last update 2-04-02

Salary Requirement for Overtime Exemption

One of the more common issues confronting employers under the federal wage and hour laws involves the ability to treat certain employees as exempt from overtime pay.

The most typical exemptions are the white-collar exemptions for executive, administrative, and professional employees. The focus of these exemptions is typically on the substantive job duties required for exempt status. Specifically, the executive exemption requires the regular supervision of the work of two or more employees or a recognized department. Administrative employees must regularly exercise discretion and independent judgment. And for the professional exemption, the employee must perform work that requires advanced knowledge, consistently exercise discretion and judgment, or work in a recognized field of artistic endeavor.

With regard to all the white-collar exemptions, an often overlooked requirement is that the employee first must be salaried or paid on a salary basis. This article discusses key issues related to the salary basis requirement for exempt status.

BACKGROUND

One of the most common issues confronting employers under the wage and hour laws concerns the placement of various employees into exempt or nonexempt status for purposes of the overtime requirements. While most employers are well-versed on the basic requirements of the law, we find that some employers and most employees subscribe to the belief that all employees who are hourly (i.e., paid on an hourly basis) are entitled to overtime and that any employee paid a set salary is not entitled to overtime. This myth has generally faded through better education and the efforts of human resource managers to educate supervisors on all facets of the wage and hour laws.

It's important, however, to emphasize that while an employee may be salaried and still entitled to overtime, the inverse is not true. An employee may not be paid hourly and still treated as exempt from overtime. This is because the law requires that to be exempt, an employee must be paid on a salary basis. Thus, in addition to addressing the substantive duties of employees in determining their potential exempt status, you must remember to examine and confirm that all exempt employees meet the salary basis test.

We have experienced situations in which employers spent so much time ensuring that their employees'substantive duties met the requisite requirements for exempt status, the salary basis requirement was forgotten. It's not atypical to find situations in which employees who are required to punch a time clock and are paid on an hourly basis are mistakenly treated as being exempt from overtime. Their employers mistakenly exempt them because they regularly supervise a department or several employees or because they regularly exercise independent discretion and judgment. They don't, however, meet the requirement of being paid on a salary basis.

SALARY BASIS REQUIREMENTS

An employee is paid on a salary basis if she regularly is (1) paid on a weekly or less frequent basis, (2) paid a predetermined specific amount constituting all or part of her compensation, (3) and the amount isn't subject to reduction because of variation in the quality or quantity of the work performed.

Subject to certain exceptions, the employee must receive her full salary for any week in which any work is performed, without regard to the number of days or hours worked. She need not, however, be paid for any workweek in which no work is performed. Put simply, all employees treated as being exempt from overtime must be paid on a salary basis and must be paid the same salary for each week during which any work is performed.

There are, however, a number of limitations and exceptions to the salary basis test, and it's the interpretation of the permissible limitations and exceptions that creates the most common issues for payroll departments. The various interpretive case law and regulations concerning permissible deductions from an exempt employee's salary may be distilled to the following basics:

---->In general, certain permitted deductions from an exempt employee's salary can be made without destroying his exempt status, although it must be emphasized that the following permitted deductions may occur only when the employee absents himself from work for a full day or more.

---->With the exception of certain instances involving public employment, you aren't allowed to reduce an exempt employee's salary for absences of less than a full day.

---->Deductions may not be made for absences caused by you or the operating requirements of your business (e.g., production shutdowns or periodic temporary layoffs). Therefore, if the employee is ready, willing, and able to work, deductions to her salary may not be made simply because work isn't available.

---->Deductions for absences caused by jury duty or attendance as a witness at a judicial proceeding or for temporary military leave may be made, but only to the extent of any amounts received as jury pay, witness fees, or military pay. In other words, you may offset the salary due the employee for that particular week by any amount he received for those duties, without losing his exempt status.

---->Deductions from an employee's salary may be made for absences of a day or more as a result of sickness or disability, provided they are made in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary due to both sickness and disability. This is the most common deduction. It may be made so long as you regularly maintain a formal plan or policy that provides compensation for sick leave or disability leave that's paid out of a sick leave bank as opposed to being paid as normal salary. In such instances, the actual salary would be reduced and, in effect, be made up for that week by the leave compensation.

---->Outright deductions may be made when an employee absents herself from work for a day or more for personal reasons other than sickness or accident. Therefore, an employee's exempt status will not be affected if deductions are made from the employee's salary for absences of one day or longer to handle personal affairs.

---->Penalties imposed in good faith for infractions of truly major safety rules will not defeat an employee's salaried status, provided the safety rules are of major importance (i.e., those relating to the prevention of serious injury or danger to the plant or other employees, such as rules prohibiting smoking in explosives plants or oil refineries). This is not a common exception.

---->Finally, it must be emphasized that an employer's failure to pay an exempt employee's full salary in the initial or final week of the individual's employment won't defeat the exemption. It's permissible for you to prorate an employee's salary based on time actually worked in his first or final week of employment.

It should also be noted that the effect of making a deduction that isn't permitted under any of the above exceptions would generally depend on the facts in a particular case. The U.S. Department of Labor (DOL) takes the position that any deduction made under any scenario where there is no work available for the employee will establish the lack of the employer's intent to pay the individual on a salary basis and destroy the exempt status of the employee.

On the other hand, when a deduction not permitted under the above exceptions is inadvertent or is for any reason other than lack of work, the exempt status of the employee won't be lost if you promptly reimburse the employee and promise to comply in the future.

Other issues arise when you keep track of an employee's hours and vary her compensation for the period by paying voluntary overtime or some other form of extra or additional compensation to reward lengthy hours or extra effort. For example, a branch manager may receive a predetermined salary and, in addition, a commission of branch sales.

Another example of this "minimum guarantee plus extras" concept would be an employee paid on a daily or shift basis if the arrangement is accompanied by an agreed-on provision that the employee will not receive less than the amount specified for his minimum salary. In any such instance, the salary basis test would still have to be met, and the variance from the employee's salary would have to involve extra compensation on top of the minimum guaranteed salary.

The issue of whether the payment of extra compensation defeats the salary basis of an employee has long been undecided in the courts. The payment of additional compensation for work in excess of a particular number of hours would at first seem inconsistent with general notions of salary status. It's important to emphasize that DOL regulations prohibit reductions in pay because of variations in the quantity or quality of work. The regulations don't, however, specifically preclude increases in compensation because of variations in the quality or quantity of work.

Hence, the DOL's long-standing position is that "extra compensation may be paid for overtime to an exempt employee on any basis. The overtime payment need not be at time and one-half, but may be at straight time, or flat sum, or on any other basis." Therefore, it's abundantly clear that employers' concern should be directed toward ensuring that no impermissible deductions in an exempt employee's compensation are made rather than with variances caused by increases in compensation for a particular week.

LESSON

This is a reminder that you should frequently review compliance with regulations governing employees' overtime exemption status. It is also advisable to review, on at least an annual basis, the status of all employees treated as being exempt from overtime. You should ensure not only that they're being paid on a salary basis, but also that the substantive duties of the position in question meet the test for exempt status under one of the recognized exemptions.

credit for this article is attributed to the Nebraska Employment Law Letter published by M. Lee Smith Publishers, LLC


========================  WARNING  =======================
                      AND DISCLAIMER
This information is provided for the reader's benefit in
becoming familiar with the legal matters discussed.  Your
particular facts may be different from the points above.
You should not rely on the above data without consulting a 
attorney to discuss the specific facts of your case
and the law of your state.
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last update 2-04-02

Salary Requirement for Overtime Exemption

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