Exempt Employees & The Reasonable Relationship Requirement

On November 8, 2018, the Wage and Hour Division (“WHD”) of the U.S. Department of Labor (“DOL”) issued an opinion letter regarding FLSA exempt employees and the reasonable relationship requirement between guaranteed weekly salaries and usual earnings.

Under the FLSA, employees employed in a bona fide executive, administrative, or professional capacity are exempt from the FLSA’s minimum wage and overtime requirements, if the employee satisfies the duties and salary requirements. See, 29 C.F.R. § 541 generally. Although salaried, exempt employees may receive additional compensation for additional hours worked without losing the exemption. Exempt employees may also receive compensation “on an hourly, daily, or shift basis” without losing the exemption, so long as a “reasonable relationship” exists between the employee’s guaranteed weekly salary and the employee’s usual earnings. See, 29 C.F.R. § 541.604(b).

The opinion letter went through an in-depth analysis of the “reasonable relationship” test and what constitutes a permissible ratio of actual earnings to guaranteed weekly salary to satisfy the test. Ultimately, the WHD opined that although an absolute ratio is not stated in the regulations, any ratio between 1.2-to-1 and 1.5-to-1 (actual earnings to guaranteed weekly salary) is permissible. Any actual earnings to guaranteed weekly salary ratio above 1.5 may not be considered roughly equivalent to the salary under 29 C.F.R. § 541.604(b).

Finally, in the opinion letter, the WHD determined that an employer can calculate an employee’s usual earnings for a normal scheduled workweek when hours and earnings are unpredictable and fluctuate from workweek to workweek. In such cases, it is permissible for the employer to calculate the average weekly earnings for the employee for a particular period (i.e. a one-year period). It is important to note, however, that the analysis is individualized, and an employer cannot make a usual earnings determination by calculating the average earnings for an entire job classification.

What Does This Mean For Employers?

If you employee exempt employees, you must pay them a guaranteed weekly salary which complies with FLSA salary requirements (at least $455 per workweek regardless of days or hours worked so long as the employee worked that particular week). Should you desire to pay your employees more than the guaranteed weekly salary for additional hours worked, for example, the employees’ actual earnings must have a reasonable relationship with the guaranteed salary. If it does not, you are potentially violating the FLSA.

For more information on FLSA and the “reasonable relationship” test, please contact York Bowman Law, LLC.