FLSA Exempt vs Non-Exempt

During a conversation I had yesterday, I was informed about a company which was paying several employees on a salaried basis, even though the employee was non-exempt. As noted in my blog from yesterday, this practice is fine.

The problem is, this company does not pay these salaried non-exempt employees overtime, which is not fine.

A professor of mine pointed out that many students fail to recognize the double negative of non-exempt. Non-exempt means not not subject to the rules. Specifically with regard to the Fair Labor Standards Act (FLSA), when we speak of exempt or non-exempt, we are talking about the overtime provisions of the law.

The DOL provides the following language in their overview of the overtime requirements of the FLSA:

Unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular rates of pay.

http://www.dol.gov/whd/overtime_pay.htm

The Common Mistake:

"But when I pay someone a salary, I am paying that for all hours worked. I don't have to pay overtime for those individuals," one might say.

In theory, paying someone on salary means that you are paying them to complete work, as opposed to paying them to work for a certain number of hours. It does not matter if the employee works 30, 40, 50, or 60 hours in a week. They are paid a flat salary for that time period.

The common mistake made by employers is the presumption that by paying an employee on salary, they don't have to worry about overtime. This is, unfortunately, incorrect.

While most exemptions require that the employee be paid on a salaried basis, there are other requirements for the position to meet an exemption. A full review of the position responsibilities and employee credentials is necessary to determine if an exemption is applicable.

Here is a link to the DOL fact sheet on exemptions: http://www.dol.gov/whd/regs/compliance/fairpay/fs17a_overview.pdf

Fluctuating Work Week:

Salaried non-exempt is a strange beast. I have recommended the structure for companies that are looking to save money on overtime, but usually recommend avoiding it. However, the fluctuating work week method of calculating overtime for salaried non-exempt employees can result in cost savings for the company.

The concept is that the employee's salary compensates the employee for all hours worked. So, if the employee is paid $400 a week and works 40 hours, their hourly rate is $10. If the employee works 50 hours, their hourly rate drops to $8.

The company is still required to pay overtime, but the fluctuating work week provides an alternate calculation for overtime. The steps are as follows:

Step 1: Determine the hourly rate.

The formula for this is - Salary/Hours Worked = Hourly Rate

Step 2: Determine the overtime due

The formula for this is - Hourly Rate x Overtime Hours x .5 = Overtime due

Example:

Fluctuating Work Week Overtime Calculation:

Salary: $400
Hours Worked: 50

Hourly Rate: $400/50 = $8
Overtime Due: $8 x 10 (hours over 40) x .5 = $40

Total pay for that week: $440


Standard Overtime Calculation:

(Hourly Rate x Regular Hours) + (1.5 Hourly Rate x Overtime Hours) = Weekly Pay

($10 x 40)+ ($15 x 10) = $400 + $150 = $550

Comparison:

Fluctuating work week method of calculating overtime saves the company $110.

The savings comes in the overtime premium. The standard method of calculating the overtime premium is 1.5x the hourly rate. The fluctuating work week presumes that the 1x the hourly rate was paid in the salary, thus leaving only .5x the hourly rate for the overtime premium.

A Note about Salaried Pay:

In order to take advantage of paying an employee on a salaried basis the company may not reduce the salary level if the employee works less than 40 hours.

The idea is that the employer gains benefit by paying on a salaried basis if the employee works more than 40 hours (decreasing the hourly rate), so there must be an equivalent benefit for the employee by maintaining the same level of pay for fewer hours (increasing the hourly rate).

This is why I rarely recommend paying employees on a salaried non-exempt basis. In short, it creates obligation to pay the employee a fixed amount, which may or may not work out in the company's favor.

Back to the Problem:

The point is that while there is potential value in utilizing the salaried non-exempt/fluctuating work week method of calculating overtime, paying someone on a salaried non-exempt basis is not a method of avoiding overtime payments.

Failure to properly pay the non-exempt employee overtime is perilous for the company.

The Peril:

There are two elements of liability with regard to violating the FLSA.

The first is based on the employee's right to file suit. Generally the employee is allowed to seek back pay for the previous two years (three years in the case of a willful violation) and an equal amount as liquidated damages, plus attorney's fees and court costs.

The company mentioned above has created a large level of exposure. An estimated 20 employees are impacted by their current pay policy. Presuming these employees average $30,000 a year and work an average of 5 hours of overtime per week and presuming that the violations are not found to be willful, the company faces exposure of $150,000 in back pay, plus an equal amount in liquidated damages. This is in addition to attorney's fees and court costs.

The second area of liability is with regard to penalties assessed by the DOL. Even if the employee does not bring suit, the DOL will require the payment of back wages. In the example above, $150,000.

If the violation is found to be willful, employers may be criminally prosecuted and fined up to $10,000. A second violation may result in imprisonment.

Employers who repeatedly or willful violate the minimum wage or overtime provisions are subject to civil money penalties of up to $1,100 per violation.

Ignorance is Risk:

As you can see, even if the company can claim ignorance, it faces large costs for violations of the FLSA. The "head in the sand" approach to human resources is not fruitful. It may save some costs in the short-term, but in the long-term the exposure is too large to ignore.

The Take Away:

If you are paying non-exempt employees in a salaried basis, review your practices to ensure that you are abiding by the FLSA regulations. Periodic payroll audits are always a good idea and it may be time to start one. If you don't have the in-house capacity to do it, HR Consult Team can help.

Works Cited:

http://www.dol.gov/whd/overtime_pay.htm