In response to the final overtime rule, which increases the minimum salary level to qualify for the white collar exemptions under the Fair Labor Standards Act (“FLSA”), employers must begin to evaluate and alter their current employee classifications and pay structures in preparation for the rule’s December 1st effective date. For many employers, it may not be possible to raise every exempt employee’s salary level to the new minimum of $47,476.00, over double the current threshold level of $23,660.00. If employers cannot raise salary levels, exempt employees will have to be reclassified as non-exempt employees entitled to overtime pay. This can be a very challenging situation for employers because many exempt employees are expected, and regularly do, work a certain amount of overtime each week to complete the required responsibilities of their positions. Furthermore, exempt employees are used to being paid on a salary basis with some level of certainty in their take home pay.
To address these issues and create some predictability for both the employer and the employee, one option is to implement a compensation structure that pays certain non-exempt employees an annual salary factoring in a certain amount of overtime. The FLSA permits non-exempt employees to be paid on a salary basis as long as employees are correctly paid for all hours worked. Indeed, in its guidance for private employers on the new rule, the Department of Labor (“DOL”) has explained that employers are permitted to compensate their non-exempt employees with a fixed salary for a workweek of more than 40 hours that includes overtime compensation as part of the pay. For example, if a newly reclassified employee historically worked 50 hours per week as an exempt employee, the employer could calculate a salary that includes the 10 hours of overtime she would earn pursuant to her now non-exempt status. Under this structure, the salary would be calculated based on 40 hours of work at the regular rate of pay and 10 hours of work at the overtime rate.
However, the employer must meet certain conditions to ensure this type of pay structure complies with the FLSA. This form of compensation is only allowed if the employer and employee have an express agreement on the fixed salary, including compensation for overtime hours, in writing before work is commenced under the new payment method. This agreement should express the regular hourly rate of pay for all hours worked up to 40 hours and the overtime rate of pay for all hours in excess of 40 hours in a work week.
Additionally, an employer would still have to ensure each new non-exempt employee’s hours are properly tracked and recorded. Compliance with the FLSA requires accurate recording of hours worked by non-exempt employees. Though an employee’s salary is set based on a 50-hour work week, this may not always reflect the exact amount of time the employee actually works and that time must be maintained. This could be difficult for formerly exempt employees not accustomed to having to track their time. Therefore, training will be essential in this respect.
Moreover, the pay the employee receives must accurately reflect the time he or she worked in a particular work week. In other words, if there is a change in the employee’s schedule during any week, i.e., the employee works more or less than the set 50 hours, the salary must be adjusted for that week to reflect the time actually worked. Thus, if that employee, who always works 50 hours per week, works 52 hours one week, her pay must reflect the extra two hours of overtime and that time would be compensated at the overtime rate. Indeed, all work performed above the set overtime hours, must be compensated at the overtime rate. This potential fluctuation in salary should be clearly discussed with employees to ensure they are aware, even though it will also be reflected on their pay stubs, that they may receive slightly less or slightly more per year based on the weekly breakdown of their work as non-exempt employees.
This could be an effective form of compensation for those formerly exempt employees who work approximately the same amount of overtime each week because an employer can keep them close to the same salary even after they are reclassified as non-exempt based on careful calculation of the base pay rate. But it can be quite tricky to keep the rate exactly the same and there may be small fluctuations in compensation that cause an employee to earn more or less than her prior salary and, potentially, some of her peers. Therefore, an employer should also carefully explain each employee’s new non-exempt salary to avoid any implication of discriminatory or otherwise unlawful treatment. An employer may even point to the recent changes in the overtime regulations to support its decisions regarding compensation.
While this type of pay system can be a very beneficial option for employers looking to curb the substantial costs associated with implementation of the new overtime rule, specific conditions must be met to ensure the employer does not run afoul of the FLSA. Indeed, in implementing any new or modified pay system for reclassified employees, it is essential to remember that non-exempt employees must always be paid for the actual hours worked and a number of these alternative, less traditional pay methods, will require explicit employee acknowledgment and agreement.