Three former Rite Aid pharmacists filed a class action suit against the national retain drugstore chain, seeking overtime pay under state and federal laws. The professionals contended that Rite Aid’s unpaid personal leave policy disqualified them from exempt status under the Fair Labor Standards Act (FLSA), and impermissibly reduced their salaries. Maryland’s federal district court granted summary judgment for Rite Aid, finding that the employer did not violate the FLSA. Kulish v. Rite Aid Corp., No. ELH-11-3178, (D. Md. Dec. 13, 2012).
The pharmacists were paid an annual salary on a biweekly basis, and Rite Aid did not deduct pay for late arrivals, store closures, breaks, illness, or personal or family emergencies. In addition to sick leave and paid leave, Rite Aid offered unpaid personal leave time to its salaried pharmacists. Unpaid personal leave was available upon exhaustion of a pharmacist’s accrued paid leave and offered in full-day increments, regardless of how much time the employee actually needed to take off. For each day of unpaid leave, a pharmacist’s pay was reduced by one full day. Each of the named plaintiffs experienced deductions for unpaid personal leave while employed for Rite Aid.
While there was no question that the pharmacists met the duties test for the professional employee exemption, the parties disputed whether the pharmacists were paid on a “salary basis.” “An employee is not paid on a salary basis if deductions from the employee’s predetermined compensation are made for absences occasioned by the employer or by the operating requirements of the business.” 29 C.F.R. § 541.602(a) (emphasis added). The pharmacists argued that Rite Aid’s policy mandated absences “longer than desired by an employee who wants to use less than a full day of unpaid leave,” and thus constituted “de facto deductions for absences of less than a full day of work.”
The Court rejected the pharmacists’ reasoning and found that Rite Aid’s unpaid leave time policy did not violate the FLSA. Judge Ellen Lipton Hollander offered two main reasons for validating the unpaid personal leave policy. First, it is up to the employee, not the employer, to decide whether to take unpaid personal leave, and thus their absence is not “occasioned by the employer or by the operating requirements of the business.” Second, while Department of Labor regulations specify that deductions for partial-day absences defeat exempt status for salaried employees, the regulations expressly permit deductions for full-day absences taken for personal reasons.
Employers should be careful when deducting an exempt employee’s salary, as deductions in increments other than a full day may risk the loss of an employee’s FLSA-exempt status and expose the employer to liability to for nonpayment of overtime.