Warning for Companies Lowering Salaries: State and Federal Overtime Rules for Exempt Employees

If your company has lowered salaries of exempt employees, the new and lower salaries must still be evaluated and paid above certain salary thresholds to maintain the employee’s exempt status to avoid overtime obligations. Under the Fair Labor Standards Act (“FLSA”), the minimum an exempt employee may make is $35,568 annual, $684/week, or $27.63 per hour. These amounts are much higher in some states, such as California, for skilled workers in the computer field. Employees must perform with a minimum salary of no less than $96,968.33 annually to qualify for the white-collar exemption. 

By way of example, consider an administrative assistant who was paid an annual salary of $42,000, and who qualified as an exempt employee per the FLSA’s administrative exemption. Due to budgetary constraints, the employer reduces all salaries by 20%, resulting in the administrative assistant making $33,600 annually, or $646 weekly. If the administrative assistant works overtime uncompensated, the employer has run afoul of the FLSA. For the administrative assistant to qualify for the administrative exemption, the administrative assistant must be paid at least $684 per week; annualized this is $35,568. 

What should the employer do? The employer can take one of two actions. 

  1. The employer can raise the administrative assistant’s salary to meet the FLSA’s or state’s threshold. Depending on the employer’s cash flow, this may not be practical. 
  2. The employer can reclassify the administrative assistant as non-exempt and carefully monitor the administrative assistant’s hours, so the administrative assistant’s hours do not exceed 40 hours in a workweek. Note that certain states, including Colorado, have daily overtime caps as well. 

Given that most employers across the country are suddenly grappling with the logistics of managing remote employees, the second option presents its own hurdles. For non-exempt employees that are working remotely, employers should disseminate a clear policy that employees are not to work overtime hours without receiving written permission from their supervisors. An employer may also require non-exempt employees to note their hours on a daily basis (rather than weekly or bi-weekly), and provide updates to their supervisors regarding their breaks, meal periods, and stop times.  

Before making decisions to reduce salaries of exempt employees, ensure you are in compliance by reviewing both federal and state laws along with exempt employee’s minimum wage thresholds. In some instances, previously exempt employees may become non-exempt employees with lowered salaries. For questions about employees’ exempt status and employer’s minimum wage and overtime obligations, please reach out to Stephanie Loughner or Becky DeCook.

This article was originally published in ColoradoBiz.