The HR Guide to Labor Laws for Salaried Employees

The U.S. Department of Labor (DOL) enforces over 180 federal laws that influence the lives of over 150 million workers and 100 million workplaces. Complying with those laws may seem impossible — but that’s the job of a modern HR professional.

For example, the Fair Labor Standards Act (FLSA) is one of the most important laws for both hourly and salaried employees. If you don’t pay your employees fairly for the work they do, you’re not only breaking the law, but damaging your organization’s health.

However, the FLSA isn’t the easiest law to discern, specifically for salaried employees. Some are exempt from FLSA requirements, but in a few important cases, you still need to consider how you pay them for their labor.

Let’s look at some important labor laws surrounding salaried employees and how you can remain compliant with FLSA.

FLSA: What You Need to Know

The Fair Labor Standards Act of 1938 protects employees from unfair labor and pay practices from employers. In creating the law, Congress aimed “to correct and as rapidly as practical to eliminate” such “labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers” (29 U.S.C. §202).

The law includes specific definitions and rules that regulate how hourly and salaried employees must be paid with regard to minimum wage and overtime pay. While inflation and economic changes affect updates to this law, the core principles remain the same.

Employers must understand the base requirements along with additional considerations for how salaried employees must be paid. To do that, we need to define a few key ideas within the FLSA.

Salary vs. Hourly Pay

First, let’s look at  the difference between salary and hourly pay.

Salary Pay

An employee who is paid salary is one who makes consistent pay on a regular basis. For example, say you have an employee who is paid $1000 every week. With a salary, this pay remains the same regardless of the amount of hours they work for a given workweek (40 or below). A person’s salary can only be deducted if they don’t show up for an entire workday. The tricky part is calculating overtime (more on that later).

The primary benefit of salary pay is pay security. For hourly employees, a company may reduce the employee’s hours (and therefore their pay) based on business needs. With a salary agreement, the employee may work less based on business needs without affecting their paycheck.

Hourly Pay

An employee paid hourly wages works according to a set wage rate. Their pay fluctuates based on the number of hours they work in a given workweek. For example, an employee could make a wage rate of $15 per hour. If that employee works 40 hours one week, their gross pay for that week would be $600 (40 hours x $15). If they work 39 hours, their gross pay would be $585.

The benefits of hourly pay usually involve overtime protections under the FLSA. Most hourly employees are entitled to overtime pay when they work over 40 hours in a given workweek.

Minimum Wage

The FLSA also regulates minimum wage, which is the minimum amount an employee must be paid on an hourly basis. At the federal level, the minimum wage is $7.25 per hour, however many states have set their own higher minimum wages. For instance, as of 2023, Washington, California, Massachusetts, and Connecticut have all set their own minimum wage at $15.00 or higher. Georgia and Wyoming are the only states that have a minimum wage below the federal level.

Overtime Pay

According to the FLSA, overtime is any time worked in addition to 40 hours in a workweek. By law, employees that qualify for FLSA protection (more on that later), must be paid overtime at no less than 1.5x the regular rate of pay. This applies for each hour worked over 40 hours in a given workweek.

For example, let’s say a standard hourly employee is paid a regular rate of $15 per hour. If that employee works 41 hours in a given workweek, you must pay them their initial $600 (40 hours x $15) + overtime pay. In this case, the overtime rate is $22.50 per hour ($15 x 1.5). Since the employee only worked one hour over the standard 40, you would just add one hour of overtime pay to their wage, like this:

$600 + ($22.50 x 1 hour) = $622.50

But overtime pay doesn’t apply to every employee, and this is where most labor laws for salaried employees are concerned.

Exempt vs. Nonexempt Employees

While overtime pay mostly applies to hourly employees, FLSA mandates that some salaried employees must be paid overtime as well, depending on a few key qualifications.

Exempt Employees

If an employee is exempt under the FLSA, this means they are exempt from FLSA provisions like overtime pay. As an employer, you do not need to pay your exempt employees for overtime. Of course, you may choose to pay your employee overtime, but this is not required by law.

Exemption under FLSA is determined primarily on the basis of two factors: salary and duties.

Salary Basis

To qualify for exemption, employees must be paid a salary. The DOL defines a salary as a “predetermined and fixed [amount] that is not subject to reduction because of variations in the quality or quantity of work performed.” Hourly employees are almost never exempt from overtime pay unless they are in certain professions (e.g. doctors, lawyers, teachers, etc.).

That same salaried employee must also make at least $35,568 per year or $684 per week to qualify for overtime exemption. If an employee makes more than this amount, they are often* considered exempt from FLSA. If an employee makes less than this amount, they are considered nonexempt.

Duties Basis

Some positions only qualify if they meet the duties outlined in the FLSA. Briefly, the FLSA allows exemption for jobs in executive, administrative, professional, computer, and outside sales jobs, but variations exist within these categories. For instance, employees may qualify for the computer duties exemption only  if they meet certain requirements. However, most outside sales employees (along with teachers, lawyers, and medical providers) are exempt automatically.

The FLSA is specific in how they define exemption for these roles, and the abundance of rules make it difficult to provide an exhaustive rubric. The best way to gain accurate information about the variations for exemption in this area is to consult the DOL directly.

Nonexempt Employees

If an employee is nonexempt, they are not exempt from overtime pay. As an employer, the law requires you to pay nonexempt employees overtime for any hours worked over 40 in a given workweek.

An employee is nonexempt if they do not meet the salary or duty requirements for exemption outlined above. These employees are entitled to a minimum wage of $7.25 per hour (depending on the state) and overtime pay at no less than 1.5x their regular hourly rate of pay. This can also apply to salaried employees. In these cases, you will need to calculate their hourly wage according to the hours they work each workweek.

Nonexempt Salary Example

For instance, let’s say Larry is a movie theater assistant manager who makes a salary of $32,000 per year ($615.38 per week). Since this does not meet the salary basis to qualify for FLSA exemption, Larry is considered a salary nonexempt employee.

Now, let’s say Larry works 42 hours one week. While he is paid $615.38 per week as a typical salary, you must recalculate this regular hourly rate according to his hours worked:

$615.38 / 42 hours = $14.65 (regular rate of pay)

From here, calculate the overtime rate based on the regular rate of pay ($14.65 per hour). This time, you’ll use the  Fluctuating Workweek method outlined in the FLSA, which sets overtime at .5 the regular rate of pay.

$14.65 regular rate of pay x .5 =  $7.33 (overtime hourly rate)

Since Larry worked two hours of overtime, you’ll calculate his gross pay like this:

$7.33 x 2 hours overtime =  $14.66 (overtime premium pay)

$14.66 + $615.38 (typical weekly salary) = $630.04

In this case, Larry’s gross pay would be $630.04 for the workweek.

This example demonstrates the Fluctuating Workweek method for calculating overtime. This applies because the nonexempt employee’s hours change from week to week (also assuming a few other qualifications). However, several states prohibit the use of this method, instead requiring the employer to calculate overtime at 1.5x the regular rate of pay. To do that, simply re-calculate overtime using the same process above with 1.5 in place of the .5 multiplier.

Recent Legislation and Revisions

Recently, the DOL revised some key standards related to salaried employees and overtime pay. For instance, effective January 1st, 2021, they raised the salary threshold to $684 per week. However, this may soon increase even more. In August 2023, the DOL also announced a Notice of Proposed Rulemaking (NPRM), Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees. This proposes significant revisions to the FLSA, including another raise to the standard salary level. It’s important to stay informed about these changes, as they may affect how you pay certain employees and rules around exemption vs. non-exemption.

Other Salary Laws and Exceptions

In addition to paying some salaried employees overtime, you may need to consider other regulations when processing payroll. Some apply to a specific sector of businesses, and others apply to virtually all industries.

7i Exemption

The FLSA also makes provisions for retail employees who primarily make commissions. The exemption outlined in section 7i of the law ensures that employees who make commission in addition to regular pay still receive at least minimum wage and proper overtime pay. Retail employees (such as salespeople and some service providers) who qualify for the 7i exemption do not need to be paid overtime, however this may change for those employees on a weekly basis.

For clarity the FLSA lists three qualifications for 7i exemption:

  • The employee must be paid by a retail establishment (as defined in the FLSA).
  • The employee must be paid more than 1.5x minimum wage (after calculating the real wage rate with commissions).
  • The employee’s commissions must make up more than half of their total earnings.

This calculation is complicated, and there’s no simple formula for determining whether or not an employee is exempt from overtime pay. For salary employees who make commission, you may need to recalculate their hourly rate with commissions included each week to determine if they’ve met the requirements for exemption.

Union Rules

According to U.S. law, organizations are obligated to negotiate with labor unions for any union employee. For example, if you hire an electrician from an electrician’s union, you’ll need to contend with the union representatives to negotiate considerations like:

  • Working hours
  • Working conditions
  • Pay (including overtime pay)
  • Holidays

For some salaried employees, you may need to contend with prevailing wages and other specific rules outlined in local union collective bargaining agreements (CBAs). While these may not be the law, per se, you are legally obligated to abide by them, and they can seriously affect your payroll process.

For example, say you have an electrician that is technically exempt from FLSA overtime, but they are also part of a local electrician’s union. If that electrician’s union has a CBA with a stipulation that their workers must be compensated for all overtime, you still need to comply with the agreement (and whatever wage rates they specify).

FAQ: Salaried Employees

It’s difficult to keep track of all of the labor laws relevant to salaried employees. Here are a few common questions from employers regarding compliance.

Do salaried employees get paid if they do not work?

In many cases, you will still need to pay salaried employees, even if they do not work a full 40-hour workweek. More often than not, the only time you can not pay a salaried employee is if they are absent for a full workday (eight hours). However, you can only deduct pay in full-workday increments. For example, if they only work five hours one day instead of eight hours, you still have to pay them their full salary for that workweek.

What is an example of an hourly exempt worker?

A practicing doctor paid $100 per hour is usually* exempt from overtime pay. This is because they are exempt as a “professional” according to the exempt duties and responsibilities outlined in the FLSA. Even if that doctor works 50-60 hours per week, they do not need to be paid overtime.

What is an example of a salary nonexempt employee?

An assistant manager of a large grocery store that makes a salary of $32,000 per year ($615.38 per week) would not be exempt from overtime pay, since they do not meet the salary threshold to qualify.

What are highly compensated employees?

The highly compensated employee exemption of the FLSA is an exemption that includes employees with high salaries deemed exempt from overtime pay and other FLSA requirements. These employees must be paid more than $107,432 per year (still abiding by the rule of $684* per week paid on a salary or fee basis) to qualify as exempt. They must also perform one of the duties of an exempt executive, administrative, or professional employee (as defined in the FLSA) on a regular basis.

Final Thoughts

Labor laws for salaried employees can be complicated and ever-changing. To remain compliant, you need to stay up to date on the decisions of the Department of Labor and other government organizations.

But chances are you don’t have time for that.

Luckily, modern HCM technology and payroll software makes this much easier. At Criterion, we build our HCM to help professionals across industries easily handle complex payroll and manage key HR processes. Criterion has many common (and quite a few uncommon) payroll calculations already built in, including section 7i overtime and union rules specific to certain cities and locals. With Criterion, you can easily automate payroll for hourly, salary, exempt, nonexempt, union, and nonunion employees — all in one system.

Experience a fully configurable, fully compliant HR and payroll platform that helps you process accurate payments with zero delays. Book a demo to see how Criterion handles payroll, overtime, and other key HR challenges.

*LEGAL DISCLAIMER: This content should not be considered legal advice. Criterion HCM provides this information to help improve your understanding of these laws. For the most accurate details regarding laws for salaried employees, consult the Department of Labor or a lawyer with expertise in employment law.

Steve Tompkins
Steve Tompkins is an HCM Solutions Consultant at Criterion HCM and is located in San Diego, California.
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