Prospective Salary Changes Are Okay,

But Too Many Can Alter Exempt Status

(Published February 2, 2009)

 

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The Fair Labor Standards Act (FLSA) allows employers to prospectively reduce employees' salaries to accommodate business needs without affecting exempt status.  The key is that you cannot make changes with such frequency that the salary is the functional equivalent of an hourly wage.  Once or twice in a year is okay; more than that could be problematic, as Wal-Mart recently found out.

 

Background: Wal-Mart pharmacists were considered to be full-time if they worked at least 28 hours each week.  They were paid by salary, and their salary was based on a three-, four-, or five-day workweek. 

 

Each pharmacist agreed to work a specific number of base hours each week for a specific rate of pay; there was not a uniform pay scale governing all pharmacists in all stores.

 

Wal-Mart, in turn, agreed to pay its pharmacists for these base hours, regardless of whether they actually worked all of the base hours in a given pay period.  If a pharmacist worked more than their base hours in a given pay period, they were paid a pro-rated hourly rate for those extra hours.  The fact that Wal-Mart compensated its pharmacists for extra hours worked did not change their exempt status.

 

A group of more than 570 pharmacists claimed that they were entitled to overtime pay because the company changed their base hours, and thus, their base pay, so frequently that it was, in effect, treating them as hourly employees.

 

The court dismissed the claims of most of the pharmacists after finding that, at most, they experienced up to four such changes over an average period that was longer than four years.  However, two pharmacists got the green light to proceed with their claim.  Evidence showed that changes were made to one pharmacist’s salary in 17 out of 21 pay periods over a nine-month period of time; the other experienced five changes.  (Archuleta, et al. v. Wal-Mart Stores, Inc., 10th Cir., No. 07-1065, 2008) 

 

If business is slow, you may reduce exempt employees' workweeks because of a temporary work shortage.  The Department of Labor (DOL) stated in an Opinion Letter that a bona fide reduction in an employee’s salary does not affect exempt status, as long as the reduction is not designed to circumvent the requirement that the employees be paid their full salary in any week in which they perform work.  A fixed reduction in salary effective during a period when a company operates a shortened workweek due to economic conditions would be a bona fide reduction not designed to circumvent the salary basis payment.  Reminder: The reduction cannot drop exempts’ salary below $455 per week.

 

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