Vacation-Sick Pay | consulting

Vacation and Sick Pay for Exempt Employees

Minimum wage and overtime work are legislated by the Fair Labor Standards Act (FLSA) [Title 29, United States Code, Chapter 8], and the regulations governing the application of the law are contained in the Code of Federal Regulations (CFR). The article entitled What Is an Exempt Employee? outlined the broader definition of the term exempt.

As regards payment for vacation and sick leave, most exempt employees are paid in the same way as nonexempt employees who are subject to the provisions of the FLSA. But there is one type of exempt employee that must be treated differently.

Title 29, Part 541, of the CFR contains the regulations concerning certain types of executive, administrative, and professional employees who are exempt from certain provisions of the FLSA. To be exempt, these employees must meet certain criteria, and they must be paid a salary of at least $455 a week. (For the rest of this article, the term exempt will only be applied to these types of exempt employees.)

Like most employees, these exempt employees may still receive pay for vacation, holidays, and sick leave, but how this pay is administered actually differs from the leave pay received by hourly employees. Understanding the regulations is important for employers who wish to avoid violations of the FLSA.

What Are the Salary Regulations Regarding Exempt Employees?

Exempt employees must receive their entire salary for each workweek. This salary is “a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of work performed.” [29 CFR 541.602(a)] In other words, if the employee shows up for work on any day during the workweek, he must be paid for the entire week, regardless of how many hours he actually works or how much work he performs.

There are exceptions to this general rule, and it is these exceptions that affect how an exempt employee is paid for vacation or sick leave.

The first exception is contained in the general rule itself. If the employee does not perform any work during the workweek, then he does not need to be paid his salary or any portion of it.

Another exception relates to whether or not it is the employee’s first or last week of work. If he only works a partial workweek at the beginning or end of his employment, he can be paid for the workweek on a pro-rated basis. [29 CFR 541.602(b)(6)]

The exception that affects vacation pay reads as follows: “Deductions from pay may be made when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability.” [29 CFR 541.602(b)(1)]

The exception that affects sick pay reads as follows: “Deductions from pay may be made for absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability. The employer is not required to pay any portion of the employee’s salary for full-day absences for which the employee receives compensation under the plan, policy or practice.” [29 CFR 541.602(b)(2)]

How Should Vacation and Sick Leave Pay Plans Be Administered for Exempt Employees?

The latter two exceptions noted above make it clear that an exempt employee’s salary may be reduced for a full day’s absence for personal reasons or for sick leave under a bona fide plan. The phrasing of the Code under paragraph (b)(2) indicates that a bona fide sick leave plan will provide replacement pay for the deduction that is made from the employee’s salary. It is, therefore, logical to assume that vacation pay is also compensation that is paid to cover the deduction from the employee’s salary.

If this is the case, then it means that if the employee is allowed a certain number of days under either a vacation leave or sick leave plan, the plan must reimburse the employee for full day absences. If the employee works any portion of a day, and then takes off personal time or goes home sick, the employee’s salary cannot be reduced for a partial day’s absence.

There is one exception. If the employee takes a partial day’s absence under the Family and Medical Leave Act (FMLA), then the employee may be paid his salary for only the portion of the day he worked, and he can be paid sick leave pay for the portion of the day he is absent. [29 CFR 541.602(b)(7)]

For most exempt employees the process is transparent. If an employee takes a day of vacation time, he simply receives his full salary, and his vacation bank or pool is reduced by one day. However, employers must recognize that the reality is what is described above, because if it were simply a process of deducting from the employee’s vacation bank, there is always the tendency to deduct partial day’s absences from the vacation bank.

What Special Implications Should Be Noted?

Since sick pay is actually a salary replacement payment, employers may reduce an exempt employee’s salary for absences due to illness or injury even if the employee has not yet qualified for replacement pay or has run out of replacement pay. [29 CFR 541.602(b)(2)]

On the other hand, if an employer does not have a bona fide sick plan, the employer may not reduce an exempt employee’s salary, even for full day absences. The only exception would be if the employee were absent for the entire workweek and did not perform any work at all.

Properly handling the matter of vacation and sick leave for an exempt employee is a serious matter because if improper deductions are made from the employee’s salary, then the employer can lose the exemption, and the employee would have to paid for any overtime work. [29 CFR 541.603]