Under the federal Fair Labor Standards Act (“FLSA”), all employees in the workplace are classified as either exempt or non-exempt. Non-exempt employees must be paid at least minimum wage for every hour worked and overtime pay after working 40 hours in a seven-day work period. Exempt employees are generally not entitled to minimum wage or overtime. The FLSA presumes that all employees are non-exempt unless a specific exemption applies to an employee. The most common FLSA exemptions are for certain defined classes of executives, administrators, and professionals. These are usually referred to as the “white collar” exemptions.
Many employers wrongly assume that paying employees by salary renders the employees “exempt,” and therefore, the employer is not required to pay the employee overtime pay. This is inaccurate. Paying an employee an annual salary does not necessarily mean that the employee is exempt from minimum wage or overtime under the FLSA. The FLSA and its implementing regulations enforced by the United States Department of Labor (“USDOL”) have specific tests that an employer must consider when classifying an employee as exempt. See USDOL Fact Sheet #17A.
In general, to qualify for one of the white-collar exemptions, an employee must:
- be paid a salary, meaning that they are paid a predetermined and fixed amount that is not subject to reduction because of variations in the quality or quantity of work performed;
- be paid at least a specified weekly salary level, currently $684 per week (equivalent to $35,568 per year); and
- primarily perform executive, administrative, or professional duties, as provided in the USDOL’s regulations.
Many employers incorrectly assume that employees who satisfy the first two prongs of the test, namely, they pay their employees a weekly fixed salary of $684 or more, automatically qualify for an FLSA exemption. However, employers sometimes fail to realize that the analysis does not end with the satisfaction of these first two prongs of the test. The so-called “duties” test must also be satisfied and each of these duties tests has a specific set of criteria that must be satisfied in order for the third prong of the test to be satisfied.
The confusion sometimes arises because the FLSA permits employers to pay nonexempt employees on an hourly or salary basis. On occasion, employers forget that when they elect to pay a nonexempt employee on an salary basis, and the employee works in excess of 40 hours in the workweek, the employer must then convert the salary to an hourly rate, and pay overtime based on that rate. For example, assume a salaried non-exempt employee is paid $1000 per week, based on a 40-hour workweek, and reports 50 hours of work for the week. The employer must calculate the hourly rate for the employee, which in this case would be $25 ($1000 / 40 hours). The overtime pay would be calculated using the overtime rate of 1.5 times the regular rate of pay, or 1.5 x $25 x 10 hours = $375. Therefore, the employee’s total pay for the week would be $1375. If the employer in this fact pattern only paid the employee $1000, the employer would not be in compliance with the FLSA.
A related legal issue worth noting for New Hampshire employers is that pursuant to New Hampshire state law, salaried employees must receive their full salary in any pay period in which they perform any work, with very few exceptions, regardless of whether the employee is classified as exempt or nonexempt under federal law. This is a requirement under New Hampshire state law. See RSA 275:43-b and Lab. 803.02. Consequently, if the employer has a bi-weekly pay period, and a salaried employee (exempt or nonexempt) works one day of the pay period, the employer generally must pay the employee their entire bi-weekly salary for the pay period.
Employer Takeaways
As noted above, paying an employee on a “salary basis” does not necessarily mean the employee is exempt from overtime pay. Employers should consider an audit of their payroll to ensure proper classification. Improperly classifying employees as exempt under the FLSA can lead to a variety of significant and costly consequences.
The FLSA permits employees to file suit to recover unpaid wages, including overtime, and contains a “liquidated damages” provision that allows employees in some circumstances to recover twice their actual back wages and attorneys’ fees. Employers may also face the risk of a USDOL audit of the company’s classification determinations. When an error is found, the employer may be in a very vulnerable spot because they likely will not have time records to establish the amount of overtime, if any, worked by their employees. Because of these risks, it is much better to correctly address this classification issue at the outset of the employment relationship.