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Clarification of “Bona Fide” Sick or Disability Plan

I previously wrote about whether employers must pay exempt employees if they are sick (Do I Have To Pay My Exempt Employees If They Are Sick?). The First Appellate District of California issued a decision this week in Sumuel v. Advo, Inc. clarifying what constitutes a “bona fide plan, policy or practice of providing compensation for loss of salary occasioned by both sickness and disability.”

As you may recall, most exempt employees must receive their full weekly salary for any workweek wherein they perform any work. One exception to that rule is if the employer has a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by both sickness and disability. (See 29 CFR Part 541.602(a)(3)) In a case of first impression, the California Appellate Court was asked to review Advo’s salary policies to determine whether Advo made an impermissible deduction from the exempt employees’ salaries.

Under Advo’s plan, if an employee knew s/he was going to be absent for more than 7 days, Advo would stop the employee’s salary on the first day of the absence so the employee could qualify for State Disability Insurance and Advo’s Short Term Disability Plan. Advo would later make up the difference between what the disability insurances paid and the employee’s weekly salary. This sometimes took several days or even weeks for the employee to receive the full salary. The employees argued that because Advo implemented this plan even if the employee began the disability leave mid-week, Advo effectively failed to pay the employee the full salary for those weeks.

Adopting language from a Department of Labor opinion letter, the court rejected the employee’s arguments and concluded that Advo’s policy was acceptable.

A January 7, 2005, DOL opinion letter provides the following guidance as to the meaning of “bona fide” in this context: “[A] plan that has defined sick leave benefits which have been communicated to eligible employees, and that operates as described in the plan, will in general qualify as bona fide. In addition, to be bona fide, the plan must be administered impartially, and its design should not reflect an effort to evade the requirement that exempt employees be paid on a salary basis.”

The Advo court concluded that the employer’s sick leave/disability leave plan did not violate the “salary” rule because it was communicated to employees, operated as described, was administered impartially, and was not designed to evade the overtime pay requirement.

Employers that reduce an exempt employee’s salary for sickness or disability should have their policies reviewed by counsel familiar with the FLSA and California law.

The Law Office of Phillip J. Griego
95 South Market Street, Suite 520
San Jose, CA 95113
Tel. 408-293-6341
Original article by Robert E. Nuddleman, former associate of The Law Office of Phillip J. Griego.

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Phillip J. Griego represents employees and businesses throughout Silicon Valley and the greater San Francisco Bay Area including Palo Alto, Menlo Park, Mountain View, Los Altos, San Jose, the South Bay Area, Campbell, Los Gatos, Cupertino, Morgan Hill, Gilroy, Sunnyvale, Santa Cruz, Saratoga, and Alameda, San Mateo, Santa Clara, San Benito, Mendocino, and Calaveras counties.