Is Your Employee Handbook Handing You a Lawsuit?

Mark D. Brookstein
Employment E-lert

If you cannot remember the last time your Employee Handbook had a “checkup,” then now is the time to determine whether any issues are lurking in its pages. 

Improper Salary Deductions

In one recent case, a Federal trial court in Chicago found that a written policy in the defendant’s Employee Handbook established that it had a practice of making improper deductions from “exempt” employees’ salaries.  Recall that under the Fair Labor Standards Act (FLSA), certain employees are considered exempt from the requirement of being paid overtime.  One of the requirements for the exemption is that employers pay these exempt employees a salary (known as the “salary basis” test).  With certain limited exceptions, employers cannot make deductions from an exempt employee’s pay.  Instead, exempt employees must be paid a predetermined, fixed amount each pay period that is not variable based on the amount of work completed or the quality of the work.  Improper salary deductions by the employer will result in loss of exempt status.

The recent case in Chicago demonstrated that an employer does not have to actually make improper deductions to create liability under the FSLA.  Rather, an employee can show a violation of the salary basis test if there is a policy that creates a “significant likelihood” of an improper deduction.  In that case, the Employee Handbook contained a “progressive discipline” policy whereby an employee could be suspended with or without pay for a variety of reasons, including violations of the dress code, use of the company phone for personal calls or poor work product.  Because such deductions cannot be made from an exempt employee’s pay, the court found the salary basis test had not been met by the employer. 

An Employee Handbook can also serve an important proactive role under the FLSA.  The FLSA contains a “safe harbor” provision which can shield an employer from liability for improper deductions under certain circumstances.  The safe harbor provision protects against inadvertent or isolated incidents of improper deductions so long as the employer: (1) has a clearly communicated policy prohibiting improper deductions, which includes a complaint mechanism; (2) reimburses employees for any improper deductions; and (3) makes a good faith commitment to comply in the future.  The U.S. Department of Labor recommends that employers include such a policy in their Employee Handbook, to be signed by employees when they are hired.

As the employer in the recent case learned, the key is to have a policy that is clearly communicated to all employees.  Incorporating these guidelines from the FLSA’s “safe harbor” provision will go a long way towards protecting the exempt status of employees, and may potentially shield employers from civil and criminal penalties associated with improper deductions.

Creation of Employment Contract

Another ongoing trouble spot for employers is the issue of whether an Employee Handbook creates a contract of employment.  Employers are readily familiar with the concept of at-will employment.  However, as an Illinois employer recently discovered, an improperly drafted Employee Handbook can constitute a contract which negates employment at-will status.  In that case, a former employee filed suit for wrongful termination on a breach of contract theory.  He asserted that his prior employer failed to follow disciplinary procedures under an earlier version of the Employee Handbook.  The employer had long since issued a modified Employee Handbook, which included language disclaiming that it formed any sort of contract of employment.  While the lower court found that the old Employee Handbook created a contract, it nevertheless dismissed the complaint based on the modified Employee Handbook, which “served to invalidate his previously existing contact.” 

The Appellate Court reversed.  Initially, it agreed that the old Employee Handbook created a contract (because it did not have any disclaimer language).  However, it disagreed with the trial court on the effect of the modified Employee Handbook.  Rather, the Appellate Court agreed with plaintiff that he never received anything from the employer in return for his signing of the disclaimer contained in the modified Employee Handbook.  Because he never received anything (referred to as consideration), he would not be found to have waived his contractual rights under the old Employee Handbook.

Advice for Employers

As these two cases demonstrate, employers should be aware of the potential for pitfalls associated with (1) not revising an Employee Handbook and (2) not having proposed revisions reviewed by counsel.

If you have any questions or would like a specific situation explored in more detail, please contact Mark D. Brookstein at 312.236.3003 (or by email at mbrookstein@gouldratner.com).

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