Overtime Exemptions: What Does "On A Salary Basis" Mean?

by Butler Snow LLP
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Generally, most employees in the United States must be paid at least the federal minimum wage for all hours worked and overtime at one and one half times the regular hourly rate for all time worked above 40 hours in a seven consecutive-day workweek.  Those who work in positions falling within the executive, administrative, professional, outside sales and certain computer employee exemptions to the FLSA’s overtime pay requirement do not have to be paid overtime.  In exchange for this exemption, the covered employees’ job responsibilities and compensation must fall within the exemption language.  As to compensation, not only must the employee be paid not less than $455 per week, but it must be “on a salary basis.” 

To meet the “on a salary basis” requirement, the employee must receive a predetermined amount of salary per workweek that does not vary based on the quantity or quality of the work performed.  The pay period may be longer than a workweek, but the amount of salary is measured on a per-workweek basis.  What this means is that unless an exception applies, the employee must be paid that predetermined amount if the employee performs any work during the workweek.  This is regardless of the number of hours or days worked during the workweek.  Further, if there are deductions made from the predetermined salary for time not worked or other impermissible reasons, the impermissible deductions destroy the exemption.  If the employee is ready, able and willing to work, but no work is available, no deductions are allowed.

In certain narrowly drawn circumstances, less than the amount of the predetermined salary may be paid when an exempt employee does not work a full workweek.  The following are permissible exceptions to the requirement of full payment of the predetermined salary:  (1) when the employee is absent for one or more full workdays for “personal reasons” other than sickness or disability; (2) for an absence of one or more full workdays for sickness or disability “if the deduction is made in accordance with a bona fide plan, policy or practice of providing compensation for salary lost due to illness”; (3) when the deduction is an offset to amounts the employee receives as jury or witness fees or military pay; (4) for penalties imposed “in good faith for infractions of safety rules of major significance”; and (5) for unpaid disciplinary suspensions of one or more full workdays “imposed in good faith for workplace conduct rule infractions.”  Finally, the full salary does not have to be paid during the beginning or terminating workweeks for a given exempt employee who does not in fact work the entire workweek or for weeks the employee takes unpaid leave under the Family and Medical Leave Act of 1993, as amended.

The consequence of making improper deductions from the predetermined salary of an exempt employee can be loss of the exemption if there is an “actual practice” of making such deductions.  Factors considered in determining if there is an actual practice include, among others, the number and frequency of impermissible deductions, the number of employees whose salaries were improperly reduced, and “whether the employer has a clearly communicated policy permitting or prohibiting improper deductions.”

Loss of the exemption means, among other possible penalties, that the employee (and all others in the same job classification working for the same manager) may be entitled to recover overtime for all time worked above 40 hours in a workweek over the period the impermissible deductions were made.

It is advisable for employers to have written policies regarding paid time off for various reasons, a prohibition on improper deductions from the predetermined salaries of FLSA-exempt employees, and a safe harbor policy.  The last should not only prohibit improper deductions, but also provide for reimbursement for any inadvertent deductions and articulate a good faith commitment to future compliance.  Of course, a policy is only as good as its implementation; thus, it is not enough to preach—employers must also practice what they preach!

FLSA exemptions from overtime are narrow and very fact specific.  No article of general legal interest can cover every situation, but general information is available at the following website.  For further information about such exemptions, including the “on a salary basis requirement,” employers should consult an attorney. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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