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Two Federal Appellate Courts Draw Different Conclusions on Effect of Salary Changes on Overtime Exemption

    Client Alerts
  • November 07, 2008

In order to claim the white-collar exemptions from the overtime provisions of the Fair Labor Standards Act, employers must pay the exempt employees on a salaried basis.  Deductions cannot be taken from the salary for variations in the quantity or quality of work performed by the employee.  Two new federal appellate cases review the employer’s latitude in making salary adjustments without threatening the employees’ FLSA exempt status.

In Archuleta v. Wal-Mart Stores, Inc., the Tenth Circuit Court of Appeals considered a lawsuit filed by Wal-Mart pharmacists who claimed that the professional exemption did not apply to their jobs, because the company frequently changed their salaries based upon anticipated workloads.  On appeal, the Tenth Circuit concluded that the FLSA allows employers to make occasional changes in salary without threatening the exemption.  However, the employer cannot constantly adjust the employees’ salary based upon anticipated work needs.  Pharmacists whose salary changed up to 17 times in a nine-month period were entitled to a trial on their overtime claims.

In Havey v. Homebound Mortgage, Inc., the Second Circuit Court of Appeals reviewed similar claims by a mortgage underwriter who claimed that her employer violated the salary requirements of the administrative exemption by prospectively changing her salary on a quarterly basis during her employment.  The Second Circuit affirmed dismissal of the claim, finding that the employer is entitled to occasionally change the exempt employee’s salary as long as this is not done in an attempt to evade the FLSA’s overtime provisions.

Both of these courts indicate that the employer can make prospective adjustments in the salary based upon business forecasts without threatening the exemption.  The key factors for employers are how often changes are made, and for what purposes.  In Archuleta, the Tenth Circuit was not troubled by several changes within a calendar year, but drew the line at situations where the employer was appearing to make almost weekly salary decisions based upon anticipated upcoming work for that time period.  In Havey, the quarterly salary adjustments were fairly frequent, but the Second Circuit appeared persuaded by the fact that the reviews were prescheduled, and not initiated based upon changing business circumstances.

Employers that claim the white collar FLSA exemptions should establish clear policies for review and change of exempt employees’ salaries, especially where those salaries are reviewed on more than an annual or semi-annual basis.