In Sumuel v. ADVO, Inc., (— Cal.Rptr.3d —, 2007 WL 2822770, Cal.App. 1 Dist., Oct. 1, 2007), a California Court of Appeal considered the issue of whether a company’s paid disability leave policy violated the “salary basis test,” which is the test used to determine whether an employee is exempt for the purposes of overtime pay. The Court of Appeal concluded that the disability leave policy did not violate the “salary basis test” and did not affect the employees’ status as exempt employees.
Facts
Tiffany Sumuel and Rudy Halim (“Employees”) brought a class action lawsuit against their employer, ADVO, Inc. (“ADVO”), alleging that ADVO made impermissible deductions from Employees’ salaries that were inconsistent with Employees’ classification as exempt employees. Employees, who were classified as salaried employees, asserted that ADVO owed them overtime pay because they were not exempt employees due to the way in which ADVO made deductions from their pay for disability leave.
ADVO gives its employees in California an unlimited number of paid sick days unless an employee is expected to be off work for more than seven consecutive days. If the employee will be out for more than seven consecutive days, ADVO encourages the employee to apply for benefits from State Disability Insurance (“SDI”). After being out of work for seven consecutive days, the employee would also receive supplemental salary benefits, if approved by a third-party disability insurer, which would replace 100% of the employee’s base salary for 13 weeks and 75% of the employee’s base salary for an additional 13 weeks. Under ADVO’s plan, if an employee began a disability period in the middle of the week, “the employee would only receive regular salary for the days he or she worked that week.” The employee in this scenario would receive full pay for the week. However, under the plan, if an employee knows in advance that he or she will be out for more than seven consecutive days, “the employee would be taken off of the regular payroll effective on the first day out of work, even if he or she had already worked one or more days that week.”
ADVO treats its California employees differently in regard to disability pay than its employees in other states because no supplementary benefits will be paid until after an employee in California submits a copy of their first SDI benefit check and the insurer gives medical approval for the claim. This process could result in a delay of payment to the employee or a delay in restoring an employee to the active payroll.
The trial court granted summary judgment in favor of ADVO finding that there was no evidence that Employees had deductions taken from their salary that were not replaced by SDI or short-term disability insurance. It also found that any miscalculations in the amounts of disability pay or delays in receiving benefits did not constitute impermissible salary deductions.
Decision
The Court of Appeal found that the trial court did not err in granting summary judgment in favor of ADVO. The “salary basis test” under the Fair Labor Standards Act (“FLSA”) provided at the time of the Employees’ lawsuit that an employee is to be considered paid on a salary basis if he or she receives a predetermined amount each pay period which constitutes “all or part of his compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” Subject to certain exceptions, “the employee must receive his full salary for any week in which he performs any work without regard to the number of days or hours worked.” One such exception encompasses deductions that are “made for absences of a day or more occasioned by sickness or disability . . . if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for loss of salary occasioned by both sickness and disability.” A company does not have to pay an employee any portion of his salary for the days for which he receives compensation for leave under such plan, policy or practice.
Employees asserted that ADVO’s disability policy failed to satisfy the “salary basis test” because Employees who returned to work after an illness were not paid their regular salary until after their paperwork was processed and because ADVO made improper deductions from disability benefits by imputing to the Employees benefits from SDI which they did not receive. The court found that neither the delay in payments nor the purported miscalculations are deductions from salary and, therefore, did not have any effect on Employees’ exempt status.
Employees also asserted that ADVO failed to pay Employees a full week’s salary when they worked a partial week prior to taking short-term disability leave. The court found that ADVO’s practice in this regard amounts to a deduction in salary. However, the court concluded that this practice falls within the above-discussed exception to the “salary basis test” because ADVO’s disability policy is a bona fide plan under both federal and state law. It found that the plan was bona fide because it “was communicated to employees, operated as described, was administered impartially, and was not designed to evade the overtime pay requirement.” The fact that ADVO did not explain to its California employees how the plan operates differently in California “may have been a poor human resources practice”, but it is not evidence of any bad faith.
Also, the fact that ADVO’s disability plan partially relied on SDI benefits did not change its status as a bona fide plan under California law. California’s Division of Labor Standards Enforcement Manual section 51.6.16 provides, “State required disability insurance benefits do not constitute a ‘bona fide’ sick leave plan.” The court read this provision as prohibiting an employer from exclusively relying on SDI to pay disability benefits. Because ADVO’s plan only partially relies on SDI, the court concluded that section 51.6.16 does not prevent the plan from being a bona fide plan.