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What Is Salary Basis Test?
The salary basis test is one of three criteria used to determine if an employee is exempt from the minimum wage and overtime pay requirements of the Fair Labor Standards Act (FLSA). This test falls under the broader financial category of employment law and focuses on how an employee is paid, specifically whether they receive a predetermined, fixed salary that is not subject to reduction due to variations in the quality or quantity of work performed. An employee who meets the salary basis test is paid the full amount for any workweek in which they perform any work, without regard to the number of days or hours worked.
History and Origin
The Fair Labor Standards Act (FLSA) was enacted in 1938 to establish standards for minimum wage, overtime pay, recordkeeping, and child labor. From its inception, the FLSA included exemptions from its minimum wage and overtime requirements for "bona fide executive, administrative, or professional" employees, commonly referred to as "white-collar" exemptions. The authority to define and delimit these terms was given to the Secretary of Labor. Since 1940, the regulations have generally required that to qualify for these exemptions, employees must satisfy three tests: the salary basis test, the salary level test, and the duties test. The U.S. Department of Labor (DOL) periodically updates these regulations to reflect current economic conditions and earnings data. For instance, the DOL published a final rule on April 26, 2024, to update and revise the regulations concerning these exemptions, including adjustments to the salary thresholds7, 8.
Key Takeaways
- The salary basis test is a crucial component for determining if an employee is exempt from FLSA overtime and minimum wage requirements.
- It mandates that an exempt employee receive a fixed, predetermined salary, regardless of hours or quality of work.
- Impermissible deductions from a salary can cause an employee to lose their exempt status, potentially making the employer liable for back overtime pay.
- The salary basis test is one of three tests for FLSA white-collar exemptions, alongside the salary level test and the duties test.
Formula and Calculation
The salary basis test itself does not involve a mathematical formula or calculation. Rather, it is a qualitative assessment of an employer's payroll practices and how an employee's compensation is structured. The core principle is that the employee must receive a predetermined amount constituting all or part of their salary, which is not subject to reduction because of variations in the quality or quantity of the work performed6.
For an employee to meet the salary basis test, they must be paid their full salary for any week in which they perform any work, without regard to the number of days or hours worked. Certain deductions are permissible under specific circumstances, such as absences for personal reasons, sickness or disability (if part of a bona fide plan), penalties for infractions of safety rules of major significance, or unpaid leave under the Family and Medical Leave Act. However, improper deductions can result in the loss of the employee's exempt status.
Interpreting the Salary Basis Test
Interpreting the salary basis test involves understanding the nuances of how an employer pays a salaried employee to ensure compliance with labor laws. The essential interpretation is that an employee's predetermined salary should remain constant, irrespective of the actual hours worked in a given workweek or the perceived quality of their output. This means that if an employee works only a few hours in a week, they should still receive their full salary for that week.
The Wage and Hour Division of the U.S. Department of Labor provides detailed guidance on permissible and impermissible deductions from an exempt employee's salary. For example, deductions cannot be made for absences caused by the employer or by the operating requirements of the business. If an employer makes improper deductions, it can indicate that the employer does not intend to pay employees on a salary basis, leading to the loss of the exemption for that employee, or even a group of employees5.
Hypothetical Example
Consider an employee, Sarah, who works as a marketing manager for a company. Her annual salary is $60,000, paid weekly. Sarah's role is typically considered exempt, and her duties meet the duties test for an administrative exemption.
In one particular week, Sarah leaves work early on Tuesday for a personal appointment and misses a full day of work on Friday due to a non-FMLA related illness, for which she has no accrued paid leave. If her employer, following the strict interpretation of the salary basis test, pays her the full weekly salary despite her absences, then she meets the salary basis test.
However, if her employer reduces her pay for the hours or days she missed, unless a permissible deduction applies (like an absence for a full day for personal reasons or sickness under a bona fide sick leave plan, or leave taken under the FMLA), they would be violating the salary basis test. Such an impermissible deduction would mean Sarah is no longer considered a salaried employee for FLSA purposes and would then be entitled to overtime pay for any hours worked over 40 in that week, and potentially other weeks where similar deductions occurred.
Practical Applications
The salary basis test is fundamentally applied in human resources and payroll departments to classify employees correctly under the Fair Labor Standards Act (FLSA). Its practical application directly impacts whether an employee is eligible for overtime pay and adherence to minimum wage requirements. Employers must ensure that employees designated as exempt meet this test, along with the salary level test and the duties test.
Compliance with the salary basis test is vital for companies to avoid wage and hour lawsuits. The U.S. Department of Labor's Wage and Hour Division provides extensive guidance on these regulations, including fact sheets that detail the requirements for different types of exempt employees4. Businesses must diligently review their pay practices and employee classifications, especially with frequent updates to federal regulations, such as those made by the DOL in April 2024, which adjusted salary thresholds for white-collar exemptions3. Misclassifying employees due to a failure to meet the salary basis test can lead to significant back pay liabilities and penalties.
Limitations and Criticisms
While the salary basis test aims to clearly delineate between salaried exempt employees and non-exempt hourly workers, it faces certain limitations and criticisms. One primary critique centers on its strict interpretation, which can sometimes appear counterintuitive to modern work arrangements. For instance, requiring a fixed payment regardless of the quantity of work can seem inflexible in environments that value productivity or project-based work.
Another limitation arises when employers make impermissible deductions. Even if an employer makes a deduction in good faith, or due to a misunderstanding of the regulations, it can jeopardize the exempt status of an employee, leading to unexpected overtime pay obligations. The regulations do include a "safe harbor" provision, which can protect an employer from losing the exemption if they have a clearly communicated policy prohibiting improper deductions, reimburse any improper deductions, and make a good faith commitment to comply in the future. However, repeated or willful violations can still result in the loss of exemption.
Critics also point to the complexity of the Fair Labor Standards Act (FLSA) regulations, especially when combined with state-specific labor laws, making it challenging for businesses, particularly small and medium-sized enterprises, to maintain full compliance. The requirement for discretion and independent judgment in the duties test, coupled with the salary basis test, necessitates a careful and continuous review of job classifications by human resources and legal teams.
Salary Basis Test vs. Salary Level Test
The salary basis test and the salary level test are two distinct, yet equally critical, components for determining an employee's exemption status under the Fair Labor Standards Act (FLSA). While both relate to an employee's compensation, they address different aspects.
The salary basis test focuses on how an employee is paid. It requires that an employee receive a predetermined and fixed amount of salary, which is not subject to reduction because of variations in the quality or quantity of work performed. This means that if an employee works any part of a week, they must receive their full weekly salary, with only limited exceptions.
In contrast, the salary level test focuses on how much an employee is paid. It mandates that an employee's predetermined salary must meet a specific minimum weekly amount set by the Department of Labor. This dollar threshold is regularly updated to account for inflation and changes in average wages. For an employee to be considered exempt, their earnings must meet or exceed this minimum threshold, in addition to satisfying the salary basis and duties test.
FAQs
What happens if an employer makes an improper deduction?
If an employer makes an improper deduction from an exempt employee's salary, it can result in the loss of that employee's exempt status, meaning they would then be entitled to overtime pay for all hours worked over 40 in a workweek. The U.S. Department of Labor has "safe harbor" provisions that can protect employers who have a policy prohibiting improper deductions, make good faith efforts to comply, and reimburse employees for any improper deductions.
Does the salary basis test apply to all employees?
No, the salary basis test primarily applies to employees who are classified as executive, administrative, or professional, as well as certain computer and outside sales employees, to determine if they are exempt from the minimum wage and overtime pay provisions of the Fair Labor Standards Act (FLSA). It does not apply to non-exempt employees, who are typically paid hourly and are eligible for overtime.
Are there any exceptions to the salary basis test?
Yes, there are a few limited exceptions. For instance, the salary basis test does not apply to bona fide teachers, doctors, and lawyers. Additionally, certain highly compensated employees may have slightly different requirements for exemption, though they generally still must be paid on a salary or fee basis1, 2.
Can bonuses or commissions be part of the salary basis?
Under certain conditions, non-discretionary bonuses and incentive payments (including commissions) can be used to satisfy a portion of the salary level test, but they do not typically negate the requirement that the primary portion of the payment be a predetermined and fixed salary. The core of the salary basis test remains the predetermined fixed amount that is not subject to reduction for variations in work quantity or quality.