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May 1, 2013 | Payroll Software | Posted by Vicki Lambert, CPP

Passing the Salary Basis Test: How Hard Can That Be?

Paying an exempt employee’s salary would appear to be an easy payroll task. According FLSA rules to qualify as exempt, the employee must receive the same amount of wages week in and week out regardless of quality or quantity of work as long as they are ready, willing and able to work. This is known as the salary basis test.  So all payroll needs to do is to just input the correct salary for the appropriate payroll period and voila it’s done! Right? Unfortunately, payroll, like life, is never that simple.

Why is it not that simple? Exempt employees have personal lives, so their payroll never remains static. Exempt employees arrive to work late, go home early, take vacation, call in sick, run out of PTO, and take time off to handle personal matters. It is because of these factors that maintaining the salary basis test becomes complex.  In addition to the quality and quantity of work clause, to further complicate the situation, the salary basis test also requires that any adjustments to an exempt employee’s salary must be in full day increments only.

For example, let’s say that an exempt employee goes home sick three hours early and then calls in sick the entire next day. But the employee only has seven hours of sick leave available. Under the salary basis test the exempt employee must be paid for the full day regardless of the quality or quantity of work. So for the day the employee went home early payroll must pay the employee for the full day since partial day deductions are not permitted.  For the next day where the exempt employee was out for the full day but only has seven hours of sick leave, again the exempt employee must still be paid for the full day even though they do not have enough sick leave available to cover the full day because docking the employee for the one hour is a partial day deduction. The employer may take the sick leave away from the employee sick leave balance but it does not affect how the employee is paid.

If the employee takes time off for personal reasons, then the employee is not ready, willing and able to work and may be docked but again only in full day increments. For example, if the same employee leaves three hours early on Thursday and takes all of Friday off to attend their daughter’s softball tournament then that employee is not ready, willing and able to work. If the employee has used up all of their vacation time then the salary may be docked but again only for the full day missed and not for the partial day.

An exempt employee’s pay can also be affected by the life of the company and other external forces such as weather. Severe weather can cause a business to have to close for a day or two as can economic realities such as forced furloughs or shut downs.  These types of situations are out of the exempt employee’s control and therefore cannot affect their salary. If deductions in the salary are made for absences occasioned by the employer such as an inclement weather situation or shut down due to slow business, the exempt employee fails the salary basis test and the employer loses the exempt status for that employee for that time period.

Vicki M. Lambert, CPP, is President and Academic Director of The Payroll Advisor™, a firm specializing in payroll education and training. The company’s website offers a payroll news service which keeps payroll professionals up-to-date on the latest rules and regulations. With 40 years of hands-on experience in all facets of payroll functions as well as over three decades as a trainer and author, Ms. Lambert has become the most sought-after and respected voice in the practice and management of payroll issues. She has conducted open market training seminars on payroll issues across the United States that have been attended by executives and professionals from some of the most prestigious firms in business today. A pioneer in electronic and online education, Ms. Lambert produces and presents payroll related audio seminars, webinars and webcasts for clients, APA chapters and business groups throughout the country. Ms. Lambert is also an adjunct faculty member at Brandman University in Southern California where she is the instructor for American Payroll Association’s “PayTrain” online program.