In today’s competitive labor market, ensuring that employees are fairly compensated is paramount to keeping and attracting top talent. A lot of that talent may be overtime-exempt employees paid on a salary basis. But what can an employer do when, during a busy season, non-exempt employees are paid overtime for their long hours of work and exempt employees do not receive overtime?
Employers with exempt employees may consider options for providing extra compensation to reward exempt employees who work longer hours. Of course, employers should ensure that when implementing such a compensation strategy, they are doing so without putting employees' exempt status at risk.
What Federal Law Says
Under federal law, to qualify for exemption from both minimum wage and overtime pay, employees generally must meet certain tests regarding their job duties and be paid on a salary basis no less than $684 per week. The Fair Labor Standards Act (FLSA) permits employers to pay employees additional compensation without violating the salary basis requirement only if the employment arrangement also includes a guarantee of at least the minimum required salary of $684 per week.
According to federal regulations, if the extra pay is computed on an hourly, daily, or shift basis, then there must be a reasonable relationship between the guaranteed minimum salary amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal scheduled work week. In a 2018 Opinion Letter, the Department of Labor (DOL) opined that, based on an example, a 1.5-to-1 ratio of actual earnings to a guaranteed weekly salary satisfied the reasonable relationship test. However, in that same letter, the DOL opined that a ratio of 1.8-to-1 would likely exceed the reasonable relationship test.
The reasonable relationship requirement applies only if the employee’s pay is computed on an hourly, daily, or shift basis. According to the regulation, the reasonable relationship test does not apply, for example, to an exempt store manager paid a guaranteed salary per week that exceeds the current salary level who also receives a commission of one-half percent of all sales in the store or 5% of the store’s profits, which in some weeks may total as much as, or even more than, the guaranteed salary.
Methods for Additional Pay
The FLSA provides different methods for how the additional compensation may be made:
Takeaways for Employers
The FLSA allows for a wide range of methods employers can utilize to remit additional compensation to exempt employees without putting their exempt status at risk. This flexibility permits employers with varying payroll budgets different options to reward their exempt employees for their hard work.
The discussion in this article is based solely on federal law. State or local governments may have different requirements, so it’s important to check the state or local laws that apply to your employment practices to ensure compliance with those laws. Learn more by consulting Employers Council’s resources on paying employees and utilizing our multi-state tool.
Ensuring compliance with the regulations of the FLSA can be tricky for employers and a potential legal minefield. If you are a Consulting or Enterprise member and need assistance understanding how FLSA regulations may apply in certain situations, don’t hesitate to contact Employers Council.
Brandon Garrett is an attorney for Employers Council.