Published by Nixon Peabody

It’s not every day that employees get a “do-over” in the wage and hour world. There are no mulligans or reset buttons when you misclassify an employee, do not pay earned overtime, or fail to comply with one of the myriad other wage and hour laws/regulations impacting the workplace. Thus, the “Safe Harbor” provisions found in the Fair Labor Standards Act (“FLSA”) regulations come as a refreshing surprise. A compliant Safe Harbor Policy provides a valuable “do-over” for employers who inadvertently jeopardize the exempt status of their employees by making improper deductions from exempt employees’ salaries. While the FLSA’s Safe Harbor provisions have been in place since 2004, they are so important that we thought a quick reminder and discussion about them was in order.

To understand the Safe Harbor provisions and why every employer should implement a written Safe Harbor policy, a quick review of the “salary basis” test is necessary. To be exempt from overtime, an employee must be performing duties recognized as exempt under the FLSA and must be paid on a “salary basis.” Generally, this means that the employee is paid a pre-determined, set amount every pay period. This amount, or salary, cannot be reduced because of variations in the employee’s quality or quantity of work. Also, with few exceptions, an exempt employee must receive that full salary for any week in which the employee performs any work. Employers can destroy the exempt status of their exempt employees if they make improper deductions from those employees’ paychecks. When an employee’s exempt status is lost in such cases, an employer can face substantial overtime liability because the employee must then be treated as non-exempt and is eligible for overtime payments for the preceding two (and in some cases, three) years.

Prudent employers, however, maintaining written Safe Harbor policies can minimize this potential liability. The FLSA provides that an employer may preserve the exempt status of employees, even where impermissible deductions have been made from their salaries, provided the employer:

• Has a written policy prohibiting improper deductions and has “clearly communicated” that policy to its employees,
• Has established a complaint mechanism for employees who believe their wages have been improperly deducted,
• Reimburses employees for any improper deductions, and
• Makes a good faith commitment to comply in the future.

See, 29 C.F.R. § 541.603(d).

The real world benefits of maintaining a Safe Harbor policy are illustrated in a case like Jordan v. GOBO, Inc., 2010 U.S. Dist. LEXIS 42778 (W.D. Va. 2010). In Jordan, an assistant manager at a restaurant claimed 535 hours of unpaid overtime, premised in part on a theory that his exempt status had been destroyed when his employer made improper deductions from his salary for missed workdays. The employer moved for summary judgment, relying in part on the fact that the employer had a written policy that prohibited such law violations, that the policy invited employees to make complaints about potential violations, and the policy promised that the employer would take every opportunity to correct any such violations. The employer also presented evidence that it followed this policy, promptly repaying the employee when the employer received notice of the improper deductions. In doing so, the employer also demonstrated good faith that it intended to comply with the FLSA in the future. In light of all the evidence, including the employer’s Safe Harbor policy, which the employee submitted as an exhibit in support of its motion, the court held that the employer satisfied its burden to demonstrate that it maintained a compliant “Safe Harbor” policy and dismissed the employee’s overtime claims.

Jordan serves as a practical reminder that a well-written Safe Harbor policy can protect employers from significant liability when an exempt employee’s exempt status is lost due to improper, inadvertent salary deductions. While Safe Harbor policies should never be considered substitutes for FLSA compliant payroll policies with respect to exempt employees, they are a powerful and important insurance policy in the event the employer does not fully comply with the FLSA. Please note that implementing a Safe Harbor policy is not enough. The policy must be clearly communicated to employees, such as in an employee handbook or on the company’s intranet. Further, the policy must be implemented and enforced in the event of employee complaints. Safe Harbor policies will not protect an employer who willfully continues to make improper deductions after an employee has tendered a complaint.

We are available to review existing Safe Harbor policies and help employers draft and implement new policies.

by David Kolek

For more information, please contact your Nixon Peabody attorney or:

• David Kolek, Associate,
  (415) 984-8348, dkolek@nixonpeabody.com
• Marjorie S. Fochtman, Partner, Chair of the West Coast Wage-Hour Team
  (415) 984-8443, mfochtman@nixonpeabody.com
• Gary J. Oberstein, Partner, Chair of the Wage-Hour Team
  (617) 345-1231, goberstein@nixonpeabody.com