It is a common misconception among employers that simply paying a salary avoids the burden of paying overtime wages. Failing to properly classify salaried employees can have devastating consequences, including liability for unpaid overtime wages for highly compensated employees who routinely work well over 40 hours per week.
The Two Tests
The key to understanding overtime entitlement for salaried workers under the FLSA is that employees are either “exempt” or “nonexempt,” as opposed to “hourly” or “salaried.” Nonexempt workers can also be paid on a salary basis, but will remain entitled to overtime wages. In order to avoid paying overtime to a salaried employee, employers must properly classify (and compensate) employees as exempt. An exempt employee must satisfy two distinct tests: (1) the salary basis test, and (2) the duties test. In other words, an exempt employee who is paid a salary must not only be paid a fixed weekly wage, but must also do the work of an exempt employee.
For example, consider a receptionist at a medical practice who might be paid a salary for all hours worked in a given week. This employee might answer calls, schedule appointments, or process insurance claims, and may work an hour or two after business hours or the occasional Saturday. However, the employee is unlikely to exercise any independent judgment over matters of significance or to supervise other employees (exempt activities). This employee will likely be entitled to overtime even though the employee is paid a salary.
Exempt job functions are particular to certain enumerated exemptions in the FLSA, such as the executive, administrative, and professional exemptions. For example, a manager who supervises two or more employees and has the power to hire and fire employees is likely performing exempt duties. If the manager is paid on a salary basis, then it is unlikely that the manager will be entitled to overtime. Note: the title given to an employee is irrelevant – what matters is whether the primary job duties performed are exempt job duties, such as office or managerial work.
The Importance of Recordkeeping
The trap of the “salary equals exempt” myth is that many employers simply stop keeping time records for salaried employees. Generally, the FLSA places the burden of accurate recordkeeping on the employer. If the employer does not keep accurate records, this is a violation of the FLSA. The FLSA requires the employer to track the clock-in and clock-out times of nonexempt employees. If the employer fails to do so, the employee is entitled to the benefit of the doubt on the issue of how many hours were actually worked; that is, if the employer fails to keep records, then the employee may make a just and reasonable inference about how many hours were worked. The employer then bears the burden of proving otherwise. In contrast, employers are not required to keep clock-in and clock-out records for exempt employees (though other recordkeeping requirements apply). Nevertheless, even though the employer has not technically violated the FLSA by failing to keep time records, if it loses the exemption in litigation, it will have to carry the burden of proof as if the employee had been nonexempt all along. In short, it is well worth the additional time to maintain accurate time records, even when it is not immediately necessary.
What’s the Damage?
Assuming an employee was misclassified as exempt without regard for the duties actually performed, then what is the (now nonexempt) employee entitled to recover? Salary cases can be problematic because salaried employees often work varying hours, making the regular hourly rate difficult to calculate. Assuming there is no agreement between the employer and the employee that the salary will compensate the employee at a set regular rate, there are two ways to calculate the amount of unpaid overtime wages in a salary case: overtime at time and a half the regular rate, or overtime at half of the regular rate. The applicable method depends on several factors – the most important being the understanding that exists between the employer and employee. That is, the amount of overtime depends on what the salary was intended to pay for – a fixed number of hours or all hours worked.
The importance of this distinction is that, if a nonexempt employee’s salary is intended to be compensation for all hours worked, overtime may be calculated based on the “fluctuating workweek” method, resulting in overtime at a rate of one-half of the regular rate calculated each week. However, the fluctuating workweek requires “a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period . . . .” 29 C.F.R. 778.114. The idea here is that, because the employee has been paid for all hours worked at a regular rate already, the overtime premium for hours worked in excess of 40 is only one-half of the regular rate, rather than time and a half for hours over 40. If, on the other hand, the salary is meant to cover a fixed number of hours, then any hours worked in excess of that fixed amount will be paid a rate of time and a half the regular rate.
Courts have differed on the question of whether the fluctuating workweek method may be used as the measure of damages for unpaid overtime in the case of a lost exemption. Some courts have noted that it is implausible for an employer to maintain that an employee is exempt from overtime while simultaneously arguing that a clear and mutual understanding existed that the employee was nonexempt and subject to the fluctuating workweek method of overtime payment. Moreover, these courts tend to treat contemporaneous payment of the half-time overtime rate as a prerequisite for the use of the fluctuating workweek. Others, however, have held that it is not necessary for the employee to understand the overtime compensation scheme; rather, as long as they were paid the same amount for all hours worked, they are fluctuating workweek employees if their exemption is lost. Some courts even suggest that receipt of the same pay over an extended period of time should effectively put the employee on notice that the fluctuating workweek applies The law is unsettled on this issue, making the measure of damages difficult to determine. The proper application of the fluctuating workweek requires a more detailed analysis – coming soon.