Penalties for Violation of a Workplace Policy
The first thing to understand about docking pay is that there is a difference between exempt and nonexempt employees.
Pay docking and nonexempt employees
The Fair Labor Standards Act requires that covered nonexempt employees receive no less than the federal minimum wage for all hours worked. Consequently, you cannot refuse to pay nonexempt employees for hours worked, and you must pay those hours at no less than the federal or state minimum wage, whichever is higher.
That aside, the FLSA does not forbid employers from docking a nonexempt employee's pay for disciplinary purposes, as long as the transaction doesn't cause the employee's pay to fall below the minimum wage. So, unless an employment contract says otherwise, you can dock a nonexempt employee's pay for violating a workplace policy, provided he or she receives at least the minimum wage.
Note that some states require that employers inform employees in advance about wage reductions. The employer may also need to make the adjustment against future wages, rather than retroactively.
Pay docking and exempt employees
If the employee is exempt from overtime and paid on a salary basis — also known as exempt-salaried — then strict regulations apply under the FLSA.
First and foremost, exempt-salaried employees must receive their full salary of a federally mandated minimum, unless there's a permissible deduction. They are not paid according to hours worked and should receive their full salary regardless of quality or quantity of work — again, except when a permissible deduction applies.
Salary deductions for serious health and safety violations are permissible, but they must be made in full-day increments, not on an hourly basis. Further, you can suspend an exempt-salaried employee without pay if he or she engages in serious misconduct — such as sexual harassment, violence, alcohol or drug use, or violation of federal or state employment laws. Note that this provision of the FLSA relates to serious misconduct, not performance problems or poor attendance. Also, the disciplinary suspension must be in line with a written policy that is "applicable to all employees."
Some states have their own laws for exempt-salaried employees. If both federal and state laws allow you to deduct for disciplinary suspension, you must comply with the law that offers the employee the greater protection.
Aside from the legal issues, pay docking as a punishment is a controversial practice that many employers shy away from. Instead of docking pay for violating a particular workplace policy, some employers opt for written warnings, counseling or suspension. Depending on the severity of the violation, termination may be warranted.
Finally, be especially cautious when docking exempt employees' salaries, as improper deductions can cause you to lose the exemption and/or incur penalties as well as expose you to employee lawsuits. If you have questions about deducting from an exempt employee's salary, be sure to seek legal counsel.