click here for printable version

New Developments Involving Partial-Day
Leave Bank Deductions for Exempt Employees

By Michael J. Killeen and Jeffrey B. Youmans
[February 2003]

For many years there has been a controversy in Washington state as to whether the exempt status of salaried employees is in any way affected by the manner in which deductions are taken from paid leave banks for such employees. Recently, the Washington Supreme Court and the Department of Labor and Industries (L&I) both weighed in on the subject indicating that (1) partial-day deductions from leave banks are generally permissible, but may invalidate exempt status in some cases, and (2) deductions from pay may be made in whole-day increments by private employers and in partial-day increments by public employers once a sick leave bank is exhausted.

Washington Supreme Court

In a decision filed January 9, 2003, entitled Webster v. Public School Employees, the Washington Supreme Court held that partial-day deductions from leave banks are a factor to be considered “in the context of the entire employment relationship” to determine whether the employee is exempt from the Washington Minimum Wage Act (MWA) as a bona fide executive, administrative, or professional employee. The Court clarified that if paid leave bank docking is not coupled with actual pay docking from salary, deductions from paid leave time do not automatically violate the salary basis test under the MWA. However, the Court left open the chance that, even without actual pay docking from salary, other factors, such as rigid hourly quotas or unpaid partial-week suspension practices, when coupled with partial-day paid leave bank docking, would violate the salary basis test. This essentially restates the Court’s holding from three years ago in Drinkwitz v. Alliant TechSystems, Inc.

Employers had hoped the Court would use the Webster case to clarify its confusing legal analysis in Drinkwitz, which is contrary to the plain language of the “salary basis” definition and inconsistent with cases interpreting the same definition under federal law. Instead, the Court stuck to its Drinkwitz “factors” test.

In a subsequent decision filed January 23, 2003, entitled Clawson v. Grays Harbor College Dist. No. 2, the Washington Supreme Court appears to have given public agencies greater latitude than private employers by adopting the “public accountability” exception also found in the federal Fair Labor Standards Act (FLSA). The public accountability exception allows public employers to deduct from the salary of public sector employees for partial-day absences if their accrued leave bank has been exhausted. Although the Clawson decision involves pay docking, rather than leave bank docking, it seems implicit that, for public sector employees, it is permissible for a public agency to dock sick leave banks in partial-day increments, just as it may do so with salary itself.

Effect of Webster and Drinkwitz Decisions

The Washington Supreme Court has made it clear in Webster, Clawson and Drinkwitz that, absent L&I regulations defining “salary basis” for MWA exemption purposes, the Court will apply an open-ended “factors” test, which essentially means that every new set of facts not covered by an L&I regulation opens up the possibility of a lawsuit where a court, using 20/20 hindsight can arrive at whatever result it considers fair to employees. This leaves employers with no clear standard as to what factors, when combined with partial-day deductions from leave banks, may invalidate exempt status in a particular case. Fortunately, L&I has now addressed some of the issues in a new “salary basis” rule that clears up some of the confusion.

L&I Regulations

On January 21, 2003, after two years of negotiations, meetings and formal hearings, L&I issued new regulations defining “salary basis.” They become effective February 21, 2003, and provide more certainty for Washington employers as well as more consistency with federal law than the Webster, Clawson and Drinkwitz cases. Under the new regulations (WAC 296-128-500, -532, and -533), the “salary basis” test in Washington will still be different than the FLSA test, but the differences between the two may be less than what the Washington Supreme Court created in Drinkwitz and Webster.

With regard to leave bank deductions, the new rule states:

1. Deductions may be made from compensatory time in any increment.
2. Deductions may be made from bona fide paid leave banks in partial- or full-day increments. However, partial-day deductions may be made only on the express or implied request of the employee for time off from work. There must be a written policy distributed to employees explaining the leave bank and leave bank deductions may not be made for less than one hour. Note: Employers are not required to honor an employee’s request for partial-day vacations. The employer can deny such requests or, if the employee takes time off without the employer’s approval, the employer may impose discipline for insubordination and/or poor performance. Such discipline is permissible so long as it does not involve pay docking from salary.
   
3. Deductions may be made from a public employee’s accrued leave banks in any increment in accordance with a policy or practice established according to principles of public accountability.
   

When leave banks are exhausted, deductions from salary may not be made for partial-day absences, except:

1. In particular circumstances set forth elsewhere in the regulations (generally allowing salary reductions in FMLA qualifying circumstances and prohibiting other salary deductions except in full-day or whole-week increments).
   
2. For public employees only, deductions from salary for partial-days absences may be made if there is an established policy of public accountability.
   

The rule also adopts two key principles from the FLSA, namely:

1. If the employee performs no work in a particular week, the employer may deduct the salary for the entire week.
   
2. If the employee takes a whole day off for personal reasons, the employer may deduct from salary in whole day increments.
   

Bottom Line

The new L&I “salary basis” rule brings Washington law back closer to the FLSA and restores significant aspects of the law as it was interpreted prior to Drinkwitz and Webster. For private sector employers, the rule permits partial-day deductions from leave banks so long as they are made “on the express or implied request of the employee for time off from work.” While this still leaves some gray area, it enables Washington employers to allow partial-day deductions from leave banks in most situations. For public sector employers, the new rule allows partial-day deductions no matter what the circumstances so long as public accountability policies have been established. This gives public employers additional leeway.

The new rules, however, are not identical to nor as comprehensive as federal FLSA rules. As is true with many areas of Washington employment law, state employers need to be aware that compliance with federal laws, even those that are seemingly similar, does not mean that the employer is in compliance with Washington state law. The Drinkwitz and Webster decisions adopt a unique “factors” test (not found in FLSA) that creates potential loss of exempt status if the employer adopts practices that a court might deem inconsistent with salary basis. The new L&I rule should provide a safe harbor for certain salary and leave bank docking practices; however, it does not address all of the issues in the same was as the FLSA. Thus, employers should strongly consider auditing and evaluating all their practices related to salaried, exempt employees to insure their paid leave practices, when coupled with other factors such as timekeeping practices, do not destroy the overtime exemption.

Any questions about this Advisory should be directed to your usual DWT contact or the authors:

Michael J. Killeen, (206) 628-7690, mikekilleen@dwt.com
Jeffrey B. Youmans, (206) 628-7783, jeffreyyoumans@dwt.com

This Employment Law Advisory is a publication of the Employment Law Department of Davis Wright Tremaine LLP. Our purpose in publishing this Advisory is to inform our clients and friends of recent developments in employment law. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2003, Davis Wright Tremaine LLP.

return to Advisory Bulletins main page