Partial-day deductions.

The California Division of Labor Standards Enforcement enforces California's wage and hour laws, and is interested in pay practices. Under the DLSE's current policy, an employer in Los Angeles County that takes deductions from an exempt employee's accrued vacation for a partial day absence violates the state's "salary basis" requirement for exempt status. To meet the salary basis test, an exempt employee must be paid a guaranteed salary for any week in which he or she performs any work. while the federal Fair Labor Standards Act allows for deductions from an employee's vacation bank to cover partial-days off for personal reasons, California does not.

In 1990, the Ninth Circuit stated that "a strong argument [could] be made" that partial day deductions from paid leave would violate the salary basis test under the FLSA. Taking the court's dictum seriously, several district courts concluded that such deductions rendered the employees non-exempt. Four years later, however, the Ninth Circuit rejected that and held that, under the FLSA, a partial-day deduction does not affect the employee's exempt status. The court reasoned that vacation is a fringe benefit, not salary.

Prior to 2000, California did not have an express "salary basis" requirement for exempt status. Instead, its wage orders set a minimum monthly "remuneration" to be paid exempt employees. Then Labor Code [section] 515 was enacted as part of AB 60 and provides that an exempt employee must earn "a monthly salary equivalent to no less than two times the state minimum wage."

On May 30, 2001, the DLSE issued an opinion that, normally, an exempt employee would have to be paid an entire month's salary if the employee worked any part of the month. It opined that deductions could not be taken from accrued vacation to cover periods of absence of less than a full day. The DLSE reasoned that since vacation pay "is not a gratuity or a gift, but is, in effect, additional wages for services performed," it may not he used to satisfy a payment due, i.e., salary, for which the employer was already obligated.

The DLSE opinion elicited a firestorm of criticism. In response to pressure, the letter was withdrawn. On March 1, 2002, the Labor Commissioner rejected the DLSE interpretation, and stated that AB 60 would be interpreted as imposing a weekly salary test consistent with the FLSA. On the topic of deductions from salary, it simply noted that "vacation is treated differently under state law than federal law. Under California law accrued vacation constitutes vested wages."

The DLSE staff opined that an employer could not make a deduction from the salary of an exempt employee who worked even a de minimis amount of time (10 or 15 minutes) while on vacation: [I]f the employer requires that the employee perform work (de minimis or not) on any day when the exempt employee has ostensibly absented himself for a full day, the exempt employee's salary may not be docked.

The Labor Commissioner then addressed the issue of deductions. [Unlike federal law], state law does not permit the deduction of accrued vacation or PTO when the employer already has an independent obligation to pay the exempt employee's salary. The reason that state law operates differently than federal law in this regard is that state law has long treated accrued vacation not as a "benefit," but rather, as accrued wages that are not subject to forfeiture. And if an employer already has a pre-existing obligation to pay full salary to an exempt employee who takes part of a day off for personal reasons, or who is furloughed for part of a week; that obligation cannot be discharged by requiring the employee to use his or her own accrued wages to pay his or her salary.

Two months later, the DLSE published its updated Manual which declares that "a vacation policy in California by law must provide for the vesting of the wages accrued as they are earned and, thus, vacation accrual may not under any circumstances be used to pay for partial day absences." If an employer "willfully" makes deductions in violation of the salary requirements, the exemption will be lost and the affected employee or employees will be entitled to overtime pay. The only solution, unless and until a court rejects the DLSE's position, is to require that exempt employees use their accrued vacation in full-day increments. Most employees embrace the flexibility of partial-day vacation policies because those policies allow for the most efficient use of precious vacation time. Most executives and managers want to keep abreast of what is happening within their sphere of responsibility, no matter that they are on vacation. Unfortunately, the DLSE's enforcement policy does not take into consideration these legitimate needs, and as a result, benefits no one.

Andrew C. Peterson is head of the Labor and Employment Group in the Los Angeles office of Morgan Lewis.