The Rules of Overtime
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Q: Can an employer decide to place all hourly employees on salary equal to a certain number of hours a week above 40 hours, and then require the employees to work the additional hours? If so, does the employer still have to pay overtime for the additional hours?
A: Under the Fair Labor Standards Act (FLSA), the federal law governing wage and hour issues, an employer is not permitted to pay its hourly (i.e., non-exempt) employees what it calls a "salary" to cover a certain number of hours a week for purposes of avoiding overtime pay. The only permissible exemptions from overtime pay are specifically outlined by the FLSA and depend on the actual job duties of a particular employee. All employees who do not qualify for one of these statutory exemptions must be paid overtime, at time and one-half their regular rate of pay.
Thus, arrangements of the sort proposed by your question should generally be avoided. However, the FLSA does allow certain employers to pay non-exempt employees a fixed salary if they work a fluctuating workweek. Under this method, an employee is paid a fixed base salary to cover whatever number of hours the job demands in a given week. Please note that adoption of this type of plan does not relieve an employer of its obligation to pay its employees overtime compensation for the hours worked above 40 hours a week. Under this type of plan, because the employer has already compensated the employee for straight-time pay in the salary, the employer need only compensate the employee for the overtime hours on a "half-time" (rather than a "time-and-a-half") basis.
There are particular requirements for using this method of compensation. First, an employer may only use this method if the hours of work generally fluctuate over 40 hours per week. Second, both the employer and the employee must understand that the salary paid is meant to cover all hours worked and that the fixed base salary (i.e., the salary before any payment is made for overtime hours) will not change even if the employee works more (or less) than 40 hours in a given week. This understanding should be memorialized by a written agreement evidencing the employee's consent to such an arrangement. Third, the salary must be large enough to ensure that the hourly wage never falls below federal or state minimum wage, whichever is higher. Fourth, if an employer qualifies for using the half-time method, the employer must make sure to properly calculate the "half-time" pay.
Employers wishing to use this method must also check state laws to ensure compliance with those laws. For example, California law generally does not allow private employers to use this approach. Employers should also note that there are downsides to this type of compensation arrangement, including potential problems with employee morale, difficulty in retaining good employees and administrative problems in calculating pay.
In sum, under this fluctuating workweek arrangement, while an employer may pay its non-exempt employees a "salary" or lump sum payment for the number of hours worked in a workweek, this will not relieve the employer of the obligation to comply with the FLSA and pay employees overtime compensation. The Department of Labor, which is responsible for enforcing the FLSA, will not permit any compensation arrangement that appears to have been adopted in order to improperly avoid overtime pay. And if an employer is found to be using an improper method, it could lead to stiff penalties, including back pay and liquidated damages.
Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.
Larry Rosenfeld is co-chair of the national labor and employment practice of the law firm Greenberg Traurig LLP. A frequent writer and lecturer on employment law topics, Rosenfeld is experienced in the areas of federal laws pertaining to employment issues, EEOC, ADA, termination matters, employment liability and the Fair Labor Standards Act.