In an age of ever-increasing workforce transience, employers often seek ways to incentivize employees to commit to their organization through benefit programs such as relocation expenses, tuition reimbursement, sign-on and/or retention bonuses, and other monetary advances. Employers also spend a considerable amount of time and money training new employees. In an effort to recoup the monies advanced and costs incurred in association with efforts to attract talented workers, Employers often enter into repayment agreements with employees to recoup wages fronted to, or costs incurred on behalf of, employees. Moreover, these repayment agreements routinely contain terms purporting to allow employers to deduct from an employee’s last paycheck upon separation. Whether such provisions comply with the Fair Labor Standards Act (FLSA) may depend upon whether the employee is classified as exempt from the FLSA’s overtime requirements.
In general, employers may deduct from the last paycheck of an employee classified as non-exempt from the overtime requirements of the FLSA if the deduction does not bring the employee’s hourly pay below minimum wage, and the repayment agreement and/or subsequent communications with the employee comply with the deduction authorization requirements found in state wage and hour laws. For instance, written repayment agreements can be drafted to satisfy the written deduction authorization requirements found in the North Carolina Wage and Hour Act. N.C. Gen. Stat. §95-25.8(a).
However, an employer’s obligations differ with respect to employees classified as exempt from the FLSA’s overtime requirements based upon the common so-called “white collar exemptions” (e.g. professional, executive, or administrative exemption). In addition to performing duties which qualify as exempt duties, salaried exempt employees must satisfy a salary basis test by being paid a predetermined and fixed salary, not subject to reduction because of variations in the quality or quantity of work performed. 29 C.F.R. § 541.602. To comply with the salary basis test and avoid jeopardizing the employee’s exempt status, an employer may not deduct from an exempt employee’s salary except in instances specifically enumerated in the regulations. 29 C.F.R. § 541.602(b). Importantly, the specifically enumerated instances where an employer may deduct from an exempt employee’s salary do not include repayment agreements seeking to recoup advanced payments to employees and/or costs incurred by employers on behalf of employees.
Significantly, the exemption from the FLSA’s overtime requirements can be lost where an employer makes improper deductions from salary. While a “window of correction” may exist for isolated or inadvertent deductions where salaried exempt employees are reimbursed unauthorized salary deductions and in other certain circumstances reimbursement for training costs may be equated to a loan and deductions authorized, the exemption could be lost where the employer has an actual practice of making improper deductions. A few years ago, the Middle District of North Carolina went even further and equated an employer’s requirement of employees to repay training costs to be tantamount to deducting from the salaried exempt employees’ wages that jeopardized the exemption. While the Court’s analysis appears to have been cabined to the specific facts the case, the decision demonstrates the perils associated with employers seeking to recoup payments to, or expenditures for, salaried exempt employees.
Despite this and other related court decisions, some employers continue to utilize agreements with employees that call into question their compliance with the FLSA’s salary basis test, and therefore jeopardize their employees’ exempt status. While such repayment agreements can be structured to comply with federal and state wage and hour laws, employment and corporate counsel should remain vigilant when drafting and reviewing employee repayment agreements to ensure they comply with the FLSA’s exemption regulations and preserve the white collar exemptions.
Kevin S. Joyner is a Shareholder in the Raleigh office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C. Mr. Joyner represents employers in a myriad of employment-related and complex commercial matters, including litigation involving discrimination, wage and hour, wrongful discharge and other claims, and matters in state and federal courts and administrative agencies.
Mr. Joyner has extensive experience representing employers in wage and hour class action and collective action defense, particularly involving alleged tip credit violations in the restaurant industry and misclassification of exemption from overtime status.