Episode 10: Salary Basis

Hear how a decades-old landmark law guides today’s employers on some of the most pressing issues facing companies. Bill Martucci, who leads Shook, Hardy & Bacon’s national Employment Litigation and Policy Practice, shares insight in these bite-sized podcasts focusing on the Fair Labor Standards Act. Whether you’re a seasoned general counsel or just finding your way through the myriad of state and federal wage and hour laws, listening to Bill’s soothing discourse is time well spent.

Subscribe on Apple Podcasts, Spotify or YouTube.

TRANSCRIPT

You’re listening to “A Window into Wage and Hour,” a podcast series that shines the light on time and money laws impacting your business today.

Welcome to our clients and friends. This is Bill Martucci, the practice group leader of the Shook Hardy National Employment Litigation and Policy practice. Here we are in Washington, D.C., and as we delve ever more into our wage and hour podcast, we today are going to focus on the salary basis aspects of the salary requirement of the wage and hour white collar exemptions.

As you know, there are the classic white collar exemptions, which have, as part of the requirements to qualify as an exemption, the duties test and the salary test. And the salary test, of course, there is the salary level, but ever more critical to the analysis of exemption is the salary basis test. It is the responsibility of the employer in an affirmative aspect to be able to demonstrate that in fact there is a salary in place. This is the procedural, affirmative burden of the employer.

Let’s consider what is at the heart of the salary basis test. At the heart of the salary basis test is that one be considered paid on a salary basis within the meaning of the Fair Labor Standards Act if one regularly receives each pay period on a weekly or less frequent basis, a predetermined amount constituting all or part of one’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Now, in that respect, the courts have been very thoughtful to highlight essentially three elements of the salary basis test. First, a predetermined amount. Second, which is not subject to reduction. And third, which is not based on the quality or quantity of work performed.

Let’s highlight some of the challenges that come into play in this context. Of course, if you think about it in a very straightforward, simple way, that’s helpful because the salary is this predetermined, specified amount that the employee is paid in connection with his or her position. The amount of time needed to do the work, the quality, the quantity of the work or the output, will vary, but the payment must remain the same. Of course, the benefit here for the employer is that one can have a set amount and have a certain number of hours that are flexible. The benefit for the employee is there is a set amount as well and hopefully some flexibility with respect to hours.

Let’s consider a few situations. Suppose, for example, that an exempt employee, an executive, an administrative employee, a professional employee, takes the afternoon off to attend to his or her personal business—perhaps they are going to a school event for one of their children or they are going to help out a friend on a special occasion. For those hours that are missed in the afternoon, if the hours are not counted against the salary, then that’s a true salary basis. On the other hand, if somehow those hours affect the salary, then that amount of the salary is not predetermined and it, if fact, would be based on quantity, and, therefore it wouldn’t truly be a salary.

Another example. Suppose that your computer system at the office crashes. It’s unavailable for two or three hours. You, as an exempt employee, leave the workplace for the rest of the day. Again, you are to be paid for that time. You are given certain flexibility with respect to your hours. Under these circumstances, you are entitled to receive the predetermined amount of pay. And it’s not subject to reduction due to variations in the quantity or the quality of your work performed.

Now, there are certain areas where an employer make deductions without impacting the salary basis status. We are just going to mention a few to explain there is some flexibility here. That is, there can be deductions from the pay of exempt employees, if in fact there are penalties imposed in good faith for infractions of safety rules of major significance. There also can be deductions from pay of exempt employees for disciplinary suspensions of one day or more that are imposed in good faith for infractions of workplace rules. An employer is not required to pay the full salary in the initial or terminal week of one’s employment. And, perhaps most significant of all, exempt individuals need not be paid for any work week in which they performed no work.

On the other hand, if an exempt individual works for a few hours in a given work week, then that exempt individual is entitled to their salary payments. In addition, exempt status is not jeopardized by deductions for absences of a day or more due to sickness or accidents, provided the employer has a policy for compensating employees when days are lost due to sickness or accidents. And, as we noted, for certain other limited circumstances.

The long and short of it is that the salary basis test means that predetermined amount will be paid, except in very limited, narrow circumstances, and will be paid regardless of the quality or the quantity of the work performed.

Thank you so much for joining us. That concludes our discussion of the salary basis provisions.