Beware FLSA peril: Constantly changing schedules and pay may destroy exempt status

Employees who are classified as exempt under one of the many categories listed in the federal Fair Labor Standards Act (FLSA) can be paid on a salary basis and must work as many hours as necessary to get the work done.

They aren’t entitled to overtime for working more than 40 hours per week, nor do they lose pay for missing time during that week.

However, some employers make such frequent changes to the salary levels of exempt employees that it can almost seem as if the employees are being paid on an hourly basis. When that happens, the employer loses the right to skip paying overtime.

Recent case: Several pharmacists sued their employer, retail giant Wal-Mart, alleging that although they were classified as exempt professional employees, their salaries changed so often that they were, in effect, hourly employees.

The retailer set the pharmacists’ salaries according to three-, four- or five-day pharmacy schedules. It also frequently changed the schedule each pharmacist worked, thus affecting their pay for the week. This, the pharmacists argued, meant that each “salary” was nothing more than the total for a set number of hours per week rather than a set salary.

Payroll Handbook D

Because most of the pharmacists didn’t experience more than one salary and schedule change per year, their cases were dismissed. However, the court found that two of the pharmacists’ salaries and schedules changed more frequently. It granted them a trial.

Now a jury will decide whether the two were actually paid for the hours they worked—and therefore might be entitled to overtime—rather than paid based on a set salary. (Archuleta, et al., v. Wal-Mart, No. 07-1065, 10th Cir., 2008)

Final note: Consult your attorney before altering salaries based on a schedule change. This is a complicated area of the law and the penalty for getting it wrong may be a class-action lawsuit or a U.S. Department of Labor investigation. Either of those will consume far more time and money than you could possibly save by shaving a few dollars off the labor budget.

Deductions that may destroy exempt status

Employees who otherwise meet the FLSA’s exempt definitions and are paid on a salary basis must receive that salary if the employee is:

  • Ready, willing and able to work, but there is no work available
  • Absent for less than a day for personal reasons
  • Absent for sickness or disability for less than a day
  • Absent for sickness or disability for a day or more, unless the time is covered by a bona fide plan, practice or policy providing compensation for sickness or disability. In other words, you can subtract time from a sick-leave plan without risking the loss of the exempt status.