The Employer's Legal Resource: What it Means to Compensate your Employee on a "Salary Basis"

07.01.16

Generally speaking, an employee qualifies for a white-collar exemption, exempting the employer from paying the employee overtime for time worked over 40 hours in a workweek, if the employee meets certain duties tests that vary among the different exemptions (discussed in the first article of this series) and is paid on a salary basis at a certain salary level. To be paid on a salary basis means the employee is paid a predetermined and fixed salary for each workweek in which work is performed that is not subject to reduction because of variations in the quality or quantity of the employee's work. With limited exceptions, an employee is not paid on a salary basis if deductions are made from the employee's predetermined compensation.

The new DOL regulations, effective December 1, 2016, more than double the salary threshold for exempt white-collar employees from $455 to $913 per week (the "salary basis"), or from $23,660 to $47,476 per year (the "salary level"). Employers can satisfy up to 10% of this salary requirement with nondiscretionary bonuses, incentive payments, and commissions, so long as these forms of compensation are paid at least quarterly. However, the value of other fringe benefits, such as health insurance, cannot be counted toward the salary threshold.

Below is a breakdown of how the salary basis requirement affects each white-collar exemption:

Executive:

  • Employee must be paid on a salary basis

Administrative:

  • Employee must be paid on a salary basis

Professional:

  • Employee must be paid on a salary basis
  • Salary basis does not apply to doctors, lawyers, or teachers

Computer Employee:

  • Employee must be paid on a salary basis, or
  • Employee must be paid at least $27.63 per hour

Outside Sales:

  • Salary basis requirement does not apply

It is important for employers to keep in mind that salary, alone, does not indicate that an employee is exempt from overtime protections; rather, salary is one factor in the exemption analysis. An employee must meet all applicable duties and earning requirements in order to qualify for an exemption.

Options for Compliance

With the new regulations going into effect before the end of the year, now is the time for employers to assess their employees' overtime eligibility. Employers should determine how many exempt executive, administrative, professional employees (excluding doctors, lawyers, and teachers), and computer employees (excluding those paid on an hourly basis) make less than $47,476 per year. Those employees will be non-exempt in December and thus entitled to overtime pay for all time worked over 40 hours a week. Employers have several options to become compliant with the DOL's new regulations. According to DOL guidance, "The method for compliance, which is entirely within each employer's discretion, will likely depend on the circumstances of that organization's workforce, including how much employees currently earn and how often employees work overtime, and may include a combination of responses, such as paying overtime and adjusting employees' hours and schedules."

  • Raise salaries. Employers can raise the affected employees' salaries to at least $913 per week ($47,476 per year). As long as the employees satisfy the applicable duties test, they will continue to be exempt from the FLSA's minimum wage and overtime requirements.
  • Convert affected exempt employees to hourly or salaried non-exempt status. Employers can reclassify affected employees as non-exempt, tracking their hours and paying overtime whenever they work more than 40 hours in a workweek. Employers seeking to curb overtime wages can limit permissible overtime work, adjust work schedules, or redistribute work hours in excess of 40 hours a week across current staff (may hire new employees if necessary). Keep in mind that even if non-exempt employees do not work any overtime, employers still must track all their time worked.

By Destyn D. Stallings, DStallings@dsda.com

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Rebecca D. Bullard

Rebecca D. Bullard

Rebecca represents clients primarily in labor and employment
litigation and counsels clients regarding everyday employment matters. 

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