer has such a practice, relevant factors include:
- The number of improper deductions.
- The time frame.
- The number and geographic location of employees and managers in charge.
- Whether the employer has a clearly communicated policy prohibiting improper deductions.
Understanding the law and making a good-faith effort to comply with FLSA requirements are not enough. Employers at a minimum should establish a safe harbor policy to limit the liability associated with isolated and inadvertent deductions. The Department of Labor provides information about safe harbor policies on their FairPay Fact Sheet, as well as a sample policy.
Article by Vicki Neal, PHR, is an HR knowledge advisor in SHRM's HR Knowledge Center from http://www.shrm.org/kc/solutions/articles/archives/CMS_024023.asp#P-8_0
