As the heat of summer rolls into August, the effective date for the new rules under the Fair Labor Standards Act (“FLSA”) draws nearer. On August 23, 2004, the new rules under the FLSA must be followed. Most of the rule changes apply to employees classified as exempt for purposes of paying overtime wages. For example, to qualify for the traditional “white collar” exemptions, employers will be required to pay their exempt employees at least $455 per week on a salary basis. This change alone may impact certain positions previously considered exempt.

In addition to rule changes affecting exempt employee classifications, the new rules also affect the general payroll management for exempt employees. Prior to August, employers who inadvertently deducted wages for improper reasons (for example, partial day absences, discipline, poor work quality or tardiness) and later repaid those wages while promising future compliance with the FLSA could avoid converting the exempt employee into an hourly employee. This “window of correction” defense was often hotly contested in lawsuits because of its unclear application and because of the significant liability if the defense was lost to the employer.

The new FLSA, as of August 23, 2004, creates a fairly well defined “safe harbor” defense for employers who unlawfully deduct an exempt employee’s wages for any reason but later follow the safe harbor regulations.

To understand the “safe harbor,” employers need to know under what circumstances an exempt employee’s wages can be deducted. As of August 23, 2004, an exempt employee’s wages may be deducted for:

• Absences, including partial day absences, that qualify for leave under the federal Family Medical Leave Act
• One or more full day absences for sickness or disability pursuant to a bona fide sick leave policy that provides replacement wages
• One or more full day absences for personal reasons other than sickness or disability
• Offsets for jury duty pay, witness fees and military pay
• One or more full day disciplinary suspensions or penalties made in good faith for violations of a written work place conduct policy that applies to all employees (this deduction was not previously available)
• Disciplinary suspension or penalty for violation of major written safety rule (this deduction is a newly modified version of the previous rule)
• Partial week payment for the first and last work week days of the individual’s employment
• Work weeks in which the employee does not work

To take advantage of the new “safe harbor” as of August 23, 2004, employers should be proactive in their payroll management by reviewing and implementing the following criteria:

• Maintain a clearly written policy that communicates the employer’s commitment to compliance with the FLSA, identifies circumstances in which deductions will occur and circumstances in which deductions are prohibited, and provides a complaint mechanism that allows employees to make a complaint and details how complaints will be handled
• After full investigation of the complaint, reimburse any unlawful deductions or advise the employee of findings if the deduction is determined lawful
• Commit to future compliance with the FLSA in any response to a complaint
• Suspend any deductions after receiving a complaint until a full investigation is complete
• Avoid repeated violations of the FLSA by training payroll managers and HR staff on proper deductions for exempt employees

Payroll policies must be clearly communicated to employees. To assure that the communication is clear, employers should publish the payroll policy in their handbook just as they have done with sexual harassment policies. Obtain acknowledgement forms from each employee that indicate the employee has received a copy of the payroll policy or revised handbook containing the payroll policy and that the employee is responsible for reviewing and following the policy.

As with all wage and hour law, close attention should also be paid to the applicable state laws regarding available deductions. What may not violate the FLSA could violate the state wage and hour laws. Proper prevention through creation and implementation of written policies, however, can go a long way toward avoiding costly penalties and unnecessary litigation.