Overtime Ruling Fallout

December 23, 2016

Can you just pay all employees a salary and be done with it?

Published in NH Business Review (12/23/2016)

After months of preparing a response plan to comply with new overtime regulations set to take effect December 1st, only to be scrapped by a Texas judge in the eleventh hour, his frustration was palpable, and his question was one of a hundred our law firm has fielded this week.  “With all the uncertainty about the changes to the Fair Labor Standards Act,” he asked, “can’t I just pay all my employees a salary and be done with it?”

All employees (exempt and non-exempt) could be paid on a salary basis.  In fact, many companies choose to pay some non-exempt employees on a salary basis because of the perception that employees paid on a salary basis are more valuable than those paid hourly.  However, it is important to remember that non-exempt salaried employees must still be paid at least minimum wage and for any overtime worked.

Practically speaking, non-exempt salaried employees must be required to keep track of all hours that they work and do not work – just like non-exempt hourly employees.  The reason for this is that non-exempt salaried employees must still be paid at least minimum wage and be paid overtime for any hours worked over 40 in a work week. 

In other words, just because an employee is being paid a salary, does not mean that the company can require him or her to work all hours necessary without paying him or her for the time. 

In calculating overtime, the company must determine the non-exempt salaried employee’s regular rate of pay.  If the employee is paid $20,000 per year based on full-time employment (40 hours per week), then the employee’s regular rate is $9.61 per hour with an overtime rate of $14.41 per hour.  If the employee is paid $20,000 per year based on full-time employment (37.5 hours per week), then the employee’s regular rate is $10.25 per hour with an overtime rate of $15.38 per hour.  In this second example, the employee would be paid the overtime rate of $15.38 per hour for hours worked over 40 in the work week.  The employee would be paid the regular rate for hours between 37.5 and up to 40.  Finally, if the nature of the salaried non-exempt employee’s position requires that his or her hours fluctuate on a regular basis, then another methodology for calculating overtime – the fluctuating workweek method – could be used and usually results in a lower overtime rate.  Companies should check with experienced employment counsel before adopting the fluctuating workweek method of calculating overtime for certain non-exempt salaried employees.

Other issues that arise when paying non-exempt employees on a salary basis include the frequency of wage payments.  The New Hampshire Department of Labor requires that employees be paid on a weekly basis unless the employer has permission from the NH DOL to pay less frequently, but no less frequently than monthly.  Therefore, if the company has a policy that salaried employees are paid less frequently than non-exempt hourly employees, it must get permission from the NH DOL.  In addition, any changes to the terms and conditions of employment must be in writing and given to the employee for him or her to sign, acknowledging the changes.  While it has always been best practice for employers to obtain a signed acknowledgment from employees of any such changes, the law and rules now specifically required that an employee sign an acknowledgement of receipt and that the employer retain that acknowledgment.

Companies should also check handbook language to ensure that any references to deductions to payroll and policies pertaining to “salaried” employees are consistent with the law.  If handbook policies are different for salaried and hourly employees, then the company should make sure that all non-exempt employees are being treated the same whether paid on an hourly or salary basis.  The company might also consider changing its handbook policies to distinguish between “exempt” and “non-exempt” employees instead.  Finally, any handbook policies related to payroll deductions must be carefully scrutinized because NH law (RSA 275:43-b) requires that salaried employees receive payment of their full salary for any pay period in which any work is performed without regard to the number of days or hours worked.  Therefore, if salaried employees are paid bi-weekly and a non-exempt salaried employee works 4 days out of the 2 week pay period, he or she must be paid for the full 2 week pay period.  There are narrow exceptions to that rule that should be carefully consulted before making any deductions from a non-exempt salaried employee’s pay. 

Deciding to pay all employees on a salaried basis does, at first blush, does appear tantalizing.  However, it does not circumvent the employer’s obligation to pay the non-exempt employees at least minimum wage, pay overtime when due, and to prohibit wage deductions in certain circumstances.  Before making the decision to pay non-exempt employees a salary, companies should understand the consequences.

Beth Deragon, an attorney in the Employment Law Practice and Litigation Group at the law firm of McLane Middleton, can be reached at beth.deragon@mclane.com or at (603) 628-1490.