By Anne Torregrossa

When pondering wage and hour law, folks generally think in terms of "hourly" and "salaried" employees to distinguish between workers who are subject to the minimum wage and overtime requirements and those who aren't. However, they are really talking about "nonexempt" and "exempt" employees under the Fair Labor Standards Act (FLSA).

The distinction is that "hourly" and "salaried" refer to how regular pay is calculated but have nothing to do with whether a person is subject to the FLSA's minimum wage and overtime protections. Using those terms accurately is important because a "salaried" employee can still be "nonexempt" and eligible for overtime pay and other protections.

Calculating overtime for salaried employees can be a bit tricky because they don't have a traditional hourly rate. To solve this problem, federal regulations allow you to calculate a salaried employee's overtime rate based on a fluctuating workweek (FWW).

The U.S. 1st Circuit Court of Appeals—which covers Maine, Massachusetts, New Hampshire, and Rhode Island—recently decided a case that helps define how to apply the FWW calculation if weekly bonuses are also part of the compensation package.

The challenge of nonexempt salaried employees

For a myriad of reasons, some employers find it advantageous to pay nonexempt employees on a salary basis. Maybe the employer wants to set a fairly low base salary while providing for production bonuses or allow employees to put in the time they feel is necessary to complete their tasks without having their work schedules micromanaged.

Such an arrangement is fine and legal as long as the employee's salary, broken down to an hourly rate, is above minimum wage and the employee is paid overtime when she works more than 40 hours per week. However, calculating overtime in this situation can be difficult because the employee's hourly rate fluctuates depending on how many hours she worked in a particular week.

For example, an employer might agree to pay a nonexempt bookkeeper a straight salary of $26,000 a year, which works out to $500 per week. The bookkeeper and her boss estimate that she will work 32 hours per week on average. During a quiet week, she might log only 25 hours of work, but during a busy end of the month stretch, she might work a 50-hour week.

In this example, the employee's hourly rate during the quiet week is $20 ($500 divided by 25 hours). During the busy times, however, her hourly rate is only $10 ($500 divided by 50 hours). Using her estimated average workweek, her hourly rate is $15.63 ($500 divided by 32 hours).

So which number should the employer use to calculate time-and-a-half pay for her overtime hours? The FWW calculation solves this problem with the elegant answer "it depends."

The FWW calculation

Basically, the employee's hourly rate depends on the workweek. In our example of the 50-hour week at the end of a busy month, the employer would use the hourly rate of $10 to calculate overtime. Therefore, the employee's time-and-a-half rate for all hours in excess of 40 would be $15.

In the 50-hour week, the employee would be paid $550 for her services ($400 in straight-time compensation plus $150 in overtime compensation). If she worked 46 hours in a week, her hourly rate would be $10.87, and she would be paid $532.63 for her week's work ($434.80 in straight-time compensation plus $97.83 in overtime).

Figuring in bonus compensation

The 1st Circuit recently decided a case that clarifies how overtime is calculated for salaried nonexempt employees who are partially compensated through production bonuses. Joseph Lalli was a store manager for GNC.

He was paid a weekly salary plus a sales commission based on the store's sales for the week. When he worked more than 40 hours in a week, he was paid overtime, with his hourly wage calculated based on both his regular salary and any bonus he received that week.

Lalli sued, claiming that GNC couldn't use the FWW method for calculating his overtime because that method is available only if an employee "will receive such fixed amount as straight[-]time pay for whatever hours he is called upon to work in a workweek." Lalli argued that he was paid a different amount each week because of the bonus structure, so his compensation was not "fixed."

The 1st Circuit has previously decided that certain types of compensation—specifically, contractual overtime and shift differential pay—are not "fixed" and therefore do not qualify for the FWW method of calculating overtime. Lalli pointed to the court's decision in those cases to argue that his salary also wasn't "fixed" within the meaning of the regulations.

However, the court wasn't convinced by Lalli's argument. Distinguishing between contractual overtime and shift differential pay and the bonus compensation that Lalli was paid, the court upheld GNC's compensation scheme.

Takeaways

The moral of this story, which will come as no surprise to employers, is that wage and hour laws can be treacherous. Once you clear the substantial hurdle of accurately classifying an employee as exempt or nonexempt, there are still traps for the unwary.

Tailoring employee compensation to your business model and goals can be a powerful way to incentivize and reward your staff. However, if you choose to pay nonexempt employees something other than a simple hourly wage, consider seeking out good employment law counsel to ensure that you are staying within the bounds of the law.

Anne Torregrossa, an editor of Maine Employment Law Letter, can be reached at atorregrossa@brannlaw.com or 207-786-3566.