On November 8, 2018, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued a new opinion letter addressing the circumstances under which an employee who is paid on an hourly, daily or shift basis (subject to a weekly guarantee) may qualify as an exempt executive, administrative, or professional employee under section 13(a)(1) of the Fair Labor Standards Act of 1938 (FLSA). While not establishing a bright-line rule, the opinion letter confirms that: (a) a ratio of 1.5-to-1 between an employee’s usual weekly earnings and the weekly guarantee is acceptable; (b) a ratio that exceeds 1.5-to-1 is vulnerable to challenge; and (c) a ratio of 1.8-to-1 or more is probably not acceptable.

By way of background, an employee must typically be compensated on a “salary basis” in order to qualify as an exempt executive, administrative, or professional employee under section 13(a)(1) of the FLSA.¹ However, the regulations permit an exempt employee’s earnings to be computed on an hourly, daily or shift basis, if two conditions are met:

(1)       the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked; and

(2)       a reasonable relationship exists between the guaranteed amount and the amount actually earned.²

The “reasonable relationship” test will be met if the weekly guarantee is “roughly equivalent” to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.³

The regulations do not define the term “roughly equivalent.” They do, however, include an example of an exempt employee who is paid $150 per shift who normally works four or five shifts each week (and thus normally earns $600 or $750 per week). According to the example, the “reasonable relationship” test is met if the employee is guaranteed at least $500 for any week in which the employee performs any work.⁴

Testing the boundaries of the “reasonable relationship” requirement, the opinion letter does not stray far from the example in the regulations. In the opinion letter, WHD describes an employer that computes the earnings of its professional employees on an hourly basis at a rate of $70 per hour. The employer pays the employees a guaranteed weekly salary of $2,100 per week, based on a 30-hour workweek (the minimum hours the employees typically work). The employees work variable hours, and in 2017 their average weekly compensation was $2,721 per week, but ranged as high as $3,761.

Citing to the example from the regulations, WHD explained that a guaranteed weekly salary of $500 is roughly equivalent—and therefore reasonably related—to usual weekly earnings of $600-$750. Because the ratio of $750 to $500 is 1.5-to-1, WHD concluded that a 1.5-to-1 ratio of actual earnings to guaranteed salary must satisfy the reasonable relationship test. Thus, WHD concluded, usual weekly earnings up to $3,150 will satisfy the reasonable relationship test for the employees described in the opinion letter, since they receive a guaranteed weekly salary of $2,100 (i.e., since $2,100 x 1.5 = $3,150).

On the other hand, WHD concluded that usual earnings of $3,761 (almost 1.8 times the guaranteed $2,100 salary) “materially exceeds” the 1.5-to-1 ratio described in the example from the regulations. While acknowledging that the regulations do not dictate that a 1.5-to-1 ratio is the “absolute maximum” permissible ratio, WHD concluded that when there is a 1.8-to-1 ratio between usual earnings and the guaranteed salary, the usual earning are not roughly equivalent to the salary.

WHD did not discuss whether a ratio somewhere between 1.5-to-1 and 1.8-to-1 would have passed muster. Nonetheless, employers that pay their exempt executive, administrative, or professional employees on an hourly, daily, or shift basis should audit their records to determine if usual weekly earnings exceed the weekly guarantee by a ratio of more than 1.5-to-1. For employers conducting such an audit, WHD suggests that calculating an employee’s average weekly earnings over a one-year period would be appropriate. Also, WHD opines that the review should be conducted on an employee-by-employee basis—not based on the average of a group of employees.

Notably, the foregoing discussion applies only when employees are paid on an hourly, daily or shift basis. Employees who are paid on a true salary basis can still receive additional compensation without needing to satisfy the “reasonable relationship” test.⁵ Thus, for example, an exempt employee guaranteed at least $455 each week paid on a salary basis may also receive additional compensation in the form of a sales commission or performance bonus (even if such payments do not bear a “reasonable relationship” to the salary).⁶ Similarly, the exemption is not lost if an exempt employee who is guaranteed at least $455 each week paid on a salary basis also receives additional compensation (including a flat sum or even an hourly rate payment) “based on hours worked for work beyond the normal workweek.”⁷ 

When the employee’s compensation is computed on an hourly, daily or shift basis, then it is critical for employers to ensure that there is a “reasonable relationship” between the guaranteed amount and the amount actually earned—ideally, a ratio of not more than 1.5-to-1 between the usual earnings and the guaranteed salary.