DLSE Finally Up to Speed
On
July 10, 2006, the Division of Labor Standards Enforcement (DLSE) made
final revisions to its Enforcement Policies and Interpretations Manual to
allow employers to deduct accrued vacation for partial-day absences from an
exempt employee's salary without rendering the employee non-exempt. This
revision brings DLSE's policies up to date with
the California appellate court decision in Conley v. Pacific Gas &
Electric Company (2005) 131 Cal.App.4th 260.
Background
Under
both state and federal law, employees who meet a "salary basis"
and duties test may be exempt from overtime provisions. The term
"salary basis" refers to provisions that require an exempt
employee to be paid a "salary" as opposed to an hourly wage.
Generally, the salary basis test requires that a full weekly salary be paid
for any week in which any work is performed in order for the employee to
qualify as exempt.
Deductions
for full-day absences for qualifying reasons, such as vacation, are allowed
under California
and federal law. On the other hand, under federal regulations implementing
the Fair Labor Standards Act ("FLSA"), employers may not
dock the pay of an exempt employee for an absence of less than a day (a
partial-day absence- four (4) hours or more). See 29 C.F.R. §§ 541.602(a)
and 541.602(b)(1). If the employer does dock for a
partial-day absence, the affected employees will not meet the salary basis
test, and are non-exempt for purposes of overtime pay.
However,
federal court decisions and the U.S. Department of Labor have long held
that employers may deduct time for such absences from the employee's accrued,
but unused vacation, without affecting the salary basis test. If the
employee does not have any accrued vacation time, then the employer may not
dock the employee's wages for time off.
DLSE Took Opposite Position from Federal Law
Prior
to Conley, the DLSE opined that the practice of debiting vacation or
paid leave banks to cover partial-day absences was unlawful in California.
In
2002, California's
former Labor Commissioner stated in an opinion letter that an exempt
employee could not use vacation or paid-time-off (PTO) benefits in partial
day increments without jeopardizing the exemption. The Labor Commissioner
stated that because vacation is a form of vested wages under California law,
docking vacation accounts for partial-day absences was the same as docking
salary for partial-day absences and, thus, was not allowed without
violating the salary basis test. Thus, the DLSE deviated from the federal
rule by opining that employers could not deduct from vacation time or PTO
in partial-day increments without violating the state salary basis test.
In
2005, Labor Commissioner Donna Dell withdrew the August 2002 letter in an
internal memorandum, but left unclear whether an employer may require employees
to use vacation or PTO in partial day increments, as opposed to allowing
exempt employees to voluntarily do so.
Moreover,
even after the 2005 memorandum, the DLSE's
enforcement manual was not revised to allow for partial-day deductions from
vested leave banks.
Conley Decision
In
Conley, the First District Court of Appeal held that, consistent
with federal policy, PG&E's practice of deducting partial-day absences
from vacation leave does not violate California
law.
In
this case, PG&E's vacation policy required exempt employees to use
their accrued vacation time for absences of four (4) or more hours in a
single workday. The plaintiffs challenged this practice claiming that it
was inconsistent with the salary basis test. The plaintiffs argued, correctly,
that accrued vacation is a form of vested wages under California law. Plaintiffs then
attempted to extend this principle to argue that since employers cannot
make deductions from exempt employee's pay for partial-day absences without
violating the salary basis test, employers could
not make deductions from accrued vacation since it is a form of pay.
The
Court of Appeal rejected plaintiffs' arguments in Conley because
employees are never forced to forfeit salary or unearned vacation as part
of a partial-day deduction policy. Instead, they are simply asked to use
accumulated leave to cover the partial-day absence. The policy did not
impose a forfeiture of vacation or prevent vacation from vesting as it was
earned. The court held: "[B]ecause the
deductions made from vacation leave banks of exempt employees represent
days on which those employees have, in fact, taken at least four (4) hours
off work, PG&E's vacation leave policy neither imposes a forfeiture, nor operates to prevent vacation pay from
vesting as it is earned." All the policy does is "regulate the
timing of exempt employees' use of their vacation time, by requiring them
to use it when they want or need to be absent from work for four (4) or
more hours in a single day."
The
court rejected the reasoning of the DLSE interpretative advice letters.
DLSE Slow to Move on Revising Regulations
Despite
the fact that Conley was decided last July, the DLSE did not revise
its enforcement manual to follow the holding of Conley until March
of this year, with final revisions not coming until July. This had left a
conflict between the Labor Commissioner's interpretation of the law and
that of the court of appeal.
On
March 1, 2006, the Labor Commissioner revised section 51.6.15 of the
enforcement manual that holds that no deduction may be made from the salary
of an employee for partial day absences. The revised language explicitly
refers to the Conley decision and notes that under Conley,
there is nothing in California
law prohibiting the practice of deducting for absences of four (4) hours or
more from an exempt employee's vacation pay bank.
On
July 10, 2006, the Labor Commissioner revised section 51.6.15.4, to deal
with the issue of bona fide sick leave plans and PTO policies and when an
employer can deduct under Conley. If the sick leave plan is in the
form of PTO, it counts as vested wages. Therefore, under Conley,
deductions may be made only for absences of at least four (4) hours in
duration. "If a sick leave plan does not establish a vested right to
wages, deductions from sick leave for increments of less than four (4)
hours continue to be permissible to the extent such leave credits exist at
the time of the partial day absence."
What Should Employers Do?
Employers
should review their vacation policies and practices in keeping with the Conley
decision and the DLSE interpretation. Remember that Conley only
applies to partial day absences of four (4) hours or more.
For
complete information on the DLSE's position, see www.dir.ca.gov/dlse/dlemanual/dlse_enfcmanual.pdf.
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