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Complexities of paying a salary to a non-exempt employee

June 16, 2016

Article courtesy of SBAM Approved Partner ASE
Author: Kristen Cifolelli

As a result of the changes to the FLSA salary level test, many employers will need to convert some of their currently exempt employees to non-exempt.  This will result in an additional administrative burden for employers. In some cases it will also create morale issues for those newly reclassified employees who will feel they have been forced to take a step backwards in their careers.

ASE has fielded a number of calls from employers over the last several weeks wondering if a non-exempt employee can still be paid a salary.  The answer to the question is an unqualified yes: A non-exempt employee may be paid a salary; however, the employer must still meet the overtime, minimum wage, record keeping and other obligations of FLSA.  The question is triggered by a common misconception, namely that only exempt employees can be paid a salary.   

There are different methodologies to pay a non-exempt employee a salary plus overtime: Fixed Salary for a set number of hours, Fluctuating Work Week (FWW), or what is called a Belo Contract.  In a series of upcoming articles we will focus on the different options available, but we will focus initially on the most common method used today, which is a fixed salary for a set amount of hours.

Fixed salary for an agreed-upon, set number of hours worked per week
Under this method, the employer and the employee must have a clear understanding, best put in writing, of how many hours per week the fixed salary represents. The number of hours used to set the salary can be fewer than, equal to, or greater than 40 hours in a work week.   The salary can be any amount as long the amount, divided by the number of hours worked, is equal to or greater than the federal (and applicable state and/or local) minimum wage. In order to determine this rate, called the regular hourly rate, employers should take the salary amount and divide it by the agreed upon number of hours.

Employees being paid by this method must be paid one-and-one-half times their regular hourly rate of pay for each overtime hour worked over 40 hours in a workweek.  If the employee works fewer than the agreed-upon number of hours, the employer is only required to the pay the actual number of hours worked.  Here are some examples of how this method of overtime pay is applied.

Salary based on 40 hours regularly worked per week 
In this method, the employer pays a salary for the first 40 hours worked and pays overtime for the hours worked over 40.

Sarah is an HR Coordinator making $36,400 annually based on working 40 hours per week. Her weekly salary is $700 per week ($36,400/52 weeks).  Her regular hourly rate is $17.50 ($700/40 hours).  If Sarah has an unusual week and works 45 hours, her employer will owe her an additional five hours of overtime paid at a rate of time-and-one-half ($26.25/hour).  Her additional overtime owed is $131.25 plus $700 for her regular weekly salary, for a total of $831.25 for that week.  

If Sarah only works 35 hours that week, Sarah only has to be paid for the time that she worked. Her regular rate of pay is $17.50 times 35 hours for a total compensation of $612.50.

Salary based on working more than 40 hours per week
In this scenario, employers have two options for paying the salary.  The first will involve paying a straight time salary for more than 40 hours worked in a week and paying an additional half-time overtime premium for overtime hours already in the base.  Any overtime hours worked over the base amount in the salary will need to be paid at one-and-one-half times the regular rate.  

The second option will involve the employer paying the salary inclusive of the entire overtime rate. For example, if the employee works more than the set number of hours, the additional hours must be paid at one-and-one-half times the regular rate. In both cases, if the employee works fewer than the agreed-upon number of hours, the employer is only required to the pay the actual number of hours worked plus the appropriate amount of overtime if applicable.  

Example 1:
Sarah makes $36,400 annually based on working a regular 50 hour per week schedule.  Her weekly salary is $700 per week ($36,400/52 weeks).  Her regular hourly rate is $14.00 ($700/50 hours).  In a regular 50-hour week, her employer would owe her an additional half-time of overtime ($7.00 per hour) for the 10 hours worked over 40. She would be owed an additional $70.00 on top of her weekly salary of $700.  Her base salary of $36,400 plus her half-time overtime earnings of $3,640 annually would equal $40,040.

If Sarah works 55 hours in one week, her employer would need to pay her an additional five hours at time and one half because her weekly salary does not cover payment for those hours ($21 x 5 = $105.00)

Example 2:
Sarah has an agreement with her employer that she is paid $40,040 annually for a regular 50 hour a week schedule.  This is inclusive of 40 hours paid at straight time and 10 hours paid at time and one half ($29,120 + $10,920 = $40,040).  If Sarah works any hours over 50, those additional hours will need to be paid at time-and-one-half as her weekly salary does not cover payment for those hours.

Salary based on working less than 40 hours per week
In this scenario, the employer pays a salary for the set number of hours worked less than 40.  Any hours worked between the set amount and 40 are paid at straight time and any hours over 40 are paid at time and one half.

Example 3:
Sarah is paid $36,400 annually for working 35 hours per week. Her weekly salary is $700 and her regular hourly rate is $20 ($700/35 hours).  In an unusual week she works 42 hours.  She will be paid the $700 for the 35 hours per week.   She will also be paid an additional $100 for hours 36-40 ($20 x 5) and time and one half for the hours over 40 ($30 x 2 = $60).  Her total earnings for that week are $860.

Paying a salary for a fixed workweek works best for employers whose employees’ schedules rarely fluctuate. In practical terms it assures both the employee and the employer of a set amount of base pay every pay period. It is also often used by employers that pay semi-monthly that have regularly changing base hours in a pay period due to the differing number of work days in a given month.  

Employers wishing to consider paying their employees a salary plus overtime should be cautious of some of the pitfalls of this methodology.  While it can alleviate some employee morale issues and continue the perception of being paid salaried similar to an exempt employee, it can result in a number of accidental FLSA violations.  Employers still are required to track all hours worked, ensure that employees are receiving at the least the equivalent of minimum wage, and ensure the proper amount of overtime is paid depending on the methodology used.

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