Q. Our company’s busy season is coming up, meaning we will be asking employees to work longer hours. Our non-exempt employees will all receive overtime pay when they work more than 40 hours in a week. Some of them will actually end up earning more per week than some exempt employees. We would like to address this by offering extra pay to our exempt employees who work extended hours during the busy season. Can we do this without converting our exempt employees to non-exempt?
A. To qualify for the executive, administrative, or professional exemptions under the FLSA, employees generally have to be paid on a “salary basis.”* That means that an employee must receive the same guaranteed salary for each workweek in which they perform any work, regardless of the quality or quantity of work performed or the number of hours worked. Taking impermissible deductions from an employee’s guaranteed salary can result in loss of exempt status not just for that employee, but for other employees in the same job classification. The idea here is that exempt executive, administrative, and professional employees are paid to perform a certain job, regardless of how many hours it takes to get that job done. Given that requirement, it’s understandable to wonder whether offering extra pay to an exempt employee based upon work hours might also jeopardize an employee’s exempt status.
This issue is addressed in the FLSA regulations at 29 CFR § 541.604, “Minimum guarantee plus extras.” That section provides that so long as an exempt employee receives a guaranteed salary of at least the minimum weekly salary level (currently $455 per week), providing an extra payment above the minimum guarantee does not jeopardize the employee’s exempt status. There is a caveat however. Under 29 CFR § 541.604(b), if the extra pay is computed on an hourly, daily, or shift basis, there must be a “reasonable relationship” between the guaranteed weekly salary and the amount that the employee actually earns. The regulations state that a “reasonable relationship” exists when “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 workweek.”
The regulations include an example stating that a guaranteed weekly salary of $500 is “roughly equivalent,” and therefore “reasonably related,” to typical weekly earnings of $600 to $750. In a recent opinion letter, the DOL found based on this example that a 1.5-to-1 ratio of actual earnings to guaranteed weekly salary would constitute a “reasonable relationship” under the regulations. The DOL noted that this is not necessarily the ceiling. However, it found that a ratio of 1.8-to-1 was too great, and did not bear a “reasonable relationship” to earnings.
The DOL also commented on the question of how an employer should calculate “usual earnings.” It found that looking at an employee’s actual earnings over the course of a year would be reasonable. However, it noted that the inquiry must be “employee-specific,” so simply looking at earnings for an entire job classification or group “may not yield accurate ‘usual earnings’ for each individual employee.”
Insights for Employers
Returning to the question, yes, you can provide “overtime” pay to exempt employees based upon an hourly, daily, or shift rate without jeopardizing their exempt status. However, you must ensure that the employee still receives a guaranteed salary of at least $455 per week, and that the guaranteed salary is “reasonably related” to the employee’s “usual earnings” including the additional pay. To be safe, you should make sure that the ratio between the employee’s “usual earnings” and guaranteed pay does not go much beyond the 1.5-t0-1 ratio specifically endorsed by the regulations.
If this seems like a bit much to keep track of, consider alternatives that are not based on hours, days, or shifts worked. The “reasonable relationship” requirement does not apply to additional pay such as commissions or performance bonuses that, while perhaps indirectly related to the work an employee puts in, are not computed on an hourly, daily, or shift basis.
Also, keep in mind that the discussion above relates to federal law. Some state or local governments may have different requirements, so be sure to check with your employment counsel to make sure that your practices comply with the law in your jurisdiction.
*Administrative, professional, and computer employees can also be paid on a “fee basis,” and certain computer professionals can be paid at an hourly rate.