Q&A: Paying exempt employees for additional hours worked

Question

We have a contract that would allow us to bill for all hours worked, including additional hours for exempt employees (beyond 40). We would not be paying them overtime all of the time, only for this particular contract. Can you provide any guidance or best practices on paying exempt employees overtime? Obviously, it would be a supplement to their salary (not a replacement for a guaranteed salary), and presumably, straight time.

Answer

The federal Fair Labor Standards Act (FLSA) regulations allow employers to provide extra compensation to exempt employees, including in the form of hourly pay, without jeopardizing the employees’ exempt status. An employer may provide an exempt employee with additional compensation, such as overtime, without losing the exempt status or violating the salary basis requirement if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis.

For example, the exemption is not lost if an exempt employee who is guaranteed at least $684 each week paid on a salary basis also receives overtime compensation based on hours worked for work beyond the normal workweek. An exempt employee guaranteed at least $684 each week paid on a salary basis may receive additional compensation of a 1 percent commission on sales.

An exempt employee may also receive a percentage of the sales or profits of the employer if the employment arrangement includes, as well, a guarantee of at least $684 each week paid on a salary basis. Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and a half, or any other basis) and may include paid time off.

However, if the employer is also reducing the exempt employees’ pay if they work fewer hours, i.e., under the threshold, then the exempt status could be jeopardized. Similarly, if the extra hours worked indicate the exempt employees’ primary job duties are nonexempt work, then the exemption also may be in jeopardy.

For an employee to be considered exempt from the minimum wage and overtime pay requirements of the federal FLSA, the employee generally must meet the job duties requirements as a bona fide executive, administrative, professional, computer-related, or highly compensated employee and must be paid on a salary basis. (Outside sales employees also may be exempt based on job duties, but do not have to be paid a salary, discussed below.) Salary basis is defined as payment on a weekly or less frequent basis of a predetermined amount constituting all or part of compensation, without reductions for variations in the quality or quantity of the work performed, and the salary must be at least $684 per week.

Thus, exempt employees generally must receive their full salary for any week in which they perform work, and the amount is not subject to reduction because of variations in the quality or quantity of the work performed. See 29 C.F.R. §541.602(a). In other words, exempt employees should receive their same salary each week without regard to the number of days or hours worked.

Further, deductions cannot be made from an exempt employee’s salary for absences occasioned by the employer or by the operating requirements of the business.

If the employee is ready, willing, and able to work, deductions may not be made for time when work is not available. Payment is usually not required if the employee does not perform any work during the entire week. See 29 C.F.R. §541.602(a). Employers also generally may not dock the pay of exempt employees for absences of less than a day, except as allowed under the Family and Medical Leave Act. The FLSA does allow limited deductions for full-day absences for personal reasons and sick days, as well as deductions in the initial and terminal weeks of employment and for certain serious disciplinary infractions. See 29 C.F.R. §541.602(b).

Although deductions from the salary generally should not be made except in limited circumstances, the FLSA regulations also clarify that an employer may pay an exempt employee additional compensation without losing the exemption or violating the salary basis requirement. Specifically, if the exempt employee is guaranteed the minimum weekly salary of $684, the employee also may be paid a commission on sales or a percentage of profits or sales, or even additional compensation based on hours worked beyond the normal workweek.

This additional compensation can be paid on any basis, including a flat sum, bonus payment, straight-time hourly amount, time and one-half, or any other basis, including paid time-off. See 29 C.F.R. §541.604(a). So, if the employer is paying exempt employees for extra hours worked on an hourly basis, this extra compensation should be allowed under the FLSA. However, if the employer then reduces pay if the employee does not meet the threshold hours, this deduction would be inappropriate under the FLSA and could result in a loss of the exemption.

Outside sales employees who meet the exempt criteria for their job duties do not have to be paid on a salary basis, so any additional compensation paid to them, even on an hourly basis, also likely is allowed under the FLSA. See 29 C.F.R. §541.500(c).

Note, too, that to qualify for the FLSA exemptions, an employee’s “primary duty” must be the performance of exempt work. The term “primary duty” means the principal, main, major or most important duty that the employee performs. See 29 C.F.R. §541.700(a). So, if the exempt employee is spending extra hours above the threshold performing nonexempt work and also performs nonexempt work regularly, the employer should be sure that the employee’s “primary duty” involves exempt work to preserve the exemption.

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