Employer's Paid Disability Leave Policy and Practices Did Not Violate the Overtime Exemption "Salary Basis" Test.

November 29, 2007

In Sumuel v. ADVO, Inc. (2007) 155 Cal.App.4th 1099, a class of ADVO Inc.’s California employees sued the company alleging that the company’s paid disability leave policy and practices violated the "salary basis" test used to determine whether an employee is exempt from overtime pay requirements under federal and state wage and hour laws. The trial court granted summary judgment in favor of ADVO and the Court of Appeal affirmed, indicating that the use of a paid disability leave policy would not violate the "salary basis" overtime exemption test.

Underlying Facts

ADVO employs hundreds of employees nationwide, including in California. ADVO gave its employees an unlimited number of sick days with pay unless the employee was going to be out for more than seven consecutive days, in which case ADVO encouraged the employee to apply for State Disability Insurance (SDI) benefits. If approved by ADVO's third party disability insurer, the employee would also receive supplemental salary replacement benefits after being out for seven consecutive days that, when added to the weekly SDI benefits, would replace 100 percent of the employee's base salary for 13 weeks, and would pay 75 percent of the employee's salary for an additional 13 weeks after that. If an employee began his or her disability period in the middle of a work week, the employee would receive a full week's pay. But if the employee knew that he or she was going to be out for more than seven consecutive days, the employee would be taken off of the regular payroll effective on the first day out of work, even if he or she had already worked one or more days that week, in order to begin the seven day waiting required to qualify for SDI.

For California employees, no supplemental salary replacement benefits would be made until after the employee submitted to ADVO a copy of his or her first SDI weekly benefit check, and the insurer had given medical approval for the employee's disability claim. The employee would ultimately receive supplemental salary replacement benefits in an amount sufficient, when combined with SDI benefits, to replace his or her full salary. However, payment could be delayed for weeks due to delays in submitting or processing the necessary medical reports and paperwork.

In some instances, there were also delays in getting an employee restored to the active payroll after a return from disability leave. In calculating the amount of an employee's salary replacement benefit, ADVO would offset the full weekly benefit amount shown on the SDI check stub submitted by the employee rather than the actual amount of the employee's SDI check. If the amount of the check was less than the weekly benefit amount, this method of calculating ADVO's supplemental payment would result in a small shortfall in full salary replacement for that partial week of disability. The company did not have a policy of informing California employees in advance of a disability that they would have to first apply for SDI benefits, and that their salary replacement benefits might be subject to delays while the necessary paperwork was being completed.

The "Salary Basis" Test

Known as the "salary basis" test, this federal wage and hour regulation establishes permissible deductions from exempt employees' salaries under the federal Fair Labor Standards Act ("FLSA"). California’s Wage Orders have also generally adopted the FLSA "salary basis" test to determine permissible deductions under California law. An employee is paid on a salary basis if each pay period he or she receives a predetermined amount constituting all or part of the employee’s compensation, and the amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to certain exceptions, the employee must receive their full salary for any week in which he or she performs any work without regard to the number of days or hours worked. One of the exceptions is that deductions may be made for absences of a day or more occasioned by sickness or disability if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation or loss of salary occasioned by sickness or disability. Similarly, if the employer operates under a State disability insurance law, or a private sickness and disability insurance plan, deductions may be made for absences of a working day or longer if benefits are provided in accordance with the particular law or plan.

Court of Appeal Upholds Overtime Exemption Under Paid Disability Plan

The Court found that ADVO's delay in returning employees back to regular payroll after disability leave was not an improper deduction. As long as the employee "regularly" receives the predetermined amount each pay period, there is no improper deduction. A reasonable delay in payroll is normal after a disability leave. As long as the employee receives a predetermined salary for each pay period that he or she works, such one time deviations from the employee's regular pay schedule do not in themselves destroy the employee's salaried status. The Court also found it was not unlawful for ADVO to deduct improper amounts for the employees' disability benefits based on imputed SDI benefits that the employees did not actually receive. ADVO's deductions were based on miscalculations of a disability benefit, not a deduction from salary. Thus, the salary basis test was not implicated.

Under the salary basis test, an employee must receive their full salary for any week in which he or she performs any work without regard to the number of days or hours worked. If the disability leave began in the middle of the week, ADVO stopped an employee's regular salary immediately and there would be a salary deduction. However, ADVO stopped the employee's salary immediately so that the employee could begin the seven-day waiting period required to qualify for SDI. Federal law allows an employer who maintains a bona fide disability benefits plan to deduct salary for absences of a day or more before an employee has qualified under such plan. ADVO's plan was a bona fide plan because it contained defined sick leave benefits which have been communicated to eligible employees and operates as described. In addition, ADVO's plan was administered impartially and not designed to evade the requirement that exempt employees be paid on a salary basis.

LCW Advice: Be Cautious With Pay Deductions for Exempt Employees

While the Court ruled in favor of ADVO with respect to its paid disability leave plan, this case does highlight the technicalities that can arise in taking deductions from an exempt employee’s pay during a workweek while maintaining the employee’s overtime and meal and rest period exemption. Employers should be careful in taking such deductions and should consult with legal counsel to determine if such deductions are legal under federal and state wage and hour laws.

This article was written by Gage C. Dungy, an attorney with the labor and employment law firm of Liebert Cassidy Whitmore (LCW). Mr. Dungy is an Associate in the Fresno office and can be reached at (559) 256-7800 or at gdungy@lcwlegal.com. For more information regarding the information above or our firm please visit our website at www.lcwlegal.com, or contact one of our offices below.

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