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November 16, 2009
FLSA Salary Basis Test: 3 Pitfalls to Avoid

The Fair Labor Standards Act (FLSA) exempts broad categories of "white-collar" jobs from minimum wage and overtime requirements if they meet certain tests regarding job duties and responsibilities and are paid a certain minimum salary. These categories include executive, administrative, and professional employees.

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Exempt white-collar employees must perform certain types of work, and they must generally be paid on a salary basis and receive a minimum salary. To be exempt, employees must generally be paid a predetermined amount each pay period. The amount paid may not be reduced because of a variation in the quality or quantity of the work performed. With limited exceptions, the employee must receive his or her full salary for any week in which he or she performs any work, without regard to the number of days or hours worked. However, the employee need not be paid for any workweek in which he or she performs no work.

The following are three common areas of confusion for employers which can lead to big problems with the Department of Labor (DOL):

  • Fee basis. Administrative and professional employees may be paid on a fee basis rather than on a salary basis. To determine whether the fee payment meets the minimum salary threshold, the amount paid to the employee should be tested by determining the time worked on the job and whether the fee payment is at a rate that would amount to at least $455 per week if the employee worked 40 hours.
  • Pro-rating for part-time employees. A DOL opinion letter states that employers may not prorate salaries of part-time employees to determine whether they meet the minimum salary requirement for exemption. For example, a part-time employee earning $300 per week for working 20 hours does not qualify for exemption, because the employer may not prorate the $300 for 20 hours out to $600 for 40 hours when the employee works only 20 hours per week.
  • Job titles. Attaching enhanced job titles to nonexempt jobs and paying a fixed salary will not transform a nonexempt position into an exempt one. For example, an employer does not escape the overtime requirements simply by calling an employee an engineer, though he or she has no college degree. Similarly, the mere fact that an employee is paid a salary does not place the employee into the exempt category. Many nonexempt employees are paid on a salary basis.

Conducting a self-audit helps ensure compliance with federal and state laws. As part of an audit, employers should:

  • Review job descriptions to determine whether they are still accurate, reflect the jobs being performed, and reflect the skills necessary to perform the job.
  • Review employees' actual job duties to ensure that they still fall within the administrative, executive, professional, computer, or outside sales exemptions.
  • Make sure overtime for nonexempt employees has been properly calculated. For instance, bonuses and shift premiums should be included in the calculation of the regular rate of pay.
  • Make sure the required posters have been hung in the appropriate places in the workplace.

More Resources on FLSA and Exempt Employees

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