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Back to Basics in Wage and Hour: How to Use the Salary Basis Test

March 10, 2022

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

A recent U.S. Fifth Circuit Court of Appeals court case brought up the issue of the salary basis test.  The case concerned an oil rig worker who met the duties test and income minimums of the FLSA executive and highly compensated exemptions. 

The court found that even though the duties test was met, the salary basis test was not as the employee was paid a day rate – not an annual salary.   As the court stated, “[s]o earning a certain level of income is necessary, but insufficient on its own, to avoid the overtime protections of the FLSA.”

The court then later opined that they typically associate the concept of “salary” with the stability and security of a regular weekly, monthly, or annual pay structure.  The worker, though, was paid daily, like an hourly wage earner—and the court found that the pay process was “subject to the vicissitudes of business needs and market conditions—as “salaried” employees.”

Fair Labor Standard Act (FLSA) regulations 29 C.F.R.  § 541.602(a) & (a)(1) state that a salary is compensation paid “on a weekly, or less frequent basis… without regard to the number of days or hours worked.” Although someone paid hourly may be exempt, it has to comply with 29 C.F.R. § 541.604(b) which states:

An exempt employee’s earnings may be computed on an hourly, a daily, or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days, or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.

Therefore, for an hourly or otherwise paid similarly type employee to be exempt, they have to overcome two conditions:  the minimum weekly guarantee condition and the reasonable relationship condition.

The minimum weekly guarantee condition is that the pay must meet a minimum guaranteed threshold of $684 per week (which may be increased in the coming year with the incoming of the new Wage and Hour Administrator).  The employee had a day rate of $963, but it was not guaranteed.

Although the pay was greatly above the threshold, the second condition comes to play in that the pay must represent a reasonable relationship between the expected pay and the earned pay. The employee would only be paid if they worked.  There was no guarantee to the salary.  As the court pointed out, the employer could have easily complied with § 541.604(b)—for example, by offering a minimum weekly guarantee of $4,000 based on Hewitt’s daily rate of $963, but it did not.

Plaintiff attorney Rex Burch of Bruckner Burch PLLC explains that this approach to the salary basis test can be confusing. He offers a hypothetical payment scheme. If an employee is paid $500 a week plus $100 an hour for each hour they work after five hours, in a 40-hour workweek that individual would make $4,000 once the hourly compensation is factored in.  But, Burch said, if they are only guaranteed $500 a week, are they truly paid a salary?

Another way to think about this is that an employer guarantees a salary regardless of how much a person works.  In the case of the employee, they were only paid for the time worked and not guaranteed anything beyond that.  Or another way to look at it is that employers have to be careful docking an exempt employee if they don’t work for some reason. 

Generally, if an employee doesn’t work, pay for that time could be characterized as sick or PTO and the “guarantee” is maintained.  Done wrong, the employee could lose exempt status and all that it entails. The salary basis does not by itself determine exempt status, the duties test is necessary, but a salary not guaranteed would undermine any exempt classification.

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