Because of the significant number of employment laws and their complexity, compliance can become difficult due to the confusion created by having so many laws. One such confusion faced by many employers revolves around paying employee on a salary basis and the impact that has on paying employees overtime. Many employers believe that paying employees a salary relieves them of any obligation to pay overtime. Although this may be true in some circumstances, it is not true in all of them. Instead, employers must pay salaried employees overtime unless the employees fall within a specified exemption under federal and state wage and hour laws. Thus, employers may pay any employee on a salary basis, but failure to also pay non-exempt salaried employees overtime leaves employers open to federal or state investigations, possible litigation, and potentially significant backpay obligations and penalties.
What is a salary?
In its simplest form, a salary is a basis of compensation where an employee is paid a set amount of money for a given period of time regardless of the number of hours worked during the salary period. An employer may set an employee’s salary as daily, weekly, monthly, yearly, or any other regularly occurring interval of time. Employers may pay any employee on a salary basis, although as discussed below, there are many instances where paying employees strictly on a salary basis may not be enough.
Non-exempt vs. exempt employees
To understand why some salaried employees must be paid overtime, employers must understand that federal and state wage and hour laws create two different classifications of employees: non-exempt employees and exempt employees. Moreover, the legal and overtime obligations for these two classifications are different.
Federal and state wage and hour laws create a presumption that employees are entitled to overtime pay. For employers in most states, this means they are required to pay the majority of their employees overtime pay (usually time and a half) when the employees work more than 40 hours in a workweek (for states with other overtime requirements check out our state minimum wage and overtime summaries). These employees that are entitled to overtime pay are referred to as non-exempt employees.
Although federal and state wage and hours laws create a presumption that employees are owed overtime, they also establish a limited number of exemptions to the general presumption. To qualify for a particular overtime exemption, an employee must meet specific criteria (see FLSA – Exemptions for information on federal overtime exemptions and State Employment Laws for state-specific exemptions) Employees who are exempt from the overtime presumption are referred to as exempt employees.
Salaries, non-exempt employees, and exempt employees
As noted previously, employers are permitted to pay any employee on a salary basis. This rule applies to both exempt and non-exempt employees. However, as also discussed above, employers must pay overtime to all non-exempt employees. Therefore, employers may pay non-exempt employees on a salary basis but must also pay them overtime, creating a salary plus overtime basis of payment. (There is a very narrow set of circumstances where an employer may pay a non-exempt employee who works irregular and unpredictable hours a fixed weekly salary; however, the weekly salary must include an amount for average anticipated overtime worked. For more information, see 29 CFR 778.402-14.)
The root of the confusion
I believe the misunderstanding that all salaried employees are exempt from overtime arises from the fact that three of the most common overtime exemptions require an employee to be paid on a salary basis in order for the employee to qualify for the exemption. The three exemptions are for executive employees, administrative employees, and professional employees, each of which have specific and distinct requirements, but each of which requires qualifying employees to be paid by salary. Because of the number of employment laws and their complexity, some employers became aware of the fact that they could avoid paying overtime to employees by paying them a salary without also recognizing that paying a salary was not the only requirement they needed to meet for the overtime exemption to apply.
Employers may choose to pay employees on a salary basis for many reasons, however, if the reason is to avoid paying overtime, the employer must make sure the employee is also an exempt employee. If not, in addition to paying non-exempt employees on a salary basis they must also pay them overtime in accordance with federal and state wage and hour laws. Failure to do so, leaves employers open to federal or state investigations, possible litigation, and potentially significant backpay obligations and penalties. If an employer is unsure whether their salaried employees are owed overtime, it is recommended they contact a local employment attorney or Human Resources professional to provide some guidance.