20 February 2020

Protecting FLSA Exemption Status

FLSA exemption status always seems to cause a little bit of queasiness.  Many clients with whom we speak are concerned that they’re going to do one little thing incorrectly that will cause their exempt employees to lose their exemption status and will require the employer to pay ungodly amounts of unpaid wages and overtime.  Of course, there are plenty of ways to protect employees’ exemption status (you have that safe harbor statement for impermissible deductions in your handbook, right?), and the Department of Labor recently issued an opinion letter that should go a bit further to ease your concerns.

First things first: let’s go over the basics to make sure we’re on the same page.  The FLSA exempts from minimum wage and overtime pay requirements certain employees who work in executive, administrative, or professional capacities.  Employees must satisfy a two-part test to qualify as exempt.  First, they must meet the “duties test,” meaning what they do on a daily basis is sufficiently executive, administrative, or professional under the law to qualify for the exemption.  Second, the employees must be paid on a “salary basis.”  Employees must receive a weekly salary of at least $684 ($35,568 a year), and the salary may not be subject to reduction because of variations in the quality or quantity of work performed.

But did you know that the FLSA allows you to pay exempt employees extra money that is not subject to these requirements?  The FLSA regulations state, and the DOL recently confirmed, that “[a]n employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement.”  The additional compensation can be paid on any basis – flat sum, bonus, hourly amount, etc.

We see this situation arise when exempt employees are compensated for performing extra work or taking on additional responsibilities.  Take, for example, an exempt employee who is assigned additional work to cover for another employee who is out on leave.  You, as a kind and generous employer, want the exempt employee to feel valued and appreciated, so you agree to pay him or her an extra $500 a pay period (or $10 per extra hour, or a $3,000 bonus) while he or she is performing this additional work.  According to the FLSA and the DOL, as long as the employee’s base salary continues to meet the exemption requirements, you, the kind and generous employer, are free to provide extra compensation – even if those extra payments do not meet the salary requirements.

Still having FLSA nightmares?  We have a practice group that specializes in Wage and Hour Issues.  Feel free to contact us if you have any questions.