By Tareen Zafrullah

Two common types of salaried nonexempt workers are (1) employees who receive overtime compensation at time and a half and (2) employees who are paid under a half-time plan known as the fluctuating workweek method.

If an employee receives overtime compensation at time and a half, the employer may prorate his salary, but if the employee is paid under a half-time plan, the employer cannot prorate his salary.

Time and a half

Some salaried nonexempt employees receive overtime compensation at 1½ times their regular rate of pay for all hours worked over 40 in a workweek. If such an employee works less than 40 hours in a workweek, the employer may prorate her salary.

If the employee works less than 40 hours in a workweek, the employer does not have any overtime obligations, but the employer must make sure the employee's regular rate of pay is at least minimum wage (the federal minimum wage is currently $7.25 per hour).

For example, if the employee's salary is intended to compensate her for 40 hours, it must be at least $290 ($7.25 x 40 = $290). The following examples show how the time-and-a-half method works:

• Example 1. Suppose an employee typically receives a salary of $290 per workweek. One workweek, he works only 24 hours. The employer may prorate his salary and pay him $174 ($290 ÷ 40 x 24 = $174) instead of $290 for that workweek.
• Example 2. Suppose an employee typically receives a salary of $290 per workweek. She performs no work in a particular workweek. She is not entitled to any compensation for that workweek.

For ease of administration, some employers choose to set a number of hours at which they will not prorate an employee's salary and instead will pay the employee's full salary for that workweek.

For example, suppose an employer sets 35 hours as the number. Thus, if an employee works at least 35 hours in a workweek, the employer will not prorate her salary and will pay her full salary for that workweek. On the other hand, if the employee works less than 35 hours in a workweek, the employer will prorate her salary for that week.

If the employer chooses to use that method, it should be consistent. For example, suppose two employees work 34 hours in a workweek, and the employer prorates the salary for Employee A but not for Employee B. Employee A could claim the employer discriminated against her because she is a member of a protected class (e.g., sex) and Employee B is not.

Fluctuating workweek method

Under a half-time plan, a salaried nonexempt employee whose hours fluctuate from one workweek to another may reach a clear, mutual understanding with his employer that he will receive a fixed salary for however many hours he is called to work in a workweek, whether few or many or over or under 40, and that he will be compensated for his overtime work at 50 percent (instead of 150 percent) of his regular rate. The salary must be large enough to ensure that the employee's regular rate never falls below the minimum wage.

The U.S. Department of Labor (DOL) takes the position that if an employee receives other types of compensation other than a salary and overtime (such as bonuses or commissions), then the employer cannot use a half-time plan for the employee. The following examples demonstrate how a half-time plan applies:

• Example 1. Suppose an employee receives a salary of $400 per workweek. One workweek, he works only 24 hours. He is entitled to his entire $400 salary for that workweek because the salary is intended to compensate him for however many hours he works in a workweek, whether few or many or over or under 40.
• Example 2. Suppose an employee receives a salary of $400 per workweek. One workweek, he works 50 hours. He is entitled to his entire $400 salary plus overtime compensation in the amount of $40 ($400 ÷ 50 x ½ x 10 = $40), for a total of $440 for that workweek.
• Example 3. Suppose an employee receives a salary of $400 per workweek. He performs no work in a particular workweek. He is not entitled to any compensation for that workweek.
• Example 4. Suppose an employee receives a salary of $400 per workweek. One workweek, he works 60 hours. His regular rate for that workweek is $6.67 ($400 ÷ 60). Because that amount is below the minimum wage, using a half-time plan would not be permissible in this situation. This example shows that before implementing a half-time plan, an employer needs to determine the maximum number of hours an employee will work in a workweek and make sure his salary is large enough that his regular rate will never fall below minimum wage.

Bottom line

If a salaried nonexempt employee receives overtime compensation at time and a half, the employer may prorate her salary, but if a salaried nonexempt employee is paid under a half-time plan, the employer may not prorate her salary. Different rules apply to the salaries of exempt employees.

Tareen Zafrullah is an editor of Indiana Employment Law Letter. He can be reached at tareen.zafrullah@faegrebd.com.