If you are a regular reader of this blog, you are hopefully familiar by now with the notion that exempt employees generally must be paid their full weekly salary for all workweeks in which they perform any work. There are certain limited exceptions to this rule. For example, if an exempt employee starts or ends employment mid-workweek, the employer may prorate the employee's salary accordingly. This calculation is easy fairly easy if the employer uses a weekly pay period - just take the regular weekly salary, divide by the number of days that salary usually covers (e.g., 5), and multiply by the number of days the employee was employed.
But what if an employer pays salaried employees semi-monthly? In that scenario, the employer divides the employee's salary into 24 semi-monthly pay periods. However, because the pay period is no longer tied to the workweek, different pay periods can have different numbers of working days. There are at least a couple of different ways an employer could prorate an employee's pay under these circumstances:
1. Calculate a day rate for each pay period by dividing the semi-monthly salary by the number of working days during the pay period. Then, multiply the day rate by the number of days worked during the pay period to calculate the employee's salary.
2. Alternatively, an employer could calculate a day rate by dividing an employee's annual salary by the 52 weeks in the year, then dividing by the number of working days per week. The day rate is then multiplied by the actual number of days worked.
Which method is correct?
That was the issue addressed in a recent decision by a federal district court in Washington State in Kirchoff v Wipro Inc. The plaintiff in that case alleged that his employer violated the Fair Labor Standards Act and the Washington Minimum Wage Act by using method 1, effectively shorting him by $41.31 for his first week of employment, and $73.43 for his final week.
The court's conclusion? The FLSA does not mandate one specific method for prorating an exempt employee's salary in situations where deductions are permitted. Rather, 29 C.F.R. § 541.602(c) says that an employer may "use the hourly or daily equivalent of the employee's full weekly salary or any other amount proportional to the time actually missed by the employee."
Because the deduction calculated using method 2 is proportional to the amount of time actually missed during a given pay period, the court held that method was permissible under the rules.
Insights for Employers
Yes, the plaintiff in this lawsuit literally made a federal case out of a $114.74 shortage. Why did he bother? And why would his employer pay its lawyers to take the case to summary judgment, rather than just writing the guy a check? Two words: class action. This case wasn't about one employee, it was about however many salaried exempt employees the employer had hired over the preceding three years, and even more so, about the fees the plaintiffs' attorneys could recover if they won or extracted a favorable settlement. Even small wage and hour issues can add up to big dollars.
Although Kirchoff dealt with prorating salary at the beginning and end of employment, the court's conclusion appears to apply equally to prorating an exempt employee's salary for other reasons permitted by the regulations, such as when an employee is absent for personal reasons.
Remember, this a decision by one district court. While the court's conclusion appears sound and should apply elsewhere, at least for purposes of federal law, results may vary in your jurisdiction. Consult your wage and hour lawyer before relying on this decision.