Employees generally fall into two categories: hourly and salaried. In the construction industry, salaried employees often work in the office (e.g., clerical workers, receptionists, CAD operators, accounting and payroll personnel, estimators, etc.) or in supervisory positions.

When it comes to overtime, many employers assume that their salaried employees are automatically exempt from overtime requirements. However, unless certain requirements are met, salaried employees may be entitled to overtime just like hourly employees. Employers who fail to recognize the distinction between salaried exempt and salaried non-exempt employees may be subject to liability and penalties.

This article addresses overtime exemptions for salaried employees under the federal Fair Labor Standards Act (FLSA). Please note, the FLSA establishes benchmark requirements for all employers. However, some states have adopted additional rules regarding overtime. Employers are encouraged to check for any additional requirements that might apply in their state.

FLSA Overtime Requirements

As a general rule, the FLSA requires that employees receive overtime pay at the rate of time-and-one-half for hours worked in excess of 40 per week. The FLSA provides various exemptions from this general rule. The provisions most frequently cited in connection with office and supervisory employees in the construction industry are exemptions for salaried employees.

To qualify for the salaried employees' exemptions, employees must meet two requirements. First, they must receive a salary, as opposed to an hourly wage. Second, they must work in executive, professional, or administrative positions.

The Salary Test

To meet the salary requirement, employees generally must receive a salary of at least $250 per week. This is referred to as the "short test" for assessing salaries. There is also a "long test" that applies to employees who earn a salary of at least $155 per week. Determining whether an employee's salary satisfies the long test requires additional analysis that is beyond the scope of this article.

In addition, a salaried employee must truly receive a salary. The employee's pay may not be tied to the number of hours worked. For example, if a salaried employee misses two hours of work on a particular day, and is docked two hours of pay as a result, the employee will not qualify as a true salaried employee. The law allows employers to dock salaried employees' pay in increments of one full day or greater, for disciplinary reasons, etc. However, if a salaried employee's pay is docked in increments of less than one day, the employee will not pass the salary test, and will not qualify for exempt status.

Executive, Professional, and Administrative Employees

The FLSA and its regulations include a series of strict requirements for determining whether employees qualify for the executive, professional, or administrative exemptions. To qualify as executives, employees must regularly direct the work of at least two or more other employees. They must customarily and regularly exercise discretionary powers. Further, their primary duty must consist of the management of the company, or a recognized department or subdivision of the company.

"Professional" employees must perform work that requires advanced knowledge in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction and study. To satisfy this requirement, employees generally must have earned a baccalaureate degree or its equivalent that includes concentrated study in a particular area, as distinguished from general academic courses.

To qualify for the "administrative" employee exemption, an employee's primary duty must consist of office or nonmanual work directly related to the management or general business operations of the employer. Employees whose primary duties consist of production work, producing the product or providing the service of the employer, do not qualify as administrators. Like an executive employee, an administrative employee's duties must involve the exercise of independent discretion or judgment. This involves the comparison and evaluation of possible courses of conduct, and acting or making a decision after various possibilities have been considered. Further, the person must have the authority or power to make independent choices, free from immediate direction or supervision, on matters of significance.

The fact that employees possess particular knowledge and skills, and apply their knowledge and skills in completing assignments, is generally not sufficient, by itself, to bring employees within the administrative exemption. Such employees are not considered to be exercising independent judgment, even if they have some leeway in reaching conclusions.

Application of Requirements

To illustrate the application of these requirements, consider the estimator position. Estimators frequently receive a salary rather than an hourly wage. Thus, they meet the first requirement of the salaried employees exemption.

Given the duties of the position, however, an estimator generally would not qualify as an executive. The estimator position usually does not require the sort of formal education and study necessary to qualify as a professional position.

Further, an estimator would normally not qualify as an administrative employee. In general, estimators are not primarily involved in the management of the company. Instead, their work relates to the providing of services to customers. Estimators apply particular skills and knowledge in completing their assignments. However, they generally do not exercise the sort of discretion necessary to qualify them as administrators.

Admittedly, each situation must be assessed on its own facts. All of an employee's duties and responsibilities must be considered when determining exempt status (e.g., an owner or CEO who also performs some estimating duties). However, the basic duties associated with an estimator generally do not meet the requirements of an executive, professional, or administrative employee. Unless estimators perform other duties that bring them into one of the classifications, they generally will not qualify for a salaried employee exemption.

Structuring Compensation Costs to Minimize Overtime

To avoid overtime, construction industry employers often try to argue that office workers and supervisors have agreed to work on a salaried basis. Since the employees receive their salaries at the agreed upon rate, the employers argue that they have no obligation to pay overtime. Employers also note that many of their staff members are very highly compensated.

While these arguments sound reasonable on an intuitive level, they fail as a matter of law. Unless an employee qualifies for a recognized exemption, the FLSA overtime requirements apply regardless of whether the employee is highly paid, and regardless of any agreement the employee might make to the contrary. In fact, the law specifically provides that agreements purporting to waive an employee's right to pay for overtime are void.

There are, however, ways to structure compensation to avoid liability and minimize overtime costs. At the most basic level, employers should make an honest assessment of their employees' exempt status. Regardless of whether employees receive an hourly wage or a salary, if they do not meet the FLSA requirements for the executive, professional, or administrative employee exemptions, employers must pay time-and-one-half for hours worked in excess of 40 per week.

Fluctuating Workweek Method

The FLSA and its regulations allow for different compensation arrangements that help employers manage overtime costs. One such arrangement that is frequently utilized in the construction industry applies to nonexempt employees whose hours fluctuate from week to week. The rules allow for employers to pay such employees a fixed weekly salary as compensation for all straight time hours regardless of the actual number of hours worked in a week.

Under such an arrangement, employees still must receive overtime pay for hours worked in excess of 40 per week. However, since the employees' fixed salary already covers all straight time hours, employers need only pay an additional one-half of the employees' regular rate for each overtime hour. Further, since the employees' regular rate for each week is calculated by dividing the number of hours actually worked into the employees' fixed weekly salary, a higher number of hours produces a lower regular rate.

Example: An employee receives an annual salary of $41,600, or $800 per week. In three weeks, the employee works 35 hours, 45 hours, and 55 hours. For the first week, the employee receives gross pay of $800, the fixed salary rate. Compensation for the second and third weeks is calculated as follows:

Week 2: 45 Hours Worked

Regular Rate = Fixed Salary ($800) Hours Worked (45)
Regular Rate = $17.78

Overtime Pay = (Regular Rate x 2) x Overtime Hours
Overtime Pay = ($17.78 x .5) x 5
Overtime Pay = $8.89 x 5
Overtime Pay = $44.45

Gross Pay = Fixed Salary ($800) + Overtime Pay ($44.45)
Gross Pay = $844.45

Week 3: 55 Hours Worked Regular Rate = Fixed Salary ($800) Hours Worked (55)
Regular Rate = $14.55

Overtime Pay = (Regular Rate x 2) x Overtime Hours
Overtime Pay = ($14.55 x .5) x 15
Overtime Pay = $7.28 x 15
Overtime Pay = $109.20

Gross Pay = Fixed Salary ($800) + Overtime Pay ($109.20)
Gross Pay = $909.10

When utilizing the fluctuating workweek method, the fixed salary paid to employees must be sufficient to provide compensation at a rate not less than the applicable minimum wage rate for all hours worked in the employees' longest week. The employer must pay the entire fixed salary even in weeks where employees do not work a full schedule; employers may not make deductions because employees fail to work a certain number of hours. Further, employees must clearly understand that their fixed salary covers all hours they may be required to work. Employers are recommended to obtain written acknowledgments from employees that the arrangement has been explained to them, and that they understand how their pay will be calculated.