UPDATE: May 18, 2016 – Details of the final rule released today show that employers will be able to make a “catch-up” payment if an incentivized employee falls short of the salary minimum to avoid reclassifying the employee as nonexempt and retroactively calculating how much overtime the employee is due. This catch-up payment probably would be $1,186.90 ($91.30 per week multiplied by 13 weeks in a quarter).
To qualify for the executive, administrative, and professional exemptions from the overtime requirements of the Fair Labor Standards Act (FLSA), usually an employee must pass each of three tests:
- The salary basis test: Being paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed.
- The salary level test: Being paid a salary that meets a minimum specified amount, currently $455 per week for most employees.
- The duties test: Performing work that primarily involves certain duties.
Any day now, the US Department of Labor (DOL) is expected to issue final regulations that will raise the minimum weekly salary level from $455 to somewhere around $970.
The DOL also may allow employers to count up to 10% in nondiscretionary bonuses and incentive payments in combination with a minimum weekly salary amount toward satisfying this new salary level.
As the DOL explained:
During stakeholder listening sessions several business representatives asked the Department to include nondiscretionary bonuses and incentive payments as a component of any revised salary level requirement. These stakeholders conveyed that nondiscretionary bonuses and incentive payments are an important component of employee compensation in many industries and stated that such compensation might be curtailed if the standard salary level was increased and employers had to shift compensation from bonuses to salary to satisfy the new standard salary level.
The DOL did not provide details about how this would work out in real-life scenarios.
But a closer look at the situation suggests there are two possibilities: counting nondiscretionary incentive pay toward the salary level is either much ado about nothing or a radical break from the way the DOL has interpreted the FLSA’s salary basis test in the past.
Much Ado About Nothing?
Let’s consider the first possibility, that this new proposal isn’t really a change in any meaningful respect.
As John E. Thompson, a partner in Fisher & Phillips LLP’s Atlanta office, recently observed, “There is already a way to accomplish much the same thing.”
Specifically, an employer could pay at least $970 per week (or whatever the actual minimum weekly salary is when the new regulations come out) on a salary basis as a guaranteed draw or advance against incentive-based compensation.
The DOL has recognized this practice for several decades, most recently in an opinion letter from 2006.
As Thompson noted, a guaranteed draw or advance is effectively no different from an employer counting incentive-based compensation towards the minimum salary level. If the $970 salary level is an incontrovertible floor, it’s irrelevant whether incentive-based compensation accounts for 10% or 100% of the $970; it’s all the same pot of money in the end.
Or Radical Break From the Past?
Another possibility is that the DOL might say that an employer could instead guarantee only 90% of $970 (or $873), with the remaining 10% (or $97) made up by nondiscretionary bonuses and incentive pay.
Given that the whole point of incentive pay is that employees receive it only when they meet specific goals, and given that overtime is supposed to be calculated on the basis of each individual workweek, this would suggest a scenario in which employees’ FLSA classification could vary from week to week depending on whether or not they hit their goals.
In a workweek during which an employee did not meet her goals, she would forfeit the amount of incentive pay attributable to that workweek. Her total salary level would fall short of $970, so she would be nonexempt. If she worked more than 40 hours, she would be owed overtime.
This overtime would be calculated using the fluctuating workweek method if her hours vary from week to week or according to the number of hours for which her salary was intended to compensate her if her hours do not vary from week to week.
Then, the amount of total compensation she would be owed would vary depending on the number of hours she worked during the workweek, as follows:
|Number of hours worked||Fixed – 35||Fixed – 40||Fixed – 45||Fixed – 50||Fluctuating|
This scenario raises some problematic questions, such as:
- Did the DOL really intend for employees to be owed more or less than their original $970 per week compensation, as illustrated by the green and red cells in the table above, depending on the number of hours worked and the method of computing overtime used?
- If the employer intends the employee to be overtime-exempt, how can it reach a “clear mutual understanding” with the employee that the fixed salary is compensation for the hours worked each workweek, which is a prerequisite for the fluctuating workweek?
- Given that the FLSA does not mandate any particular method of agreeing upon, establishing or memorializing the number of hours which a salary is intended to compensate, what’s to stop an employer from saying a salary is intended to cover 50 hours or more in order to minimize its overtime liability?
Stay tuned to see if the final regulations clear things up.