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You can adjust salaries based on occasional business ups and downs

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Employees must be paid on a "salary basis" to be declared exempt from overtime pay under the Fair Labor Standards Act (FLSA). In the past, some employers tried to evade that requirement by paying employees a salary, but making frequent changes to that salary amount, which essentially adjusted the pay for hours worked.

Our advice: As the following case shows, not all more-than-annual salary changes will erase an employee's overtime exemption. You can change employees' salaries during the year, but to preserve the exemption, those salary changes must be 1) occasional and 2) in response to operational needs, as opposed to strictly seasonal business fluctuations.

Unless such wage reductions create what could be seen as a "sham" salary system that compensates employees based on hours worked, your changes won't threaten their overtime exemption.

Recent case: A group of Wal-Mart pharmacists sued for unpaid overtime pay, arguing that they should have been classified as nonexempt hourly employees because Wal-Mart violated the FLSA's salary basis test by reducing their salaries in advance to compensate for anticipated decreases in business.

A federal appeals court sided with Wal-Mart, saying that employers can prospectively change employee salaries without threatening the exemption, as long as such changes aren't so frequent as to create an hourly pay situation.

The court relied on Labor Department opinion letters stating that employers can occasionally change salary levels due to business needs. (Archuleta v. Wal-Mart Stores Inc., Nos. 03-1432 and 03-1473, 10th Cir., 2005)

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