Many employers believe that all salaried employees are exempt from overtime: “I pay them a salary. So, I don’t owe them overtime.” That belief is dangerous. The salary requirement is only one part of the FLSA’s overtime exemption. The employee must also fit within the FLSA’s categories of Executive, Administrative or Professional (“EAP”) employees. The EAP analysis can be extensive, and that analysis is outside the scope of this blog post. For our purposes, assume that you have an employee who is an Executive, Administrative or Professional employee, and they are promised an annual salary of $23,660 or more. It may be possible to compute that employee’s salary “by the hour” without losing the overtime exemption.
On November 8, 2018 the U.S. Department of Labor’s Wage and Hour Division (“DOL”) published an opinion letter that provides some guidance. Here is a link to that opinion letter: FLSA2018-25.
The “salary basis” test is satisfied when an employee “regularly receives each pay period … a predetermined amount … not subject to reduction because of variations in the quality or quantity of the work performed.” 29 C.F.R. § 541.602(a). This is the key: a “salaried” employee must receive a guaranteed amount that is not subject to reductions based upon quality or quantity of work. So long as the employee receives that “predetermined amount,” employers have great discretion in their method for calculating the amount.
An exempt employee’s earning may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days, or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount earned.
Snipes v. Northeast Pharmaceuticals, Inc., No. 2:11-cv-1000-SRW, 2013 WL 757628 at * 6 (M.D. Ala. Feb. 27, 2013) (citing 29 C.F.R. § 541.604(b)).
DOL Opinion FLSA2018-25 goes a step further and analyzes whether an employee loses the overtime exemption by working too many hours beyond the guaranteed “predetermined amount.” In that opinion, an employer paid engineers a guaranteed weekly salary of $2,100, determined by multiplying $70 per hour by 30 hours per week. Even if the engineer worked less than 30 hours, he/she still received $2,100. The employer also paid the engineers an extra $70 per hour if they worked beyond 30 hours.
DOL found that the extra pay beyond 30 hours was permissible, so long as there was a “reasonable relationship” between the guaranteed amount and the amount actually earned. “A ‘reasonable relationship’ exists when ‘the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly … rate for the employee’s normal scheduled workweek.'” Ultimately, the DOL found that an employee can earn up to 1.5 times the guaranteed “predetermined amount” without losing the exemption. But, if an employee received as much as 1.8 times the guaranteed “predetermined amount,” they might be considered an hourly employee who is not exempt.
Obviously, these issues are complex. If you want to compute your salaried employees’ pay “by the hour,” you should consult with your employment attorney.