Overview: In furtherance of a practice reinstituted earlier this year, the DOL’s Wage Hour Division (WHD) issued Opinion Letter FLSA 2018-25 which provides guidance to employers paying exempt employees on an hourly, daily, or shift basis by addressing the requirement in 29 C.F.R. Section 541.604(b) that a “reasonable relationship” exist between an exempt employee’s guaranteed amount and the amount actually earned.
Details: Opinion Letter FLSA 2018-25 addresses the requirements of 29 C.F.R. Section 541.604(b) that a “reasonable relationship” exist between an exempt employee’s guaranteed amount and the amount actually earned. 29 C.F.R. § 541.604(b) permits an “exempt employee's earnings [to] be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee . . . and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee's usual earnings at the assigned hourly, daily or shift rate for the employee's normal scheduled workweek.”
In the facts presented, an engineering firm paid its professional employees a guaranteed weekly salary of $2,100 for 30 hours per week and paid $70/hour for each hour over 30 weekly. The average weekly compensation ranged from $1,793 to $3,761. Per the DOL, usual earnings of $3,760 were nearly 1.8 times the amount of a guaranteed weekly salary of $2,100. The DOL concluded this “materially exceeded the permissible ratios.” Hence, the compensation arrangement presented to the DOL did not meet the reasonable relationship test.
The opinion letter provides that a 1.5 to 1 ratio of actual earnings to guaranteed weekly salary constitutes a reasonable relationship under the regulations. The opinion letter further provides that using a calendar year for purposes of calculating an employee’s average weekly earnings was a reasonable method when the employee’s hours and earnings fluctuated widely from workweek to workweek.
Action Required: Employers paying exempt employees on an hourly, daily, or shift basis should review their pay policies, particularly the ratio of actual earnings to guaranteed salary.
As always, please be sure to contact your Human Resources Business Partner if you have any questions.
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