Labor & Employment Law Blog

As many employers know, the federal Fair Labor Standards Act (“FLSA”) and California law require an exempt employee to satisfy both the “salary” test and “duties” test (executive, administrative, or professional) to relieve an employer from paying overtime compensation.  Under the “salary” test, an exempt employee must receive his or her full salary for any workweek in which the employee performs any work, regardless of the number of days or hours worked.  In other words, an exempt employee’s wages cannot fluctuate based on the quality or quantity of work performed.

A primary exception to the rule against deductions from wages under the salary test is deductions resulting from absences from work for one or more full days for personal reasons, sickness or disability.  Under this exception, employers are permitted to deduct wages in increments of one full day only.  Employers cannot deduct partial-day absences from the wages of an exempt employee.  However, according to federal law and a California court decision in Conley v. Pacific Gas & Electric Co., employers may deduct partial-day absences from an exempt employee’s leave bank without violating the salary test.

In Rhea, the plaintiff, Lori Rhea, challenged the Conley decision, arguing that California’s unique anti-forfeiture provisions, which protect vacation wages from forfeiture once vested, do not permit partial-day deductions from an exempt employee’s leave bank.  The Court of Appeal, however, rejected this argument in favor of the rationale in Conley, which recognized that an employer’s practice of deducting leave time for partial-day absences did not amount to a forfeiture, but merely allowed an employer to require an employee to use leave time in accordance with its terms and conditions.  Moreover, the court refused to limit the holding in Conley to partial-day absences of four or more hours.  Although the court in Conley expressly stated that its decision only addressed deductions for partial-day absences of four or more hours, the Rhea court held that the length of the partial-day absence does not impact an employer’s ability to deduct such absences from an employee’s leave time.  Therefore, Rhea clarified that employers may deduct partial-day absences in any increment, including increments of less than four hours, from the leave time of exempt employees without violating California law or losing their exempt status.  This is welcome news for California employers, allowing for added flexibility in administering paid time off benefits.