Can a Public Employer Reduce an FLSA Exempt Employee’s Salary to Account for Unpaid Leave Time?

By Cynthia O’Neill, a partner in the San Francisco office of Liebert Cassidy Whitmore and a member of the of the firm's team of FLSA experts that advise and represent public agencies.

If you have ever thought about reducing the salary of a public employee, who is exempt from the overtime requirements of the Fair Labor Standards Act (FLSA), to account for that employee’s use of any of several protected leaves, then consider the following two items before you proceed:  1) a U.S. Department of Labor (DOL) opinion letter, dated February 8, 2007; and 2) the public sector salary test codified at 29 CFR section 541.710.

Background –FLSA Salary Test
An employer must meet two tests in order to exempt an employee from FLSA overtime:  1) the “salary test”; and 2) the “duties test.”  The salary test, generally prohibits an employer from reducing an exempt employee’s salary because of the quality or quantity of the employee’s work.  The duties test, generally requires that the employee perform high-level, management or discretionary duties.  This article focuses on the salary test. 

Salary Reductions are Only Permitted for FMLA Leave
The February 8, 2007 DOL Opinion letter, which was written to a private employer, cautions that the FLSA only allows salary reductions for unpaid leaves that an exempt employee takes under the federal Family and Medical Leave Act.  (29 CFR § 541.602(b)(7).)  An employer generally cannot reduce an exempt employee’s salary to account for a leave that is not FMLA-qualifying.  For example, state leave laws, that allow an employee to take leave to participate in a child’s school activities, or to take an elderly parent to routine medical appointments, are not FMLA-qualifying activities. 

Public Sector Salary Test – 29 CFR § 541.710
Because the February 8, 2007 DOL Opinion letter was written to a private employer, it did not take into account the salary test that applies to public employees who are paid according to a system established pursuant to “principles of public accountability.”  According to an April 11, 2005 DOL opinion letter, such a pay system is one that includes practices intended to control and track employee entitlement to pay and benefits.  Such a pay system may require a salary reduction to account for absences when leave is not used because:  1) permission for leave has not been sought, or has been sought and denied; 2) accrued leave has been exhausted; or 3) the employee chooses leave without pay. 

As a result, public employers who do require public employees to track their leave and work time and who do control employee entitlement to pay and benefits, have a pay system established pursuant to principles of public accountability.  Those public employers are not constrained by the private sector salary test that the DOL interpreted in the February 8, 2007 letter.   As a result, those public employers may reduce an exempt employee’s pay for any time increment to account for personal absences (except for absences due to jury duty, attendance as a witness, or temporary military leave).   

Moreover, the salary test also allows all public employers – with or without a system of public accountability-- to reduce the paid leave time of an exempt employee.  (Barner v. City of Novato (9th Cir. 1994) 17 F.3d 1256.)