Paying Extra: Guidance on the Overtime Exemption
In 2018, the DOL responded to a query regarding whether a "reasonable relationship" exists between a professional employee's guaranteed weekly salary amount and the amount actually earned. The Fair Labor Standards Act's "reasonable relationship" provision enables an employer to calculate "an exempt employee's earnings on an hourly, daily, or shift basis, without losing the exemption or violating the salary basis requirement."
The fundamentals of salaried-exempt status
A professional employee is exempt from the FLSA's minimum wage and overtime pay requirements if he/she satisfies the act's salary basis test and job duties criteria. Under the salary basis test, the employee must receive a guaranteed/predetermined minimum salary of $455 per week. This guaranteed salary amount cannot be reduced because of changes in the quality or quantity of work performed.
Generally, salaried-exempt employees can be paid extra as long as they receive their guaranteed salary amount. This extra compensation can be paid on any basis, such as bonus payment, flat sum, straight-time hourly pay, or time and one-half. But, in certain circumstances, there are limitations to that rule.
The DOL weighs in
The employer in question pays its exempt engineers a guaranteed weekly salary of $2,100, which is based on $70/hour for 30 hours/week. These employees receive their weekly salary of $2,100 even if they work fewer than 30 hours/week. However, if they work more than 30 hours/week, the employer pays them an extra $70/hour.
As stated earlier, to be able to calculate an exempt employee's earnings on an hourly, daily or shift basis — and pay him/her extra — there must be a reasonable relationship between the guaranteed salary amount and how much the employee actually earns.
The DOL opinion letter defines a reasonable relationship as "when the weekly guarantee is roughly equivalent to the employee's usual earnings at the assigned hourly ... rate for the employee's normal scheduled workweek."
The DOL’s conclusion
The additional pay for hours beyond 30 is permissible if a reasonable relationship exists between the guaranteed salary amount and the usual earnings. Ultimately, a reasonable relationship exists if the employee earns up to 1.5 times the guaranteed salary amount — in which case, the employee gets to keep the exemption.
However, based on the information provided in the query, the DOL found that the engineers' usual earnings were nearly 1.8 times (almost double) the guaranteed weekly salary amount — and did not satisfy the reasonable relationship test. In other words, earning as much as 1.8 times the guaranteed salary amount could cause the employee to lose the exemption.
While this DOL opinion can serve as a guidepost for other employers with similar situations, it should not be viewed as a blanket solution. The takeaway here is that if you'd like to pay your salaried-exempt employees extra or on an hourly basis, be sure to seek expert assistance.