If you pay “exempt” employees a combination of a guaranteed weekly salary and supplemental hourly payments, read on for guidance from the U.S. Department of Labor.
In Wage Hour Opinion FLSA 2018-25 (November 8, 2018) https://www.dol.gov/whd/opinion/search/fullsearch.htm, the U.S. Department of Labor Wage and Hour Division (WHD) considered the following scenario:
- Employer pays exempt employees a guaranteed weekly salary of $2,100
- Employer computed the weekly salary as $70 x 30 hours (30 hours is the minimum employees typically work during the week)
- Employees receive the guaranteed $2,100 per week even if they work fewer than 30 hours
- Employer pays employees $70/hour for each hour worked over 30 during the week
- At least one employee has average weekly earnings of $3,761
- Question: Do the employees meet the “salary basis” test required to be exempt?
A weekly salary of $2,100 is well above the minimum threshold currently required for several common exemptions. But that does not end the inquiry. WHD regulation 29 CFR 541.604 describes when an employer may pay “extra” compensation to an exempt employee, in addition to the required guaranteed salary, without jeopardizing the exemption. If an employee’s earnings are computed on an hourly, daily, or shift basis, there must be a “reasonable relationship” between the guaranteed amount and the amount actually earned. In other words, the guaranteed weekly salary must be roughly equivalent to the employee’s usual earnings for the normal scheduled workweek. In this case, the employer computed both the guaranteed salary and the “extra” payments on an hourly basis, so it was required to satisfy the “reasonable relationship” test.
The regulation, through an example, confirms that a 1.5 to 1.0 ratio of actual earnings to guaranteed weekly salary is a “reasonable relationship.” Therefore, the WHD concluded that average weekly earnings of up to $3,150 (assuming a guaranteed weekly salary of $2,100) satisfy the “reasonable relationship” test (2,100 x 1.5 = $3,150).
The WHD concluded that an employee who averages $3,761 in total earnings per week (assuming a guaranteed weekly salary of $2,100) would not satisfy the “salary basis” test for the exemption. In such case, the ratio of actual earnings to guaranteed weekly salary materially exceeds a ratio of 1.5 to 1.0; therefore, the employee’s total pay does not have a reasonable relationship to the guaranteed salary. The WHD noted that a 1.5 to 1.0 rule is not an absolute maximum ratio; however, exceeding that ratio increases the risk that the WHD or a court will find the guaranteed salary too low to qualify for exempt status.
What to Do Now
Review your compensation programs for exempt employees. If you compute salary or “extras” for a normal workweek on an hourly, daily, or shift basis, determine the ratio of total weekly earnings to the guaranteed salary. If the ratio is greater than 1.5 to 1.0, consider discussing with legal counsel the potential need to increase the guaranteed salary.
(This post is not legal advice. Consider consulting with a lawyer about specific situations.)