To qualify for the “white collar” exemptions under the FLSA, an employee must be paid on a “salary basis” and meet a job duties test. To meet the salary basis test, the majority of exempt employees are paid a guaranteed weekly salary that does not vary depending on the number of hours they work. However, employees paid on a daily, shift, or even hourly basis can also meet the salary basis test if they are guaranteed at least $455 per week in pay and the amount they actually earn bears a “reasonable relationship” to the guaranteed amount. A “reasonable relationship” exists when the guarantee is “roughly equivalent to the employee’s usual earnings . . . for the employee’s normal scheduled workweek.” 29 C.F.R. § 541.604(b).
The consequence of failing the salary basis test as to employees who the employer thought were exempt can be severe, as it can result in up to three years of unpaid overtime, liquidated damages, and attorneys’ fees. Much litigation has occurred over the years regarding what constitutes a “reasonable relationship” between usual earnings and a guarantee, not only as to the ratio between actual pay and the guarantee, but also as to the proper time period for measuring the employee’s “usual earnings.”
The Department of Labor has resumed its practice of issuing opinion letters, and a recent letter explains the DOL’s position on what constitutes a “reasonable relationship.” According to the letter, a “reasonable relationship” between actual earnings and a guarantee is a ratio of 1.5-1 or less. By contrast, according to the DOL, a ratio of 1.8-1 “materially” exceeds a 1.5-1 ratio and thus is not reasonable. The DOL does not specify what, if any, factual circumstances could exist that would permit a ratio between 1.5-1 and 1.8-1.
In terms of an appropriate time period for measuring “usual” weekly earnings in a “normal scheduled workweek,” the opinion letter endorses averaging weekly earnings over a calendar year. According to the DOL, such an approach “should ordinarily provide ample representations in variations in an employee’s earnings and hours.” The letter leaves open the question of what other time periods might suffice, and further notes that the usual-earnings inquiry is employee-specific and so calculating an entire group of employees’ average earnings may not reflect accurate earnings for a particular employee within the group.
The letter is here: https://www.dol.gov/whd/opinion/FLSA/2018/2018_11_08_25_FLSA.pdf
The Bottom Line for Employers
Employers desiring to classify employees paid on a daily, shift, or hourly basis as exempt should keep the following in mind:
- The employee must be guaranteed at least $455 per week.
- The DOL’s position is that the employee’s usual weekly earnings should ordinarily not exceed a ratio of 1.5-1 as compared to the guarantee. The employer should carefully consider how it measures the usual weekly earnings. If it chooses a period other than the calendar year in which to average the employee’s earnings, it should be able to articulate why the chosen time period is likely to generate a more appropriate average than earnings over a calendar year.
- The employee must still meet one or more of the white-collar exemptions’ job-duties tests.