man calculating salary and overtime pay with calculator

The U.S. Department of Labor recently issued an opinion letter that clarifies an important question for employees who are paid a guaranteed weekly salary plus an hourly wage or other extra compensation, such as flat sums, bonuses, straight-time hourly, or even time-and-a-half. These often highly compensated workers are typically classified as “exempt” from the overtime labor laws, and denied overtime pay, based on the fact that their base weekly salary amount satisfies the legal minimum of $455 per week / $684 as of 1/1/2020 (salary basis requirement) – even when this amount is a mere fraction of their total actual earnings after items such as extra hourly pay and other forms of pay are included.

This is a big deal for workers who receive a significant amount of pay on top
of a base guarantee. This includes many Managers, Supervisors, Professionals,
and Executives.
They may be owed large amounts of back overtime pay. 

How Much is Too Much?

The “salary basis requirement” has always allowed for situations where there is a difference between an employee’s actual earnings and the guaranteed weekly salary when employees are paid on an hourly, daily or shift basis – so long as there was a “reasonable relationship” between the two.

The open question has been how much of a difference can there be between a worker’s minimum guarantee and total earnings and still be “reasonable”? Now we have an answer!

For there to be a “reasonable relationship” between an employee’s guaranteed weekly salary and actual earnings, his or her actual earnings should not exceed 1.5 times the guaranteed weekly salary. If actual earnings exceed 1.5 times the guaranteed salary amount, the “salary basis test” is failed, and the employee is no longer “exempt” from the overtime pay laws – meaning they must be paid overtime for all hours worked over 40 per workweek.

So, in order for an executive, administrative or professional employee whose compensation is computed on an hourly, daily or shift basis, to be denied overtime pay:

Average Actual Weekly Earnings
_________________________________   Must be Less Than or Equal to 1.5

Guaranteed Weekly Salary

If the ratio of your actual earnings and guaranteed weekly salary exceeds 1.5, then your employer may have you misclassified as an exempt executive, administrative, or professional employee. If so, your employer must change your compensation plan going forward to bring it into compliance. Your employer must also compensate you for all of the back, unpaid overtime wages you earned for the past 2-3 years. For high earners who work 50, 60, or more hours per week on average, this can be tens of thousands of dollars. Use the overtime pay calculator to get an idea of how much you might be owed (note: enter your total actual earnings in the weekly salary rate box).

What Does the Opinion Letter Mean for Employees?

The Opinion Letter specifically addressed highly compensated engineers and senior designers whose job duties clearly met the professional exemption and were paid a guaranteed weekly salary of $2,100 ($109,000+ per year) – based on an hourly rate of $70 and a minimum of 30 hours typically worked each week. They received this amount even if they worked less than 30 hours in a week, but when they worked over 30 hours, they were paid an additional $70 per hour.

The payroll records revealed that these engineers and designers had a usual average salary that was 1.8 times their guaranteed salary. According to the DOL, this ratio significantly exceeds the permissible ratios found in the regulations, and therefore was not “roughly equivalent to the weekly guarantee”.  While acknowledging that a 1.5 to 1 ratio is not the absolute maximum, the DOL clearly signaled employers are entering dangerous waters if the ratio is much above that range.

For employees, this means you should start looking at your pay records and get out your calculator to determine what your total earnings to guaranteed salary ratio is – or contact us and we will guide you through the calculation. If the result is much above 1.5 to 1, you should get more information about your specific situation and the options you may have for recovering up to double your backpay.

Why Put a Cap on Pay Above a Salary?

The reasons for capping how much extra compensation employees should earn above a guaranteed weekly salary include 1) insuring that an exempt employee’s salary remains the primary source of their pay – not these extra types of payments, and 2) incentivizing employers to increase guaranteed salaries as market forces push employee earnings upwards.

The Obama Administration attempted to increase the minimum “exempt” salary amount to $47,476, but it did not go into effect as planned on 12/1/16. Instead, the Trump Administration increased the minimum “exempt” salary to only $35,568 per year as of 1/1/2020.  Please see this page for the latest updates.