Reed Smith Client Alerts

A recent Sixth Circuit Court of Appeals’ decision highlights the importance of documenting pay arrangements with employees to ensure compliance with the Fair Labor Standards Act (“FLSA”). In the case, the exempt status of the employees depended on whether they were paid by the employer on a “salary basis.” The employees’ offer letters stated that they would be paid on a day rate basis, without any reference to a guaranteed amount they would be paid on a weekly or less frequent basis. However, in practice, the employer paid the employees an amount equal to six days of work each week (including weeks when they did not perform work for six days because of holidays and sick leave). The employer’s pay practice resulted in the employees earning over $100,000 annually.

When the employees sued to recover more money in the form of overtime, the Sixth Circuit reviewed the technical language of the FLSA regulations and determined that, in order to show that the employees were paid on a “salary basis,” the employer had to establish that it guaranteed the employees a minimum salary amount. The employer could not conclusively establish that such a guarantee was made as the language of its offer letters conflicted with the evidence of its actual pay practices. Accordingly, the employees’ claims for overtime were allowed to go forward.

Authors: Peter J. Stuhldreher Cheryl L. Blount

Certain exemptions under the FLSA provide that employers do not have to pay employees overtime if, in addition to performing certain duties, the employees are paid a certain amount on a salary basis. To determine if an employee is paid on a salary basis, courts use the “salary-basis test.” This test requires that (1) the employee regularly receive a predetermined amount each pay period on a weekly, or less frequent basis; and (2) the predetermined amount is not subject to reduction because of variations in the quality or quantity of the work performed.