In order to claim most exemptions from overtime and minimum wage requirements under the Fair Labor Standards Act, employers must pay a guaranteed salary. Employers can only deduct from such salaries in very limited circumstances. Earlier this month, the Eleventh Circuit Court of Appeals considered whether wage withholding at the end of employment based on a contract dispute constituted an impermissible deduction, removing the employee from FLSA exempt status.

In Pioch v. IBEX Engineering Servs., the plaintiff tendered notice of resignation. Upon receiving this notice, the employer discovered approximately $150,000 in unauthorized per diem payments made to the plaintiff. Based upon this discovery, the employer withheld his last three weeks’ pay. As part of the ensuing litigation, the plaintiff contended that the employer’s failure to pay his wages removed his exempt status for the last three weeks of employment, entitling him to either payment of this amount, or reclassification as non-exempt.

The Eleventh Circuit affirmed dismissal of this claim. The court said that an end of employment contractual dispute with the employer does not convert an exempt employee to non-exempt status. Withholding pay based on allegations of fraud is a permissible deduction under the FLSA. This principle applies regardless of whether the employee is salaried exempt, or as in this case, a highly compensated exempt computer professional paid on an hourly basis.

Even though the employer was found in compliance with FLSA payment requirements, withholding salary can create liability under state law. In most states, this action can result in both breach of contract and wage and hour statutory claims. The state wage acts often include double or treble damages remedies along with payment of the prevailing employee’s attorneys’ fees. Employers that decide to withhold wages on the basis of alleged fraud or embezzlement should demand crystal-clear proof of such behavior before taking this step.