Court Rules Pay Variations for Exempt Employees no FLSA Violation

May 2, 2006 ( - The 6th US Circuit Court of Appeals ruled that paying exempt employees additional compensation at an hourly rate - instead of at overtime rates - for working more than 40 hours per week and occasionally paying employees less than salary when an employee underreports the number of hours worked does not violate the Fair Labor Standards Act (FLSA).

According to an article by the Society for Human Resource Management (SHRM), 24 employees of Detroit Edison sued the utility giant, claiming they should get overtime pay even though the company classified them as exempt employees under the FLSA. They claimed that they actually were paid on an hourly basis because when they underreported their hours, they received less than their pre-determined salary, violating the salary-basis test.

The company’s payroll system requires all employees – exempt and non-exempt – to report hours worked each week, and every two weeks they get a paycheck. Salaried employees are entitled to overtime pay rates, and if they report less than 40 hours, their pay is reduced.

The appeals court affirmed the lower court’s finding that Detroit Edison rightfully paid employees on a salary basis. Pay variations caused by sporadic underreporting of hours worked does nothing to alter the employee’s exempt status, according to the SHRM article. The court also found that tracking actual hours worked by exempt employees and paying additional compensation at a salaried exempt employee’s “hourly” rate for hours worked over 40 in a workweek does not violate the FSLA’s salary-basis test.

The appeals court opinion  leaned heavily on an opinion letter by the US Department of Labor that said an employee’s time reporting errors or omissions or other errors that result in an initial payment of less than 1/26th of an employee’s annual salary is not considered unlawful docking, does not call into question the employer’s intention to pay on a salary basis, and does not affect exempt status.