Why I Don’t Like “Non-Exempt Salaried” Arrangements

By Jonathan K. Driggs, Attorney at Law
 
Ok, I tried to find a nice way of saying it, but ultimately I thought it best that I get right to the point: I don’t like it when my clients pay non-exempt employees on a salary basis—it makes me nervous (and you don’t want to be around me when I’m nervous!)   I know, I know, I’ve heard all the stories about why “so and so” wants to be paid on a salary basis even though they don’t meet exemption requirements, yada-yada-yada.
 
Don’t do it.  It’s a trap.  No, I’m not saying that your employees are trying to trap you.  What I am saying is that sooner or later the nature of non-exempt salaried arrangements often leads employers to inadvertently violate the Fair Labor Standards Act (FLSA). 
 
First of all, when properly done, there is nothing illegal about non-exempt salaried arrangements.  A non-exempt salaried arrangement is simply when an employer pays a non-exempt employee a fixed salary for the week instead of paying the employee by the hour (by the way, we often use the term “hourly employee” and “non-exempt employee” interchangeably—although these terms are not entirely synonymous as this article demonstrates).
 
The basic premise under the FLSA is that while you can pay non-exempt employees pretty much any way you want to (i.e., hourly, piece rate, salary, commission), at the end of each work week you still must be able to show that the employees received at least the equivalent of minimum wage for every hour worked, and received overtime pay for every hour worked over forty during the week.  What this means is that the employer still has to track employees’ work hours every week regardless of the method of payment.
 
And here’s where I get nervous (and remember, you don’t want get me nervous!): because the weekly pay is usually a fixed amount, non-exempt salaried arrangements tend to lure employers into a false sense of security that they don’t need to track the employee’s work hours each week.  Nothing could be further from the truth! 
 
And here’s where I get really nervous!  Because the employer forgets that work hours still need to be tracked, the employee may be working overtime without the employer’s knowledge!  “Come on Jonathan”, you say, “I’m confident that my employee never works overtime, so it’s a non-issue!” (Note: you should be sensing at this point that I have had these conversations before with my clients. J)
 
Here’s the deal.  First of all, the FLSA requires employers to track the work hours of their non-exempt employees.  It is the law.  Secondly, if the employer has not kept appropriate records on hours worked, the U.S. Dept. of Labor will simply interview the employees in question to estimate actual hours worked—and employers will be surprised to find out how often employees will claim that they crossed the 40 hour line during any given workweek (and then multiply this going back two to three years as a starting point to determine damages!)
 
The bottom line is this: one of the main reasons to have salaried arrangements is so that everyone can avoid the hassle of tracking work hours.  However, as mentioned above, if the employee is non-exempt under the FLSA, you still must track their work hours regardless of the method of compensation!  My point is why bother with non-exempt salaried arrangements when they really don’t accomplish what you’re hoping to accomplish in the first place? I’ll say it again: the very nature of non-exempt salaried arrangements tend to lure employers into non-compliance with FLSA recordkeeping requirements.  As Nancy Reagan said so many years ago (on a very different subject), “just say no” to non-exempt salaried arrangements!
 
Note:There are additional complicating factors lurking in non-exempt salaried arrangements that are beyond the scope of this article, including: 1) complexities (both mathematical and legal) in determining a non-exempt salaried employee’s true “regular rate” for overtime purposes, 2) dealing with employee absences and making corresponding deductions to the weekly salary amount (so if you need to reduce the employee’s pay by six hours because of an absence, why are you bothering with the salary arrangement in the first place?), and 3) dealing with U.S. Dept of Labor and their restrictions on providing additional variable pay to employees working under “fluctuating workweek” salary arrangements (see 29 C.F.R §778.114).
 
This article should not be construed as legal advice.  Copyright ©2012 by Jonathan K. Driggs, Attorney at Law, P.C.  All rights reserved.
 
Jonathan K. Driggs is an employment law attorney with over 19 years of experience, including 3 years with the Utah Labor Commission.  www.jkdlawpc.com

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