Archive for July, 2014

The Interesting Problem of Salaried Non-Exempt Employees, continued.

Last week we talked about some general issues with so-called “salaried non-exempt employees.” And we left it wondering if you could have a salary that covered “all the hours that an employee works in a workweek, no matter how many there are.” We call that a “cliff hanger.” I know you were on the edge of your seat for the whole week waiting for the answer. And the answer is . . . (that’s a drum roll in case you didn’t get it) . . . of course you can. In fact, there is a Reg for that.

(a) An employee employed on a salary basis may have hours of work which fluctuate from week to week and the salary may be paid him pursuant to an understanding with his employer that he will receive such fixed amount as straight time pay for whatever hours he is called upon to work in a workweek, whether few or many. Where there is a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period, such a salary arrangement is permitted by the Act if the amount of the salary is sufficient to provide compensation to the employee at a rate not less than the applicable minimum wage rate for every hour worked in those workweeks in which the number of hours he works is greatest, and if he receives extra compensation, in addition to such salary, for all overtime hours worked at a rate not less than one-half his regular rate of pay. Since the salary in such a situation is intended to compensate the employee at straight time rates for whatever hours are worked in the workweek, the regular rate of the employee will vary from week to week and is determined by dividing the number of hours worked in the workweek into the amount of the salary to obtain the applicable hourly rate for the week. Payment for overtime hours at one-half such rate in addition to the salary satisfies the overtime pay requirement because such hours have already been compensated at the straight time regular rate, under the salary arrangement.
(b) The application of the principles above stated may be illustrated by the case of an employee whose hours of work do not customarily follow a regular schedule but vary from week to week, whose total weekly hours of work never exceed 50 hours in a workweek, and whose salary of $600 a week is paid with the understanding that it constitutes the employee’s compensation, except for overtime premiums, for whatever hours are worked in the workweek. If during the course of 4 weeks this employee works 40, 37.5, 50, and 48 hours, the regular hourly rate of pay in each of these weeks is $15.00, $16.00, $12.00, and $12.50, respectively. Since the employee has already received straight-time compensation on a salary basis for all hours worked, only additional half-time pay is due. For the first week the employee is entitled to be paid $600; for the second week $600.00; for the third week $660 ($600 plus 10 hours at $6.00 or 40 hours at $12.00 plus 10 hours at $18.00); for the fourth week $650 ($600 plus 8 hours at $6.25, or 40 hours at $12.50 plus 8 hours at $18.75).
(c) The “fluctuating workweek” method of overtime payment may not be used unless the salary is sufficiently large to assure that no workweek will be worked in which the employee’s average hourly earnings from the salary fall below the minimum hourly wage rate applicable under the Act, and unless the employee clearly understands that the salary covers whatever hours the job may demand in a particular workweek and the employer pays the salary even though the workweek is one in which a full schedule of hours is not worked. Typically, such salaries are paid to employees who do not customarily work a regular schedule of hours and are in amounts agreed on by the parties as adequate straight-time compensation for long workweeks as well as short ones, under the circumstances of the employment as a whole. Where all the legal prerequisites for use of the “fluctuating workweek” method of overtime payment are present, the Act, in requiring that “not less than” the prescribed premium of 50 percent for overtime hours worked be paid, does not prohibit paying more. On the other hand, where all the facts indicate that an employee is being paid for his overtime hours at a rate no greater than that which he receives for non-overtime hours, compliance with the Act cannot be rested on any application of the fluctuating workweek overtime formula.

29 CFR § 778.114.

They call this a “fixed salary for fluctuating hours” method of payment. It has advantages. For example, when using this method you do simple division to determine the regular rate: The salary divided by the number of hours actually worked in the workweek. Then, you pay HALF TIME for anything over 40. The theory here is the employee has already been paid the straight time rate for all hours worked so only the half-time rate is owed for overtime. And that’s great, but there are a couple of things to keep in mind:

According to the DOL’s guidance, you can only use this method when:

1. The employee is paid a fixed salary that does not vary with the number of hours. That means does not vary “UP” or “DOWN”. No deducting when the employee works less than 40;

2. The salary has to be big enough so the employee does not fall below the minimum wage no matter how many hours they work;

3. You have to have a “clear understanding” with the employee that the salary covers all hours worked. So, PUT IT IN WRITING (that is me, not the DOL); and

4. The employee’s hours fluctuate from week to week.

Next time we go back to good old hourly employees and will talk about working at two or more rates.

The Interesting Problem of Salaried Non-Exempt Employees.

When I first started working, back in the “good old days” . . . Remember the “good old days”? Your grandparents and parents talked about the “good old days” all the time. Well, now I’m old and I talk about the “good old days” too. Only in my case the “good old days” were the 70’s and everyone knows there was nothing good about the 70’s. Disco, polyester, 27% interest rates. Bad old days, not good old days.

By the way, for you youngsters, if you want to see an excellent example of the 70s, disco and polyester jump on the internet and look for an image of the Bee Gees. Anyway, back in the 70’s when I got my first real job in a factory baking mushy white bread at a rate of 6,000 loafs per hour, I was under the impression that there were only two kinds of employees: hourly employees and salaried employees, and hourly employees got overtime and salaried employees did not. Of course, now that I’m older and wiser and I actually went to law school, I have learned that there is a big difference between a “salaried” employee and an “exempt” employee. And it is your exempt status that determines if you get overtime, not your salaried status.  In fact, you can have an employee who is “salaried” and who is still “non-exempt.”

So what is a salaried non-exempt employee? It is an employee that gets paid a salary but is still entitled to overtime. Wait a minute, how can that happen? Simple – to be exempt you have to be paid a salary AND pass a “duties test.” Have one but not the other, you get overtime. And, as you already know, there is a Regulation to determine exactly how that overtime is paid.

(a) Weekly salary. If the employee is employed solely on a weekly salary basis, the regular hourly rate of pay, on which time and a half must be paid, is computed by dividing the salary by the number of hours which the salary is intended to compensate. If an employee is hired at a salary of $350 and if it is understood that this salary is compensation for a regular workweek of 35 hours, the employee’s regular rate of pay is $350 divided by 35 hours, or $10 an hour, and when the employee works overtime the employee is entitled to receive $10 for each of the first 40 hours and $15 (one and one-half times $10) for each hour thereafter. If an employee is hired at a salary of $375 for a 40-hour week the regular rate is $9.38 an hour.

(b) Salary for periods other than workweek. Where the salary covers a period longer than a workweek, such as a month, it must be reduced to its workweek equivalent. A monthly salary is subject to translation to its equivalent weekly wage by multiplying by 12 (the number of months) and dividing by 52 (the number of weeks). A semimonthly salary is translated into its equivalent weekly wage by multiplying by 24 and dividing by 52. Once the weekly wage is arrived at, the regular hourly rate of pay will be calculated as indicated above. The regular rate of an employee who is paid a regular monthly salary of $1,560, or a regular semimonthly salary of $780 for 40 hours a week, is thus found to be $9 per hour. Under regulations of the Administrator, pursuant to the authority given to him in section 7(g)(3) of the Act, the parties may provide that the regular rates shall be determined by dividing the monthly salary by the number of working days in the month and then by the number of hours of the normal or regular workday. Of course, the resultant rate in such a case must not be less than the statutory minimum wage.

29 CFR § 778.113.

So the math here is really simple and we all already know, if we have been following along, that each workweek stands alone for overtime purposes, so that is no big surprise either. What I find interesting and what I’ll bet comes as a surprise to some of you is that the regular rate computation is based, not on a 40 hour week, but on the “number of hours which the salary is intended to compensate.”

So what does that mean and why do I find it interesting? It means that if, on the off chance you intend to hire a salaried non-exempt employee, you better be clear how many hours that salary is intended to cover. Put it in writing in an offer letter, and if the same policy applies to all salaried non-exempt employees, put it in the handbook too.

I know what you’re saying: “I want the salary to cover all the hours the employee works, no matter how many there are!” Don’t panic, we will talk about it next week.