Salaried Can Mean Non-exempt, Really!

Hate to admit it, but a surprising number of people in the compensation profession don’t understand that “salaried” is only a term referring to payroll treatment.  It does not determine overtime exemption status.  Furthermore, you can’t simply “make someone exempt” from overtime without jumping through multiple hoops subject to Federal trials for final decisions.  A recent discussion in the WorldAtWork Online Community illustrated how problematic the issue remains even for HR people who should know the law, at least at the common Federal level.  States can have more favorable overtime rules.

Under the United States Department of Labor Wage and Hour Division Fair Labor Standards Act (DOL WHD FLSA), you can be:

• hourly overtime-eligible non-exempt,
• salaried overtime-eligible non-exempt or
• salaried exempt from the overtime provisions of the FLSA.

The U.S. government doesn’t care if you call someone “salaried” because you tend to cut their payroll checks in exactly the same amount from week to week.  They obsess instead about whether the person has been properly paid their obligated time and one-half overtime for all hours worked in excess of forty (40) in the workweek.  Most workers are legally entitled to overtime.  Those whose individual work content meets specific regulatory standards detailed in the newly revised 2004 statute may be exempted from the overtime requirement, but merely modifying their title, altering their payroll cycle or changing their employee category cannot make them exempt.

The terms "salaried" and "hourly" refer to company payroll practices on the frequency for paychecks and the consistency of amounts.  "Salaried" usually implies a fixed rate of pay every week, while "hourly" anticipates a variable weekly paycheck.  Hourly workers are required to report actual hours worked each workweek and are almost always non-exempt and eligible for FLSA time and a half overtime.  Some salaried employees are also eligible for FLSA overtime, even though they may typically receive the same paycheck amount for the same amount every week, especially if they work the exact same 40-hour week every week. 

The essential point is that exemption is a matter of factual law finding and is not an option chosen by the employer. Exemption requires passing specific regulatory tests applied by the Federal Court, which always (by law) operate to the advantage of the employee, with a statuatory bias towards granting overtime entitlement.

For instance, the salary of salaried non-exempts can be docked, by law, to match the hours worked.  At many employers, it is standard practice to modify the weekly "salary" of non-exempts when they take off 2 hours early, for example.  But then, you have to constantly and continually recompute their "normal rate" for subsequent 1.5 overtime computations.  Make sense?  FLSA Fact Sheet #23 shows an excellent example.

See the section on computing overtime pay at the very bottom of the FLSA Reference Guide here for more specifics:  Handy Reference Guide to the Fair Labor Standards Act, Revised September 2010.

Confusing salaried status with exempt status can be dangerous.  You risk $10,000 fines per incident and possible prison sentences if you don't comply with the letter of the law.  

Clear as mud, right?  With regulatory challenges like this, I become much more appreciative of payroll departments who are typically tasked to wrestle with this issue.  Nevertheless, HR and comp people must be sensitive to the reasons that onerous payroll reporting rules must be followed, so supervisors can be trained effectively and held accountable for their compliance with U.S. law in the way they schedule and report work in their sections.

Here in America, it doesn’t have to make sense, if it’s the law.

E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.

Editor's Note: We have opted to modify this post in order to make corrections and remove information found to be potentially confusing or misleading.  The central point of this post, however, remains important – that we as HR and compensation professionals need to be aware of the fact that a worker can be both salaried and nonexempt.  Thanks to all who shared comments and thoughts below.

Image courtesy of clearasmud.eu

Comments

[Ben]

I could not find specific references at DOL's website for your statement: "The detailed examples on the DOL WHD website confirms that a salaried non-exempt's regular rate of pay for overtime computation purposes depends on the exact number of hours worked in the prior week."

Can you pls supply them.

[E. James (Jim) Brennan]

It is the last sentence in the seventh paragraph titled "Salary Basis Test" in the DOL WHD link behind the quote itself. Just click on the words and you will see the Coverage Under the FLSA statement with that quote.

[Ben]

Did not find the reference, after much searching. Can you please give the link.

[E. James (Jim) Brennan]

When you click on the quote text in this article, it should take you to http://www.flsa.com/coverage.html; but perhaps you have a firewall blocking your access. Read down to the last sentence in the seventh paragraph which contains my exact language, down to the quotation marks.

[E. James (Jim) Brennan]

Oops... I responded too swiftly. The text I linked to there is from a law firm's FLSA Home page. Follow my other subsequent links.

The second page of the example in the official FLSA Fact Sheet #23 specifies: “Salary for Workweek Exceeding 40 Hours: A fixed salary for a regular workweek longer than 40 hours does not discharge FLSA statutory obligations.”

Likewise, the Computing Overtime Pay section at the end of the next link (FLSA Handy Reference Guide) also shows salary doesn't create exemption. See item #3: “Salary - The regular rate for an employee paid a salary for a regular or specified number of hours a week is obtained by dividing the salary by the number of hours for which the salary is intended to compensate. The employee is entitled to an additional one-half times this regular rate for each hour over 40, plus the salary.” Salary status is required for exemption, generally, but it does not determine exemption status. Some salaried are exempt but the majority of salaried are non-exempt overtime-eligible.

[Ben]

I see, there is no reference in the law or on the DOL website to support calculating the regular rate of a non-exempt employee according to the exact number of hours worked in the prior week. Just wanted to clarify. Could be misleading. I ask that you consider changing your original post to eliminate any chance of confusion.

[E. James (Jim) Brennan]

Nope, that is not the case, best as I can discover. The law is the law and it doesn't care about payroll definitions and only speaks to overtime regulations and overtime terms. The last two references both in my article and in the comment response above are DOL publications from their site. When the Wage and Hour Division publishes one of its rare clear statements like these, I tend to believe them. Government publications can be trusted to generally accurately reflect the law, especially when law firms confirm that same precise understanding.

[Jacque Vilet]

Thanks for info Jim. Dealing with international compensation for so long has put me at a disadvantage as far as knowing about U.S. law. This article really helps.

[E. James (Jim) Brennan]

Ben: Ah, but you still DO have a good valid point, that my exact words ("That statement comes from the US DOL WHD FLSA site.") are misleading if not flat-out incorrect. That particular prior quote comes from a private law firm with an FLSA home page summarizing the vital legal points of the law's application and my underlying link is to the law firm page rather than to DOL WHD.

Sorry, Ben, but I don't want to alter the article because that creates blogsite file chaos and also would render our otherwise interesting comment exchanges quite puzzling. The official DOL pages do repeatedly refer to salaried non-exempts and give examples of how you have to recalculate their "regular rate" for overtime purposes, but they don't summarize it as clearly as the law firm did. Here is the actual DOL language from my last link to DOL WHD’s instruction sheet on “Computing Overtime Pay.”

"(3) Salary - The regular rate for an employee paid a salary for a regular or specified number of hours a week is obtained by dividing the salary by the number of hours for which the salary is intended to compensate. The employee is entitled to an additional one-half times this regular rate for each hour over 40, plus the salary.

"If, under the employment agreement, a salary sufficient to meet the minimum wage requirement in every workweek is paid as straight time for whatever number of hours are worked in a workweek, the regular rate is obtained by dividing the salary by the number of hours worked each week. To illustrate, suppose an employee’s hours of work vary each week and the agreement with the employer is that the employee will be paid $480 a week for whatever number of hours of work are required. Under this agreement, the regular rate will vary in overtime weeks. If the employee works 50 hours, the regular rate is $9.60 ($480 divided by 50 hours). In addition to the salary, half the regular rate, or $4.80, is due for each of the 10 overtime hours, for a total of $528 for the week. If the employee works 60 hours, the regular rate is $8.00 ($480 divided by 60 hours). In that case, an additional $4.00 is due for each of the 20 overtime hours for a total of $560 for the week.

"In no case may the regular rate be less than the minimum wage required by the FLSA.

"If a salary is paid on other than a weekly basis, the weekly pay must be determined in order to compute the regular rate and overtime pay. If the salary is for a half month, it must be multiplied by 24 and the product divided by 52 weeks to get the weekly equivalent. A monthly salary should be multiplied by 12 and the product divided by 52.”

Wow. Can you blame me, looking for a more concise summary? My apologies for mis-citing the link, but I can hope that all this detail makes it more interesting, anyway

[Jeff]

We pay our salaried non-exempt employees a salary based on 40 hours of work a week. They have their regular hourly overtime rate calculated by dividing their weekly salary by 40 hours. Their regular overtime rate is fixed for all weeks. Our general counsel has approved this method.

Not sure what Jim Brennan means by this---“a salaried non-exempt's regular rate of pay for overtime computation purposes depends on the exact number of hours worked in the prior week.” We surely don't follow this rule and our legal staff has never heard of it.

Jeff

[E. James (Jim) Brennan]

I was referring to that complicated example situation in the DOL WHD Fact Sheet #23 detailed example under "Computing Overtime," where point #3 says, "If, under the employment agreement, a salary sufficient to meet the minimum wage requirement in every workweek is paid as straight time for whatever number of hours are worked in a workweek, the regular rate is obtained by dividing the salary by the number of hours worked each week."

There should be no such issue for you.

[Ben]

If the overtime rate varies for an employee, for any given week, it is based on how many hours the employee works in that week, not on how many hours they worked in the prior week, as stated in the original post. This subject is dfficult enough without adding inaccurate complexity!

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=48d6ee3b99d3b3a97b1bf189e1757786&rgn=div5&view=text&node=29:3.1.1.2.38&idno=29#29:3.1.1.2.38.2.166.14

[Jim Brennan]

Agree and apologize if wrong, but was just trying to summarize consistent with the WHD examples. Pulled my head out of that whirlpool a while ago. Clear as mud, for sure.

[marsha]

There is additional content in the orginal blog post that is in error. It states "if you don't dock pay for hours unworked, the hourly rate used for overtime increases." The thinking here is a bit confused and the exact opposite is true. When you dock a non-exempt salaried employee on a variable schedule, they have fewer hours worked in the week to divide into their salary which would make their overtime rate higher because of the docking. The blog states that if you don't dock, the overtime rate is higher. The DOL regulation cited below confirms that as the hours worked increase, the regular overtime rate decreases.

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=48d6ee3b99d3b3a97b1bf189e1757786&rgn=div5&view=text&node=29:3.1.1.2.38&idno=29#29:3.1.1.2.38.2.166.14

Thanks for posting this topic. It is one that receives insufficient coverage.

[E. James (Jim) Brennan]

You are right, Marsha, that I used the wrong term ("docked") while attempting to explain that if you don't pay a non-exempt for actual hours worked but instead pay a flat salary for the week, your "regular rate for overtime" will vary. Thanks for the correction, proving again (a) why this is a blog piece rather than an academic technical article pre-reviewed and approved by DOL and (b) why the application details are so darn hard to summarize without stepping into a pothole!

[Herb]

This statement in the original blog post needs qualification to make it accurate, as we recently learned: " the salary of salaried non-exempts can be docked, by law, to match the hours worked."

According to DOL Opinion Letter FLSA 2006-15, employers are not permitted to charge salaried non-exempts for absences, except for discipline, when these employees are on a variable work schedule (paid for actual hours worked, not a fixed period, such as 40 hours):

Here is part of the letter:

"Therefore, it is the longstanding position of the Wage and Hour Division that an employer utilizing the fluctuating workweek method of payment may not make deductions from an employee’s salary for absences occasioned by the employee. See Wage and Hour Opinion Letters August 20, 1991, November 30, 1983, December 29, 1978, and March 1, 1967 (copies enclosed). However, an employer may take a disciplinary deduction from an employee’s salary for willful absences or tardiness or for infractions of major work rules, provided that the deductions do not cut into the required minimum wage or overtime compensation. See Field Operations Handbook § 32b04b(b) (copy enclosed); see also Sampson v. Apollo Resources, Inc, 242 F.3d 629, 639 (5th Cir. 2001). If the deductions are made frequently or consistently, then the practice of making such deductions would raise questions as to the validity of the compensation plan. 29 C.F.R. § 778.306(b) (copy enclosed). Therefore, it is our opinion that your client may not make full day deductions from the salary of its fluctuating workweek employees when the employee has exhausted his or her sick leave bank or has not yet earned enough leave to cover the absence. "

http://www.dol.gov/whd/opinion/FLSA/2006/2006_05_12_15_FLSA.pdf

[E. James (Jim) Brennan]

Thank you, Herb, for finding an opinion letter that has not been withdrawn that shows that you cannot make a full day deduction from the salary of an employee on a fluctuating workweek method of payment for absences "occasioned by the employee." Not sure what that means for changes in hours not meeting those conditions (not paid under the fluctuating workweek payment methods or if a mere few hours rather than a full day's pay is involved), but expect it should be consistent with the details covered under WHD FLSA Fact Sheet #23 or their September 2010 Handy Reference Guide section.