California court confirms employers may deduct from exempt employee leave banks

The San Diego division of the Court of Appeal has confirmed that California employers may deduct from exempt employee leave banks for partial-day absences, without destroying the employee's exemption.

General Atomics provided its employees with a set amount of paid annual leave determined by the employee's length of service. Employees could draw upon the paid leave for absences caused by illness, vacation, and personal and family obligations. The company deducted from the accumulated leave for any partial-day absences. Lori Rhea filed a lawsuit challenging the company's practice as a violation of the salary-basis requirement for several recognized exemptions from the wage and hour laws. The Court of Appeal rejected her argument. Rhea v. General Atomics, Case No. D064517 (Jul. 21, 2014).

It is a requirement of many of the exemptions under federal and state law that the employee earn a salary, which means the receipt of a pre-determined amount per pay period that "is not subject to reduction because of variations in the quality or quantity of the work performed." Kettenring v. Los Angeles Unified School District, 167 Cal.App.4th 207 (2008). Rhea argued that her employer's practice resulted in her not receiving a salary, because unauthorized deductions from her leave bank for partial-day absences constituted a forfeiture of wages that she had earned. The Court of Appeal rejected the argument, because the employer was not taking away something that Rhea had earned. It was just applying the rules it had established for how Rhea could enjoy the fruits of what she earned.

The Court of Appeal in San Francisco reached the same result in Conley v. Pacific Gas & Elec. Co., 131 Cal.App.4th 260 (2005). Rhea sought to distinguish that case because PG&E had only deducted for partial-day absences that exceeded four hours. The Rhea Court could see no basis in California law for distinguishing among partial-day absences based on the length of the absence.

The California rule stated in Conley and Rhea matches the interpretation of federal law that the Department of Labor stated in a January 19, 2009 opinion letter, and the interpretation of California law that the Labor Commissioner stated in a November 23, 2009 opinion letter.

What is a salary?

Many of the exemptions from the wage and hour laws require that the employee earn a "salary," a term that is not defined in California law. The California Division of Labor Standards Enforcement construes the wage orders to incorporate the federal salary basis test, as explained in a March 1, 2002 opinion letter. The U.S. Department of Labor regulations state that an employee is paid on a salary basis if the employee "regularly receives each pay period on a weekly, or less frequent basis, 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 the work performed." See 29 CFR section 541.602(a).

The Sixth District Court of Appeal recently addressed the concept in Negri v. Koning & Associates, Case No. H037804 (May 16, 2013). An insurance claims adjuster was paid $29 per hour with no minimum guarantee, but did not receive premium pay when he worked overtime. The employer claimed that he was salaried because he received an unvarying minimum amount of pay equivalent to $29 per hour for 40 hours. The court rejected the argument. Since the amount of pay was based on hours worked, it was not a predetermined amount.

Exemptions from Wage and Hour Requirements: Salary Basis

Three of the exemptions that we will discuss in upcoming posts (executive, administrative and professional) require that the employee be paid on a salary basis. This post will help you understand that critical concept.

Both federal and state law have the same general definition of what it means to be paid a salary. The employee must regularly receive each pay period a predetermined amount that is not subject to reduction because of variations in the quality or quantity of the work performed. An employee who earns $750 per week no matter how many hours she works has earned a salary within that definition. An employee who is paid at a rate of $750 per week, but earns only $600 if she works four days in a week, has not. A salaried employee is not paid for the amount of time spent on the job, but for the general value of services performed.

Minimum Salary

Under federal law, an employer must earn a salary of at least $455 per week to meet the salary basis test. 29 CFR section 541.600. Under California law, the minimum salary is twice the minimum wage for  a 40-hour work week. See 9 Cal. Code Reg. section 11040(1). At the current minimum wage of $8 per hour, the minimum salary is $640 per week.

Missed Days

One important exception to the general rule is that a salaried employee who misses a day of work for personal reasons other than disability or illness has not earned the portion of her salary attributable to that day. But, if the employee works part of a day, she has earned the portion of the salary attributable to that day, no matter why she misses work for the rest of the day. See 29 CFR section 541.602. The employer may deduct the salary attributable to a partial day's absence from a vacation leave bank, because the employee will still receive the designated salary, even though she loses a portion of her vacation benefit. See Conley v. Pacific Gas & Electric Co., 131 Cal. App. 4th 260, 31 Cal.Rptr.3d 719 (2005).

Employers may deduct the pay attributable to any days not worked before the commencement of employment and after its termination, even if the employee has performed some work during that work week.

Employers may not deduct from an exempt employee's salary for days missed because of jury duty, temporary military leave or attendance as a witness. Although the federal regulations permit deductions as penalties for infractions of safety rules of major significance and for suspensions for infractions of workplace conduct rules, California law does not permit such deductions.

Sick Leave


Although the salary basis test bars deductions for days missed because of illness or disability, there is an exception if the employer offers a bona fide plan that offers a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by sickness or disability. Employers may deduct from sick leave for full and partial day absences due to illness. If the employer offers such a plan, it may deduct from the weekly salary for full day absences that occur before the employee qualifies for paid leave, and after she has exhausted the paid leave available under the plan. Sumuel v. ADVO, Inc., 155 Cal. App. 4th 1099, 66 Cal.Rptr.3d 622 (2007). The California Labor Commissioner has provided a detailed explanation of how this exception works in conjunction with rules regarding deductions from vacation leave banks in a November 23, 2009 opinion letter.

Under California law, a sick leave plan is not bona fide unless it provides for paid leave that is restricted to illness. A paid time off program that combines sick leave with vacation pay does not qualify.

Extra Pay for Extra Work

An employer does not destroy the salary basis of an employee's compensation by paying more than the weekly salary if the employee works more hours beyond the normal workweek. The extra compensation for extra hours may be paid on any basis, time and a half, straight time, half time, or flat sum.