The Salary Basis Test for Overtime and Minimum Wage Laws

• Publication year: 2019

The Salary Basis Test for Overtime and Minimum Wage Laws

Allen Vaught

THE SALARY BASIS TEST FOR OVERTIME AND MINIMUM WAGE LAWS

Allen Vaught^*

Responsible businesses do their best to stay in compliance with applicable overtime and minimum wage laws. The overtime and minimum wage law that generally covers most businesses in the United States and certain other locations¹ is the federal Fair Labor Standards Act ("FLSA").² Depending on the particular state in which the business has employees, there may be state laws that provide more overtime wage and/or minimum wage protections for employees than the FLSA.

Employers should watch developments relative to the amount of salary an employer is required to pay its FLSA exempt employees (i.e. those who are not owed overtime wages and/or minimum wages) carefully. A recent court ruling prevented a regulatory increase of the weekly salary to $913, leaving in place the previous $455 weekly amount. However, new FLSA regulations raising that amount are likely to be issued. Additionally, even if an employer knows the salary it pays its employees meets the FLSA minimum, it should nevertheless investigate applicable state laws that may require higher salary levels than the FLSA.

I. What Is the Salary Basis Test?

Many of the common FLSA exemptions relied on by employers are known as the white-collar exemptions,³ which exempt "from both minimum wage and overtime requirements any employee employed in a bona fide executive,

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administrative, or professional capacity."⁴ Congress did not define the elements for "bona fide executive, administrative, or professional capacity," and instead delegated the "power to define and delimit [those] terms through regulations" to the Secretary of the United States Department of Labor ("USDOL").⁵

While each of those exemptions has a different test an employer must prove, many of them require or include payment on a salary basis.⁶ For example, the executive exemption requires that the employee be: (1) paid on a salary basis; (2) have a primary job duty of management of the business or a customarily recognized department or subdivision of the business; and (3) have the authority to hire and fire, or make suggestions and recommendations on hiring, firing, advancement, promotion, or any other change of status of other employees that are given particular weight.⁷

Payment on a salary basis means that the "employee regularly receives, each pay period on a weekly or less frequent basis, a predetermined amount constituting all or part of the employee's compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed."⁸

II. What is the Minimum Salary that Must Be Paid to Meet Relevant FLSA Exemptions?

Currently, the FLSA exemptions that mandate or allow payment on a salary basis require that the employee be paid a salary of no less than $455 per week.⁹ However, if an employer were to simply review the currently published Electronic Code of Federal Regulations¹⁰ relative to the white-collar

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exemptions, it would see a different amount - $913 per week.¹¹ Specifically, the current regulations state:

[A]n employee must be compensated on a salary basis at a rate per week of not less than the 40th percentile of weekly earnings of full-time nonhourly workers in the lowest-wage Census Region [which is the Southern United States¹² ]. As of December 1, 2016, and until a new rate is published in the Federal Register by the Secretary, such an employee must be compensated on a salary basis at a rate per week of not less than $913 (or $767 per week, if employed in American Samoa by employers other than the Federal government), of board, lodging or other facilities.¹³

The reason the required salary is $455 per week instead of the amount stated in the current regulation is due to a United States District Court ruling in the case styled Nevada v. United States Department of Labor.¹⁴

Prior to the Nevada case ruling, the operative white-collar exemption regulations, which were enacted in 2004, set the required salary level at $455 per week, in addition to requiring certain job duties for each such exemption.¹⁵ On May 23, 2016, the USDOL issued regulations increasing the salary level to $913 per week with an effective date of December 1, 2016.¹⁶ The Nevada case plaintiffs, which were a consortium of certain states and various business organizations, sought an injunction prohibiting the implementation of the new salary requirements for the white-collar exemptions.¹⁷

Although the Nevada Court confirmed that Congress had delegated the rule making authority for the white-collar exemptions (which were not defined in the FLSA itself) to the DOL, it concluded that the "significant increase" to...