I read an interesting article by Linda Bond Edwards from Rumberger Kirk which addressed the issue of paying employees a “salary” in exempt and non-exempt scenarios.  The article brings up the very misunderstood issue of what a “salary” really means when applied to these two employee groupings.  It also highlights what I have seen in my practice a hundred times—there is a confusion and misunderstanding as to what that term means and what the legal implications are.   

The FLSA defines a salary (for exempt workers) as a predetermined amount of money, a lump sum, that is paid every week (or for a longer period) and does not change based on hours worked or production output or quality of work.  Exempt people must receive a salary in order to potentially qualify as exempt; the focus then turns to the duties performed.   Exempt workers receive that full salary if they perform any work in the week and cannot suffer partial day deductions, except in situations where the employer deducts hours from paid leave banks to make up the full salary.  The current salary level (which may/will change upwards) is $684 per week.

Non-exempt workers may also be paid a salary; there is no law or FLSA regulations that mandates that non-exempt workers be paid hourly.  What is crucial to remember is that such employees are entitled to overtime (albeit computed differently) when they work more than forty hours.  Paying non-exempt workers a salary does not “immunize” the employer from the requirement to pay overtime.  The employer must also keep time records for such employees, which is different than exempt workers, as the employer is under no legal obligation to track hours of truly exempt workers. 

Many employers believe that if they “build in” the expected weekly overtime hours into a salary and pay accordingly, they do not owe the worker more money if he/she exceeds forty hours in a week.  That is not true and only has the unintended consequence of inflating the actual overtime liability.  If the salaried non-exempt worker exceeds forty hours, the “defense” of built-in overtime will not prevail, and the employer must calculate overtime on a half-time basis.  Now, there is a way to keep non-exempts salaried and pay proper overtime.  The employer can put the worker on a Fluctuating Work Week plan.  Under that arrangement, the worker receives a salary, but gets overtime at a half-time rate, instead of time and one half.  There are several prerequisites that first must be met (and which are too lengthy to go into here) but non-exempts can be paid a salary and the employer can comply with the law.

The Takeaway

The rules regarding salaries are simple, yet complex.  Simply paying someone a salary (of $684 per week or more) does not make someone exempt, as they must still meet the duties test.  Conversely, paying a non-exempt worker a salary does not mean they do not receive overtime, even if a well-meaning employer raises that salary to try to account for overtime hours the employer knows will be worked.  It is possible to control overtime costs for salaried non-exempts but there are tricky conditions precedent that must be complied with.

Easy, ain’t it…