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Salary Pay to Avoid Overtime: Does it Work?

BOP NEWSLETTER • Summer 2022

Salary Pay to Avoid Overtime: Does it Work?

by Rebecca Boartfield

“To avoid overtime, I’m just going to pay everyone a salary.”

We hear this phrase, or other iterations like it, a lot. And we’d love to say it was that easy. So many headaches and problems would just disappear if it were. Of course, it is not that easy (is anything when it comes to government regulations?). Sadly, paying an employee a salary does not, in and of itself, solve the overtime conundrum. 

If you read no further in this article, know this: salary compensation is just a method of pay. It holds no other power as it relates to tracking employee hours, paying overtime, or having to adhere to other wage & hour laws that may be applicable. 

The question of whether it is better to pay employees a salary really depends on a myriad of factors and hinges on your specific circumstances. This may vary between positions as well. Some could be salary and others not. There is no one right method for compensating employees so long as the rules, when applicable, are followed. The bottom line is this: overtime pay may still be required, regardless of the method you choose. 

Before you make any decisions or changes, let’s take a closer look at compensation methods, some of the rules, how that may or may not affect overtime requirements, and what might be best for you.

Compensation methods
While salary and hourly compensation are the most common methods of pay, there are more choices:

  • Hourly Compensation: This is as straightforward as it gets. This method simply pays employees for each hour, or portion thereof, worked. This is easy to understand and administer.
  • Salary Compensation: Payment on a salary basis means that an employee receives a predetermined amount of compensation on a regular basis such as weekly, bi-weekly, or monthly. This is usually regardless of the number of hours worked by the employee each week, or each pay period.
  • Piece Rate: This is a system where an employee is paid a fixed amount for each unit produced or action completed. For example, an auto mechanic who is paid a certain amount per tune-up. 
  • Commission: This is a sum of money paid to an employee upon completion of a task, usually selling a certain amount of goods or services. This may be in addition to a salary or instead of a salary. 
  • Daily Rate: Employees are paid on a per-day basis as opposed to being paid hourly or salary. This is a flat rate for the entire day. For example, $400.00 per day. 

To be clear, none of the above changes any overtime requirements. These methods simply change how an employee is compensated, which will only impact how overtime is calculated if it is worked. 

Overtime Triggers
On a federal level, the overtime trigger is 40 hours in a week. Anything over 40 hours in a week must be compensated at time and one half. 

Some states, like California, have daily overtime triggers in addition to the federal weekly requirement. In those states, overtime is triggered for all hours worked over 8 in a day and/or hours worked over 40 in a week. Note: California actually has a complex set of overtime requirements which includes double time in some cases. A closer review of those laws is necessitated if you live there.  

Wherever you are, it is imperative for all employers to know and understand their applicable overtime triggers and comply at all times.  

Employee Classifications
The sole factor that determines whether overtime is applied or not is employee classification. We don’t mean full-time or part-time classification. We’re talking specifically about government classifications under the Fair Labor Standards Act (FLSA). 

According to the FLSA, employees fall into one of two classifications: exempt or non-exempt. Exempt employees are excluded from having to be paid overtime, while non-exempt employees must be paid overtime. 

“Salaried” is not a category for overtime purposes. Methods of compensation, as described above, do not determine the exempt or non-exempt status of employees.

Given that exempt employees do not receive overtime pay – they are exempt from the overtime pay requirements and calculations – don’t you wish you could arbitrarily make every employee exempt? Again, we wish it were that easy. 

To qualify for exemption status, an employee’s job must meet the specific work duty criteria set forth by the FLSA and other state laws. The categories available under the law are: Executive, Administrative, Professional, Computer, and Outside Sales. To qualify, there are specific criteria regarding work duties for each category which includes:

  • The amount of time spent managing/supervising/administrating
  • The number of people managed/supervised
  • The degree to which their primary duty includes the exercise of discretion and independent judgment with respect to matter of significance
  • Hiring and firing authority

All of the FLSA’s requirements for exempt status are extensive, specific, and stringent and cannot be covered here in detail. For more details, click here

For employees who truly meet exempt status, they generally must receive their compensation in the form of a salary or fee basis (computer and outside sales are exceptions). The salary or fee must be equal to or greater than $684.00 per week under the FLSA, but may be higher in states, such as California, that have their own, more rigorous rules.

Exempt employees are paid based on the job they perform, not the hours they work. Therefore, while employers do not have to pay overtime when they work more in a day or week, employers are restricted in being able to reduce an exempt employee’s pay when they work less. If an exempt employee works any portion of the week, they’re entitled to their full salary with few exceptions. Pay deductions for exempt employees are nuanced. For more details on this, please contact us. 

By default, all employees are assumed to be non-exempt. In other words, they are not exempt from the overtime pay requirements and calculations. Non-exempt employees are to receive overtime pay, regardless of their method of compensation, any time their hours exceed the overtime trigger. The non-exempt classification applies unless the employer can show that the employee’s work duties meet the criteria for being exempt, as described above.

There is no rule that says non-exempt employees have to be paid a certain way. They can be paid a salary whether that’s weekly, bi-weekly, or monthly. They can also receive their compensation in the form of a daily rate, an hourly wage, piece rate, or commission. So long as you are paying a non-exempt employee at least minimum wage for all hours worked, you may compensate them at a rate and method of your choosing. 

Furthermore, non-exempt employees must only be paid for time actually worked. This means that when employees are late, have to leave early, or take time off during the day, whether that’s a half or a full day, they are not required to be paid.

Unlike exempt employees who all have to be paid on a salary or fee basis based on their classification, not all non-exempt employees have to be compensated in the same manner. You can have some employees be paid hourly, some on a daily rate, or some a salary depending on what you think will be best for those positions and your business.

While exempt employees are protected from a variety of salary reductions for work not performed, non-exempt employees are not. If a salaried, non-exempt employee fails to work the full schedule required, then his/her salary can be reduced by the appropriate number of non-work hours. Be sure you have clearly established policies, in writing, explaining that you will avail yourself of this right to avoid confusion and arguments. 

So…Does Salary Pay Avoid Overtime?
If you’ve read this far, you know it doesn’t. Maybe now the question is: what is the best method for paying a non-exempt employee? 

For non-exempt employees, we do recommend hourly pay because it is simple, straightforward, and easy to understand and administer. The other compensation methods, while valid, do come with more complications to manage. 

That being said, paying a non-exempt employee a salary often does have a psychological value for the employee. And, it can be administratively easy if overtime isn’t worked or if time-off deductions are minimal. This will depend on the employee – their attitude, their motivation, their general nature, etc. This may drive one employee to be more successful while another may abuse the privilege. 

If you decide to pay your non-exempt employees a salary, follow these guidelines:

  • Be clear how many hours per week the salary is based upon. It can be any number up to 40 hours.
  • As mentioned, you can dock the employee’s pay for time not worked. Make it clear how you’re going to handle this when the employee works less than the defined schedule. In other words, what will you do if you define the salary as 34 hours per week and the employee only works 28 unexpectedly? 
  • Know that if the employee works more than the defined schedule, you must increase their pay. In other words, a salary based on 34 hours must be increased if the employee works 38 hours. A poorly defined salary will result in this happening frequently, which is not advised. Audit your employee’s hours to determine the most ideal number of hours to base the salary on. 
  • Don’t forget that any hours over applicable daily and/or weekly overtime triggers must be paid at time and one half (or double time, as the case may be in CA for certain situations). 
  • Once the above is established, put it in writing to ensure everyone is on the same page. 

There are misconceptions and misunderstandings about paying employees on a salary basis as it relates to overtime. Avoiding overtime pay is not as simple as “just pay everyone a salary.” It’s time to bust that myth once and for all. Spread the word; tell your colleagues. If overtime is an issue for your business, look for other ways to solve it or prevent it. Short of being able to classify someone as exempt, which is limited and fairly rare, you have no other choice.