Repayment Obligations May Jeopardize Exempt Status



Human Resources Counsel

Many employers maintain incentive programs for new employees under which, for example, a sign-on bonus is provided or a loan is made to a new employee. As part of these programs, employers sometimes provide that the employee has an obligation to repay all or a portion of a sign-on bonus if the employee does not work through a specified date. Also, employers may provide for the forgiveness of loans to the employee but only if the employee works through a specified date.

A few years ago, the Department of Labor ("DOL") issued an opinion letter responding to questions about the application of the Fair Labor Standards Act ("FLSA") to certain "incentive programs" for pharmacists. The first program involved an arrangement under which pharmacy students obtained summer internship loans whereby the students would have the amount of each loan payment forgiven for each year of continuous employment as a full-time pharmacist. If they resigned or were discharged prior to the completion of a full year, recipients were responsible for repaying the balance of the loan, which would be deducted from the final paycheck. The second program involved a one-time sign-on bonus. If the employees resigned or were discharged prior to the completion of two years, they were obligated to repay the bonus, and the repayment amount would be deducted from their final paycheck. The pharmacists were classified by the employer as exempt from the overtime provisions of the FLSA.

The DOL found that the payments made under the incentive programs were not bona fide loans or cash advances such that they could be deducted from final paychecks. The loans were "conditional," and there was no firm obligation to repay as required with bona fide loans. Under the DOL regulations, an employee is not considered paid on a salary basis if compensation is subject to reduction because of "variations in the quality or quantity of work performed." The DOL took the position that the professional exempt status of the pharmacists was affected by the policy of deductions from final paychecks if the pharmacists failed to remain employed for a specified amount of time. The DOL also found that the incentive programs created a substantial likelihood of impermissible deductions across the board even though not all pharmacists would necessarily end up repaying the bonuses or loans. As a consequence, the DOL took the position that the company's employees would not qualify for exempt status "irrespective of whether deductions are actually taken, or if taken, reduce the pharmacists' salary below the minimum salary amount required under the regulations."

The DOL opinion is particularly broad in affecting not only the exempt classification of the employees from whose pay deductions were taken but of all of the employees in the program. Since this is only one DOL opinion that is tied to the particular facts and circumstances in the request, it may be that future DOL opinions and courts' decisions will not be as broadly written. However, employers should evaluate their programs and consider whether it is advisable to continue including a repayment obligation.