Published on May 21st, 2018 | by Dack Varss0
The Minimum Salary for Exempt Employees Under Federal Law
The federal Fair Labor Standards Act (FLSA) is the name for the series of laws and regulations designed and passed to protect workers throughout the United States when it comes to fair treatment in the workplace.
The FLSA requires that most employees in the United States meet minimum wage requirements for all hours worked and that they get paid overtime, which is time and one-half their normal rate of pay, for all hours worked over 40 in a week. There is a solid legal basis for the FLSA, and the Supreme Court has upheld its validity quite often.
In one such case, Barrentine v Arkansas-Best Freight System, Inc., 450 US 728 (1981), the Court recognized that the FLSA was a natural outgrowth of laws such as the National Labor Relations Act and the Labor Management Relations Act, which acknowledged that the average employee has little or no bargaining power on their own and that Congress has every right to “improve the economic well-being of workers” in the furtherance of what they called “industrial peace.”
Prior to that, in Vaca v. Sipes, 386 US 171, 182 (1967), which was a challenge to the Taft-Hartley Act, the Court ruled that all rights established through labor laws like the Fair Labor Standards Act were valid because they served to minimize “industrial strife.”
In Barrentine, the Court noted that the primary purpose for establishing the FLSA was to protect as many workers as possible from “substandard wages and oppressive working conditions,” and to establish working conditions that were better for everyone and contributed to the improve the “general well-being of workers.”
By creating a framework for workers to receive a “fair day’s pay for a fair day’s work,” they would be protected from the evils of overwork and underpay through the FLSA.1Overnight Motor Transportation Co. v. Missel, 316 U.S. 572, 578 (1942) (quoting 81 Cong. Rec. 4983 (1937) (a message of President Roosevelt).
Are Some Employees Exempt from FLSA Protections?
While virtually every hourly employee in the United States is covered by the provisions of the FLSA, many employees are exempt from coverage. In part, this is based on the assumption that many, especially professionals and executives, don’t need protection.
However, in some cases, employees have protection in some other part of the U.S. Code. In some cases, specific jobs are excluded from coverage, like those who work in movie theaters or many of those who work in agriculture.
Those specific professions are not subject to FLSA overtime rules, although they are still subject to minimum wage laws. Also excluded from FLSA coverage are jobs that are governed by some other specific federal labor law.
As a general rule, if a job is covered by some other law, the FLSA won’t apply. For example, since most railroad workers are governed by the Railway Labor Act245 U.S.C. §§ 151-165. and most truck drivers are governed by the Motor Carriers Act,349 U.S.C. § 13902. they are not covered under the FLSA.
In addition, there are many exemptions from the law contained within the FLSA itself.429 U.S.C. § 213. Those provisions provides for an exception from both minimum wage and overtime requirements, primarily for specific types of jobs.
There seems to be an increasing level of both confusion and controversy over this provision, in part because some employers have tried to find ways to work employees as much as possible, without having to pay overtime for every hour they work. Many others have tried to stretch the definitions of exempt jobs to get around the minimum wage, as well.
Section 13 of the FLSA provides for an exemption for those employees who hold bona fide executive, administrative, professional and outside sales positions, as well as certain types of computer employees.
However, whereas many employers believe they can avoid paying overtime or the minimum wage by assigning certain job titles to an employee, the reality is, job titles d0n’t determine whether an employee is exempt from FLSA provisions. To qualify as an exempt employee, it is necessary for them to meet certain tests regarding their job duties regardless of title.
In other words, rather than examining a job title and accepting that as a determination of their exempt status, the agencies who enforce the FLSA will look at the employee’s specific job duties and see to it that they can pass certain tests.
The Base Salary Exemption Provision
In addition to looking at their job duties and making sure they meet certain criteria; the employee must also be paid on a salary basis at a rate not less than $455 per week. That level of salary became effective in 2004 and, while an attempt to increase that was made in 2016, that effort failed in the courts and Congress has thus far refused to consider further modifications.
For some computer jobs, employees may be paid either on a salary basis at $455 per week or more, or they can be paid hourly, at a rate of not less than $27.63 per hour.
For the purposes of the FLSA, “salary basis” refers to any employee who receives a predetermined amount of compensation each and every pay period, whether they are paid on a weekly, bi-weekly, semi-monthly or monthly basis.
The employee must be able to count on that level of pay every payday. It cannot be reduced for most reasons, and certainly not based on variations in either the quantity or quality of the employee’s work.
Under the FLSA, employers must not reduce that pay through deductions based on the operating requirements of the business. Paying an employee on a “salary basis” means that employee is essentially “guaranteed” a certain amount of pay every week, regardless of how many hours or days that employee works.
It is important to keep in mind that the $455 salary level to qualify for an exemption is a minimum and it doesn’t have to constitute the totality of the compensation received. However, to qualify as a salary, the employee must be able to count on at least $455 per week or $23,600 per year if an employer is to be allowed to call that employee exempt.
There are several common ways to indicate that an employee is being paid on a “salary basis,” as required under the FLSA. For example, if the employee’s pay is computed from an annual amount (at least $23,600 for FLSA purposes) and divided by the number of pay periods in a year, that qualifies as a salary.
On the other hand, if an employee is paid less in pay periods where they work less and more when they work longer hours, that is not considered payment on a “salary basis,” for FLSA purposes. Again, a salary means the employee should rightfully expect that amount every pay period, regardless of the number of hours the employee works.
Permissible and Impermissible Salary Deductions
One thing to keep in mind; the salary basis test in the FLSA applies only to reductions in monetary amounts. Requiring an employee to charge absences from work to leave accruals does not constitute a “reduction in pay,” since the size of the employee’s paycheck remains the same.
Likewise, paying an employee more than the guaranteed salary amount does not affect the “salary basis” test, if there is no reduction in the employee’s base pay. For example, if commissions or bonuses are paid to the employee, they will have no effect on their salary, so they will have no effect on the salary basis test.
When employers are deciding if an employee is properly exempt from the FLSA, there are permissible reductions in salary basis pay. If an employee runs out of sick days under an accrued sick leave plan, the employer may dock said salaried employees without affecting their exempt status.
Permissible reductions have no effect on the employees exempt status. On the other hand, if the effect of a reduction is to essentially take them off a salary basis, even for a short time, they can become non-exempt. If that happens, all is not lost. Employers have several avenues they can take to “cure” any impermissible reductions in salary basis pay.
It is permissible for employers to deduct pay when an exempt employee is absent from work for one or more full days due to personal reasons other than sickness or disability. However, such a deduction must be made according to a bona fide plan, policy or practice of providing compensation for such absences.
These can include compensation for military or jury pay, or to offset an amount the employee received for other sanctioned reasons for a day off work. Also, the employer is not required to pay the full salary in either the initial week of work or the week including the employee’s termination. This is also true of weeks in which the exempt employee takes unpaid leave under the Family and Medical Leave Act.
Put simply, as long as the employer has a valid reason for deducting pay from an exempt worker’s salary, they will likely be on solid ground with regard to FLSA regulations. The key consideration will be to make sure any reduction in pay is part of the regular course of things.
How Can an Employer Lose an Exemption?
The employer will usually only lose an employee’s exemption of they make improper or irregular deductions from salary as an “actual practice.” Factors to be considered when determining whether an employer has an actual practice of improper deductions will include an examination of:
- The number of deductions they take and the time period during which the improper deductions were taken;
- The number and geographic location of the employees who were hit with improper deductions and the managers responsible; and
- Whether the employer has a clearly communicated policy either for or against improper deductions.
If they find an “actual practice” exists, the employer will likely lose the exemption during the time period in which the deductions were made for all employees in the same job classification working for the same managers.
Put simply, accidents happen. If an improper deduction is seen by regulators as an isolated incident or an inadvertent mistake, the employer won’t lose any exemptions and recovery will be limited to that particular incident and that particular employee. It also means the employer can simply reimburse the employee to make it all go away.
There is a safe harbor available to employers when it comes to the salary base exemption529 C.F.R. § 541. If an employer:
- Has a clearly communicated policy prohibiting improper deductions and including a complaint mechanism;
- Reimburses employees for any improper deductions, and;
- Makes a good faith commitment to comply in the future when a problem is found.
The employer will not lose their exemption for employees who qualify. The exception to that rule would some if the employer willfully violates the policy by continuing to make improper deductions, especially after federal officials receive several employee complaints.
Reliance on the Salary Base Exemption May be Unwise
One thing employers should keep in mind; as a practical matter, given today’s pay scales in many areas, it is unlikely a truly exempt employee would become non-exempt due to salary basis pay problems.
If so, restoring the day or two “docked” from that employee’s pay, that pushed them below the level would be an easy way to remedy that. The base salary exemption is rarely a factor in determining whether an employee is exempt.
Another thing employers should keep in mind is that the salary basis pay requirement for exempt employees doesn’t even apply to many professionals.
Doctors, lawyers and schoolteachers, for example, are always exempt, even if they are paid hourly. Also, exempt employees do not have to be paid for any workweek in which they perform no work.
Once again, it is important to note that the “salary basis” test is a relatively minor consideration when determining whether an employee is exempt from FLSA overtime and minimum wage provisions.
For example, the Court of Appeals for the Fourth Circuit, in In re Family Dollar FLSA Litigation, 637 F.3d 508 (2011), considered a case in which a Family Dollar store manager tried to make the case that she was entitled to overtime pay. The court determined that she was not actually entitled to such pay because she was treated “as an executive” with the parent company.
The court ruled that the plaintiff’s job as store manager met the criteria under the FLSA and Department of Labor guidelines for establishing that she was an executive employee. The fact that she also performed some non-executive tasks did not negate her primary duties, which were managerial in nature and qualified her as exempt.
For our purposes, the fact that she was paid $655 per week in her last year as manager and was also paid bonuses based on store performance meant that she qualified as exempt under the FLSA base salary requirement, in any case.
The bottom line in all this is, most employees are covered under the Fair Labor Standards Act. Exempt employees are the exception, not the rule.
Whereas the Family Dollar employee in the above case was a manager and qualified for an exemption, it is quite possible no one else in the same store qualified.
Too often, employers will slap a title on an employee and brand them as a “manager” to avoid paying overtime, but unless they have a significant amount of autonomy and their duties are mostly executive or managerial in nature, they will not be considered exempt.