One of the biggest reasons that employers get sued for wage violations, is they think that they do not need to pay their salaried employees overtime. Salarieed employees get overtime, unless they meet one of the exemptions (exceptions) from overtime requirements under the Fair Labor Standards Act (FLSA). Basically, if an employee is entitled to overtime pay as an hourly worker, they are, usually, entitled to overtime pay as a salaried worker.https://www.dol.gov/whd/regs/compliance/whdfs23.pdf
An employer can save money on overtime by paying a salary, under certain circumstances, but setting up such a system is best done by an experienced employment lawyer, because getting it wrong can cost you countless lawsuits. When I represented plaintiffs, I brought cases against large companies that used employment firms to design their pay systems, and I found ways to get my clients substantial sums. It is not just necessary to get it most of the way right, if an employer plans to save money by taking advantage of labor laws, the employer does not just have to get it right, but perfect, to get out of a lawsuit.
If a small employer wanted to move someone from hourly to salary to save a few dollars on overtime, then as an employment lawyer I would advise that is a poor decision. However, if a medium or large company is considering moving multiple employees to salary, to save on overtime, it is worth consulting with an employment lawyer.
There are two factors. The first is if the number of hours the employee works varies throughout the year. The second is what the employer and and the employee understand the salary is meant to cover. A worker and employer cannot agree that no overtime payment is owed for hours worked over forty per-week. An employer must pay over-time for hours worked over forty per-week, the only question is whether payment is one-half times the regular rate, or one-and-one-half times the regular rate.
The first factor has to do with the Fluctuating Work Week Method, codified at 29. U.S.C. § 778.114. https://www.law.cornell.edu/cfr/text/29/778.114 The Fluctuating Work Week Method allows an employer to save money by paying less per-hour in regular hourly rate, and one-half that rate for every hour over forty worked in a week. A lot of large companies use this method. Basically when a worker’s hours fluctuate throughout the year, so some weeks the worker works more than forty hours, and some weeks the worker works less than forty hours, but the worker is paid the same base salary, the worker can be paid less in overtime, to make up for the times when the worker works less than forty hours and still makes the salary. When executed properly, this system can save a company an enormous amount of money in overtime payments, because the overtime rate is one-half of the number gotten when the total weekly salary is divided by the total number of hours worked that week.
While the Fluctuating Work Week Method is very attractive, strict compliance with countless conditions is necessary, requiring a meticulously structured system with built-in safeguards.
The second factor is what the understanding of the salary is between the employer and employee. https://www.law.cornell.edu/cfr/text/29/778.108 Does the employee and employer understand that the salary is to cover all hours worked in a week, or does the salary cover a specific number of hours per-week.
If the understanding with the employee is that the salary is to cover forty hours per-week, then every hour over forty that the employee works, must be paid at one-and-a-half times the employee’s normal hourly rate. However, if the employee and employer come to an understanding that the salary is to cover fifty hours per week, from hours forty-one to fifty, the employer pays one half the normal hourly rate, and for hours fifty-one and over, the employer pays the worker one-and-a-half times their normal hourly rate. In order to get the regular hourly rate, to base overtime off of, the employer divides the salary by the number of hours it was intended to compensate, and that number is halved or paid at one-and-a-half times per-hour.
If the employee and employer agree that the salary is to compensate all hours worked in a week, no matter how many, all overtime hours are paid at the rate obtained by multiplying .5 by the weekly salary, divided by forty.
Written by: Joshua H. Sheskin, Esq., M.A. -Trial Counsel- Lubell & Rosen, LLC. 954-880-9500 JHS@LubellRosen.com