by Robert W. Ditmer, CPP*
Salaries for Fixed Overtime Hours
Some employers have attempted to simplify payroll for employees who work a fixed
workweek of more than 40 hours by paying them a salary that includes payment
for the overtime at a rate of one and half times the regular rate of pay. For
instance, if an employee works 45 hours every week and his compensation is based
on an hourly rate of $10 per hour, why not just pay him a salary of $475 (40
hr x $10/hr plus 5 hr x $15/hr)? Seems reasonable, doesn’t it?
Well, the FLSA has no provision for such a compensation arrangement.
To the Department of Labor the above pay is 40 hours at the
regular rate of pay and 5 hours at time and a half. And the
employee’s pay stub must reflect that fact. There cannot
be any agreement that the employee is being paid a salary.
The employee may consistently be paid the same amount
each week because his overtime is consistent, but if
the employee works more than the regular number of hours, then
additional overtime is due. And if the employee takes vacation or
sick leave, which are not hours worked, then no overtime is
actually due.
Salaries Reduce Costs
So employers can definitely reduce costs under certain circumstances by paying
non-exempt employees a salary. Although in many cases employees cannot be paid
a salary and must be paid an hourly wage, we have examined three types of salary
arrangements that can benefit the employer.
- Salaries for employees who work a fixed number of hours each week of 40 hours
or less.
- The Fluctuating Workweek method for employees whose hours fluctuate and
may normally work overtime.
- Salaries under a Belo Plan.
If employers are
careful about conforming to the restrictions under each of these
salary arrangements, they may be used to effectively cut administrative
costs and, in some cases, even reduce payroll costs.
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**Robert W. Ditmer, CPP, is Controller of Parker, Cade & Large, Inc., a commercial real estate development and construction company located in Columbia, Maryland. Mr. Ditmer has worked in five different states and has experience dealing with multi-state taxation involving states with reciprocal agreements and those that do not. He can be reached at robertwditmer@yahoo.com.
