What Is the “Safe Harbor” Against Improper Deductions from Exempt Employee Pay?

It is not often that the U.S. Department of Labor (DOL) really helps employers out. But, with its 2004 changes to the federal Fair Labor Standards Act regulations the DOL created a “safe harbor” for employers to protect them when they make improper deductions from exempt employee pay.

Inadvertent improper deductions are common given the complexity of the Salary Basis Test, which employers must meet to classify employees as exempt. The test requires employers to pay exempt executive, administrative, and professional employees a predetermined weekly salary that is not determined by the quantity or the quality of their work. Employers may only make specified deductions from this salary. Consult our FYI Wage and Hour: Exemptions – Salary Basis Test for more information. If an employer does not pay an employee according to the Salary Basis Test, the employee is nonexempt and entitled to overtime pay.

All employers need to do to take advantage of this safe harbor is:

  • clearly communicate a policy that prohibits improper pay deductions and includes a complaint mechanism,
  • reimburse employees for any improper deductions, and
  • make a good faith commitment to comply in the future.

To meet the first of these requirements, MSEC recommends a written policy distributed to employees at the time of hire, in employee handbooks, or published on an employer’s intranet.

Sounds easy, right? However, we find that many employers do not have such a policy and have not availed themselves of this protection. Employers who do this will not lose exempt status for any employees they improperly deduct from unless they willfully continue making improper deductions after receiving employee complaints.

The DOL has even gone so far as to provide a sample model salary-basis policy on its website. Employers are not required to use the DOL’s model policy, and can create their own covering the same material. MSEC has created two shorter samples for members based on the DOL’s model policy. Click here to access MSEC’s samples, and contact MSEC with your questions.