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Calculating Salaries for Non-Exempt Employees

by Robert W. Ditmer, CPP*

In an effort to cut payroll administrative costs many employers will pay some or all of their non-exempt employees a salary, especially if the employee has a fixed workweek. The employee’s salary is usually stated in terms of a specific frequency of payment (such as an annual salary) or according to the employer’s payroll period (such as a biweekly salary). Salaries are an acceptable alternative under the FLSA, but employers must remember one basic fact: The employee is still subject to the FLSA. That means the employer must be able to calculate the employee’s regular rate of pay, and the employee is entitled to additional compensation if he works more than 40 hours in a workweek.

Therefore, if a non-exempt employee is paid a salary, the employer and the employee must come to an understanding that the salary covers a fixed number of hours in each workweek. [29 CFR 778.113(a)] So the employee’s regular rate of pay can be calculated by dividing the number of hours expected each week into the weekly salary. For instance, suppose a secretary is hired to work from 9:00 am to 5:00 pm each, and she has an hour off for lunch. She would be working a 35-hour workweek. If she is paid $350 per week, then her regular rate of pay is $10 per hour ($350 / 35 hr).

What if a salaried, non-exempt employee works more than 40 hours per week? The CFR states that the employee should be paid for the first 40 hours of work at his regular rate of pay, and he is then entitled to overtime at one and a half times his regular rate of pay. If the above secretary works 45 hours in one workweek, the overtime can actually be calculated using the overtime premium method as follows:

  • Calculate the regular rate of pay. ($350 / 35 hr = $10/hr)
  • Calculate the employee’s total remuneration. (45 hr x $10/hr = $450)
  • Calculate the overtime premium. (5 hr x .5 x $10/hr = $25)
  • Calculate total pay. ($450 + $25 = $475)
So the employee is paid $125 in addition to her salary of $350/week. We can test the validity of the above method by following the CFR’s description exactly.
  • Calculate the additional straight-time pay for the hours between 35 and 40. (5 hr x $10/hr = $50)
  • Calculate the overtime pay at time and a half. (5 hr x 1.5 x $10/hr = $75)
  • Calculate pay in addition to salary. ($50 + $75 = $125)
There are some additional issues that still need to be addressed. What if the agreed upon salary is not stated in weekly terms? Then the CFR provides the basic calculations for reducing the employee’s salary to weekly terms. [29 CFR 778.113(b)]
  • Annual – Divide by 52.
  • Monthly – Multiply by 12 and divide by 52.
  • Semi-Monthly – Multiply by 24 and divide by 52.
  • Biweekly – Divide by 2.

What if the agreed upon workweek is less than 40 hours, and the employee works more than the expected number of hours, but less than 40 hours? The Tax Court has ruled that if a non-exempt, salaried employee works more than the normal week, but less than 40 hours, the employer is not required to pay for the additional hours worked. [U.S. v. Klinghoffer Brothers Realty, 285 F.2d 487 (2nd Cir. 1960)] For instance, if the above secretary works 38 hours during the workweek, she does not have to be paid for the additional 3 hours. The agreement between the employer and the employee is that the salary covers all hours worked with the exception of workweeks in which the employee works more than 40 hours.

Employers have the option of paying for all extra hours over what the salary is meant to cover, but if the employer is going to pay the employee for all extra hours, then the employer might as well just pay the employee on an hourly basis. And if the employee consistently works overtime, then there are no savings administratively because of the constant need to calculate overtime. There are other alternatives in that case, and these will be discussed later.

What if the employee works less than the expected number of hours during the workweek? In some cases there could be problems because in some states if an employee is paid a salary, his salary cannot be reduced if he works less than the expected number of hours. He is treated the same as an exempt employee. In those states the only way an employer can avoid paying the employee who works less than the expected number of hours is to make the employee an hourly employee. So employers must be aware of what state law permits.

So when is paying a non-exempt employee a salary an effective strategy? The best situation in which to use this method is when an employee has a workweek with a fixed number of hours. Preferably this would be when the employee actually works less than 40 hours per week. If the employee is scheduled for 35 hours or 37.5 hours per week, then minor fluctuations in the workday that result from the employee arriving a little early, leaving a little late, or working part of his lunch break can be ignored (although the time must still be tracked).

Salaries can also be used when employees are paid less frequently than once a week. But employers need to be aware of problems that can be inherent in doing this. In some states non-exempt employees cannot be paid less frequently, so employers must conform to state law in these cases. And payroll periods that do not correspond to workweeks (such as semi-monthly and monthly payrolls) have their own special problems. In fact, in the next section I will address one of these – semi-monthly payrolls.

Semi-Monthly Payrolls

Semi-monthly payrolls have an obvious cost savings because they eliminate at least two payroll runs each year for companies that would normally pay biweekly. Most companies that have a lot of hourly wageworkers don’t use them because state law prohibits them or administering them can actually be more expensive. This appears to be reflected in the American Payroll Association’s 2001 Benchmarking Study. The number of companies using semi-monthly payrolls dropped from 24.3% in 2000 to only 9.7% in 2001. [PAYTECH 11(4), April 2002, pp. 26ff.]

Since the semi-monthly payroll period doesn’t match any workweeks, how can employers deal with the adjustments that are necessary to pay overtime? To administer these payrolls an employer needs to establish certain timeframes and set certain policies regarding adjustments to payroll. These might include:

  • Pay Dates – The employer has to determine which two calendar dates each month will be used for paying payroll. This would include the issue of when to pay the payroll if the calendar date falls on a weekend.
  • Cut-off Dates – The payroll department needs a certain number of days of lead-time to process the payroll. For instance, the cut-off date may be set at 5 business days before the payroll date. Anything that would require an adjustment to payroll (such as overtime) would have to occur prior to the cut-off date to be included in the next payroll.
  • Payroll Period – The employer has to make a choice between alternatives here. The payroll period could include all of the workdays that occur from the first day following the previous payroll’s cut-off date through the cut-off date of the current payroll. Or the employer could decide that payroll will be paid current, so the payroll period would begin on the day following the previous payroll and would end on the date of payroll.
  • Workweek – Since the workweek is the basic unit of the FLSA, the employer must set a workweek for determining if employees have worked overtime. Any overtime that occurs in a workweek that ends prior to the cut-off date would be paid on the next pay date. If the workweek ends after the cut-off date, then the overtime would not be paid until the following pay date.
Probably the biggest problem that administrators of semi-monthly payrolls face is how to pay employees for the initial payroll or the final payroll. This issue is not addressed by the CFR, although some state governments have developed formulas for calculating initial or termination payrolls. Be sure to check state law to see if the issue is addressed.

If the payroll period is current, then the employer will have to calculate the initial payroll based on the expected number of days or hours the employee is scheduled to work in the payroll period. If the payroll period is based on the cut-off dates, the employee’s actual hours worked can be used. The employee’s daily rate would be calculated by dividing the annual salary by 52 and then by the number of days normally worked each week. The regular hourly rate of pay could be calculated by dividing the weekly salary by the number of expected hours.

The following equation could then be used:

  • Gross wages = Number of hours worked x Regular rate of pay
Suppose a secretary is hired to work a 35-hour week, and she will be paid a semi-monthly salary of $834.17. She starts work in a payroll period that has 11 available workdays, and she works 4 days of that period.
  • First calculate the employee’s regular rate of pay. ($834.17 x 24 = $20,020.08/yr; $20,020.08 / 52 = $385.00/week; $385.00 / 35 hr = $11.00/hr)
  • Calculate the number of hours worked (or expected to work) in the payroll period. (4 days x 7 hr = 28 hr)
  • Calculate the initial paycheck. (28 hr x $11.00/hr = $308.00)
There is also another method that can be used in the semi-monthly payroll period situation for an initial or terminating paycheck. If the employer and employee agree beforehand,, the employee's regular rate of pay can be determined by dividing the monthly salary by the number of working days in the month and then by the number of hours in the employee's normal workday. That rate is then multiplied by the number of hours worked in the semi-monthly period to determine the employee's gross wages.
  • Calculate the employee’s regular rate of pay. ($834.17 x 2 = $1,668.34/month; $1,668.34 / 22 working days = $75.83/day; $75.83 / 7 working hours = $10.83/hr)
  • Calculate the number of hours worked (or expected to work) in the payroll period. (4 days x 7 hr = 28 hr)
  • Calculate the initial paycheck. (28 hr x $10.83/hr = $303.24)
This section and the previous one have focused on paying non-exempt employees a salary if the employee regularly works 40 hours or less. Overtime must be paid for any hours worked over 40, but if this does not occur on a regular basis, then the employer can realize savings in administrative costs. On the other hand, what if the employee regularly works more than 40 hours per workweek? Or what if the employee sometimes works less than 40 hours a week and then works more than 40 hours a week? There are alternative strategies for paying such employees a salary. These are explored in the following two sections.

*Originally published as "Calculating Salaries for Non-Exempt Employees," PAYTECH, March 2003, pp. 38-40.

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