Some employers will try to incentivize employees to work for a set period of time by requiring repayment of money by the employee if he or she prematurely resigns. The terms of these incentives would be set forth in a written agreement signed by both parties.
For example, if the employee completes two years of continuous full-time employment, there would be no repayment obligations under the written agreement. If, however, the employee resigns or is terminated by the company before having completed two years of full-time employment, he or she would be obligated to repay the incentive amount to the company. This amount, which would be interest-free, would be deducted from the employee’s final paycheck.
Non-Exempt Versus Exempt Employees and Incentives
Employees exempt from the FLSA typically must be paid a salary above a certain level and work in an administrative, professional, executive, computer or outside sales role. The Department of Labor (DOL) has a duties test that can help employers determine who meets this exemption criteria. The question is: can an employer require an employee to pay a “penalty” if he or she resigns before an agreed upon date and maintain the employee’s exemption?
If the employee in question is classified as exempt from the overtime provisions of the FLSA, then the answer is, NO. The employer may not employ such an incentive or, if it does, the employee will lose exempt status.
While the pertinent regulations permit employers to pay an exempt employee compensation in addition to the minimum salary required to qualify for the exemption (see 29 C.F.R. 541.118 (b)), an employee is not considered to be paid on a “salary basis” if his or her compensation is “subject to reduction because of variations in the quality or quantity of the work performed.” 29 C.F.R. 541.118(a).
Under some incentive programs, the compensation of the otherwise exempt employee is “subject to reduction” because of his or her failure to work the number of years required to retain the entire bonus amount free and clear.
Deductions for recoupment of the bonus compensation do not come within any of the enumerated exceptions to the “salary basis” requirement. See 29 C.F.R. 541.118 (a) (2), (3), (5). Consequently, the deductions are impermissible under the regulations.
Department of Labor Wage and Hour Division – Final Rulings and Opinion Letters