Staying on the Right Side of the Salary Basis Test


Many of you have asked how to (temporarily) reduce pay.  For hourly workers the answer is easy – you can either reduce the hourly rate or the hours worked per week or both.  It is not so easy for salaried workers.  As a general rule, if a salaried employee works one hour in a week, they must be paid their weekly salary.  So, sending salaried workers home early and docking their pay for the reduced workweek can subject an employer to liability under wage and hour statutes.

This liability was recently highlighted by the Fifth Circuit, the federal appellate court for Texas, in a decision released earlier this week.  In that case, property tax consultants who were paid a salary were found to be hourly workers.  Making things worse, the court frowned on the employer’s pay practices of docking pay, subjecting them to higher overtime liability,

The good news is that in Texas it is relatively easy to reduce pay, even for salaried workers.  An employer must simply communicate its intent to reduce the salary prospectively. If the employee continues to work for the reduced pay, the employee has effectively agreed to the salary reduction. An employer may reduce regularly scheduled hours to make up for the loss in pay, but it should be made clear to the employee that the reduced salary is intended to cover all hours worked in any work week. The prudent employer will convey the reduction is regularly scheduled hours in a separate communication so that the reduction in pay is not tied to a reduction in hours.

Pay and hours reductions above certain thresholds also may have implications for unemployment benefits, so that issue needs to be considered as well.

We also recommend that employers have written policies establishing that they will pay their salaried workers a guaranteed amount every week that will not be reduced except for limited, permissible reasons.  Similarly, we recommend that employers also have a written policy that in the event of an overpayment (or underpayment), the employer can easily correct the mistake.

Stay safe and keep the course.  And please let us know if we can be of help.

Thanks, Jack, Elizabeth and Jim

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