Can Per-Project Payments Satisfy the Salary Basis Test for Overtime Pay Exemption?
On January 7, 2020 the U.S. Department of Labor issued an opinion letter responding to an inquiry asking whether payments to certain consultants constitute payments on a fee basis or salary basis under the Fair Labor Standards Act (FLSA). The answer was yes, under the circumstances.
This issue is important because an employee who satisfies the duty and salary-related requirements of the FLSA may be treated as “exempt” from the overtime pay laws. An employer can use the exemption, and avoid paying overtime, for administrative and professional employees that satisfy the duties tests, so long as they are paid “on a salary or fee basis.”
An employee is paid on a salary basis if he or she receives each pay period on a weekly or less frequent basis, a predetermined amount constituting all or part of their compensation that is not subject to reduction because of variations in the quality or quantity of work performed. The salary cannot be less than the amount required under the minimum salary threshold – effective January 1, 2020, $684 per week (or $35,568 annually for a full-year worker), up from the previously enforced salary level of $455 per week and for highly compensated employees at $107,432, up from the previously enforced annual compensation level of $100,000.
Administrative and professional employees are considered to be paid on a fee basis if they receive “an agreed sum for a single job regardless of the time required for its completion.” It is based on the “accomplishment of a given single task” and not “on the number of hours or days worked.” Fee basis payments “resemble piecework payments” except that a fee is paid for a “job that is unique” rather than for a “series of jobs repeated an indefinite number of times and for which payment on an identical basis is made over and over again.”
The following are some key excerpts from the Department of Labor’s opinion.
You request that the Department of Labor (Department) assume that educational consultants meet the duties tests of the administrative or professional exemptions. You state that the company will determine educational consultants’ compensation on a per-project basis regardless of the amount of time required to complete the project. The company will make payments for the project in “equal pre-determined installments” biweekly or monthly. You request that the Department assume that the amount of the per-project payment will exceed the currently enforced minimum salary threshold – effective January 1, 2020, $684 per week (or $35,568 annually for a full-year worker), up from the previously enforced salary level of $455 per week and for highly compensated employees at $107,432, up from the previously enforced annual compensation level of $100,000.
Two examples of the proposed method of payment:
The company assigns educational consultant A to Project One to develop a new curriculum for teaching literacy for its school district client. Educational consultant A will work on the project for the district’s academic year (a 40-week duration), and he or she will work irregular hours ranging from zero to 80 per week, including a minimum of 100 days of on-site support. Educational consultant A will be paid $80,000 for the project in 20 biweekly installments of $4,000 (i.e., $2,000 per week) regardless of the number of hours worked in any specific week. Educational consultant A will perform no other work for the company when not working on Project One.
While working on Project One, educational consultant A is assigned to Project Two. Project Two will last eight weeks and involves designing and conducting five teacher workshops. Educational consultant A will be paid an additional $6,000 in four $1,500 biweekly payments for Project Two (i.e., $750 per week). During the four biweekly periods when Projects One and Two overlap, educational consultant A will be paid $5,500 biweekly (= $4,000 Project One + $1,500 Project Two, or $2,750 per week).
Based on the information provided in your letter, the payment method in example 1 satisfies the salary basis requirement. In this example, you state that for developing a new literacy curriculum, the educational consultant will receive a predetermined amount in 20 biweekly installments paid throughout the district’s academic year. You indicate that the amounts of these payments will not vary from week to week or month to month based on the number of hours worked by the consultant on the project and, for purposes here, we presume they will not vary based on the quality of the work performed. As a result, this payment structure satisfies the requirement that employees be paid a “predetermined amount constituting all or part of the employee’s compensation” paid weekly or less frequently, provided the payments are not subject to reduction because of variations in the quality or quantity of work performed.
The scenario described in example 2 also complies with the regulations. For completing the second project, in addition to payments received for work on the first project, the consultant will be paid $6,000 in four $1,500 biweekly installments, for a total of $5,500 per pay period during the eight weeks in which the projects overlap. The employer’s payments for the second project also satisfy the requirements as “extra” compensation under the regulations. “An employer may provide an exempt employee with additional compensation without losing the exemption or violating the salary basis requirement.” The “additional compensation may be paid on any basis,” such as a flat sum, bonus, or hourly amount, and may be paid for “hours worked for work beyond the normal work week.
Here, as explained above, the employee is already paid on a bona fide salary basis that is presumably not subject to improper deductions. The additional compensation, even in the form of a weekly lump sum, is paid for additional work beyond the normal workweek, in other words for work beyond the scope of the first project, and can be paid on any basis. As the employee’s underlying compensation is not computed on an hourly, daily, or shift basis, the reasonable relationship requirement does not apply. For these reasons, the additional payment for the second project may be made without changing the employee’s exempt status.
The fact that the total amount of compensation (i.e., salary plus additional payments) might change several times throughout the year depending on the particular projects to which the educational consultant is assigned, as described above, does not change the conclusion provided the employee’s compensation satisfies the salary basis and extra compensation requirements.
Finally, you note that there are unusual occasions whereby the customer and company determine that the scope of a project should be changed prospectively, such that the employee’s per-project pay—and, therefore, the amount of the employee’s biweekly payment going forward—may be increased or decreased. These changes may not necessarily defeat the salary basis exemption provided the revised biweekly payment meets the minimum threshold. Indeed, WHD has long found that employers do not violate the salary basis test by prospectively reducing the salaries of exempt employees under certain conditions. An employee’s exempt status may be undermined, however, if the employer and customer engage in such frequent revisions to the contract that the amount of the employee’s biweekly compensation for a certain project is rarely the same from pay period to pay period and the circumstances suggest the amount of the payment is, in fact, actually based on the quantity or quality of work performed.
Having found that the method of payment presented in the examples of your letter is a salary basis, WHD will not separately address whether the method of payment is compliant with the fee basis method.