Salary Ain’t the Rule
Written by attorney Brian Bouchard
Published: seacoastonline.com
I hear the incredulity from clients constantly: “Overtime? We pay our employees a salary; they aren’t eligible for overtime.” I call it the salary assumption. Unofficially, it is the most common misconception in employment law. And it’s an understandable mistake. If an employee is paid a salary, how could an hourly overtime rate apply? The Fair Labor Standards Act (the “FLSA”) explains.
Enacted in the heyday of steam whistles, the FLSA requires everyone to earn an overtime premium of 1.5x of their regular-rate-of-pay for all hours worked over 40, unless otherwise exempt. For most industries, this involves satisfying a three-part test known as the “white collar” exemptions. Being paid a salary of at least $684 per week or $35,568 per year is only the first part of that test.
The employee must also be paid on a consistent “salary basis.” This means they receive a predetermined amount of compensation for each pay period, regardless of the quality or quantity of work performed. While an employee does not need to be paid for weeks where no work is performed, they must be paid their predetermined salary even if they work fewer days than expected or agreed upon.
Finally, the employee must satisfy a nuanced duties test. This is what most businesses miss. Overtime is intended to protect employees from predatory compensation and scheduling practices—think Upton Sinclair’s The Jungle. Because of this, not every job qualifies for overtime relief. In fact, most do not, and that is by design. Being exempt from overtime is intended to be the rarity.
While exceptions abound, an employee’s primary work obligation must generally fall into one of three categories: Executive work (think executives or department heads), administrative professional work (think HR or controller, who—while not an executive—has significant autonomy), and learned professional work (think doctors, attorneys, and certified athletic trainers). There are other categories for outside sales employees, computer employees, and highly compensated employees, but the executive, administrative professional, and learned professional exemptions are the most common. Each exception contains specific, rigorous subtests that are often misapplied.
But the analysis does not end there. Another common mistake is to assume that compliance with the Federal FLSA is the finish line. In reality, the FLSA merely sets the floor. Take Maine, for example. In Maine, the minimum salary threshold for an overtime exemption is tied directly to the state minimum wage—specifically, an annualized rate of 3,000 times the state minimum wage. Adding further complication, Maine’s minimum wage increases each year, causing the exemption threshold to likewise increase. Furthermore, while the federal government offers a relaxed duties test for “Highly Compensated Employees,” Maine does not. An employer operating nationally might rely on the federal Highly Compensated Employee exemption for a well-paid manager, only to find themselves stepping on a statutory landmine when applying that blanket classification to a Maine-based employee.
Messing up these exemptions is not just a frustrating administrative hiccup; it is sometimes a fast track to liability. When an employee is misclassified as exempt, they are retroactively owed overtime for all hours worked over 40. Under federal law, these unpaid wage violations routinely trigger liquidated damages equal to the unpaid amount—effectively doubling the employer’s exposure. State laws can be even more draconian. Massachusetts imposes treble damages, plus the employee’s costs and attorneys’ fees.
The good news is that the risk of turning a common misconception about the “salary assumption” into a disruptive (and potentially costly) lawsuit is entirely preventable, but it requires a proactive, state-specific audit of your pay practices before a plaintiff’s attorney or government agency does the math for you.
