Can Employers Pay Shift Differentials to Exempt Workers?
“No good deed goes unpunished.”
--Anonymous
A client writes to me and asks if it is permissible to pay a shift differential to an exempt/salaried employee. For nonexempt employees, the shift differential is indeed part of their regular rate of pay, must be included in the base compensation, and it will operate to boost up the overtime rate for the weeks where the shift differential is in fact paid. But the issue posed by my client is whether you can pay exempt workers a shift premium in addition to their salary, since the exempt worker is entitled to no premium overtime.
The answer is likely yes, provided that you don’t pay excessive shift differentials to the exempt workers. Unlike the famous Mae West quote, here too much of a good thing is not wonderful. It is “lawful” to have a shift differential paid to exempt personnel. But that begs the issue of whether the extra payment affects the salary basis of compensation. Of course, an employer must ordinarily compensate exempt employees on a salary basis, which means the exempt workers must receive a fixed amount of pay for all hours worked and the amount must equal the minimum salary threshold specified in the Fair Labor Standards Act (“FLSA”) and perhaps state law if higher. Otherwise, DOL says that “Extra pay for working night shifts is a matter of agreement between the employer and the employee (or the employee's representative).” https://www.dol.gov/general/topic/workhours/nightwork.
Pursuant to some 2004 changes to the DOL regulations, additional compensation in excess of the salary does not automatically destroy the salary basis of the compensation. As noted in 29 C.F.R. § 541.604, Minimum Guarantee Plus Extras: "Such additional compensation may be paid on any basis (e.g., flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis), and may include paid time off." Therefore, an exempt employee may receive extra pay for extra work without violating the requirements of the salary basis regulation.
Of course, the examples of permissible compensation set forth in the FLSA regulations do not expressly include shift differentials. But the regulations do cover additional compensation “on any basis” or “any other basis” than the examples listed in the regulations. Thus, the absence of a mention of shift differentials isn’t controlling.
I suppose the problem with shift differentials is that they require the employer to track time worked in the shift. According to the Department of Labor, it is acceptable to track the time of exempt employees for the purposes of performance, discipline and other organizational matters such as billing and extra pay. But employers are not supposed to track time of exempt employees purely for compensation purposes absent some need. Otherwise, it makes the employees look hourly. Again, salaried exempt workers usually (with a few exceptions) are supposed to get a fixed salary without regard to their hours worked. But whatever the risk, DOL does expressly allow tracking of hours to pay exempt employees additional overtime above and beyond the salary basis, so the need to track hours for payment of a shift premium likely is also permissible.
In addition to being able to receive additional compensation, there is another way to analyze this question. “White-collar” exempt employees may also be paid on an hourly, daily, or shift basis, without affecting the exemption, as long as certain requirements are met. See 29 C.F.R. 541.604(b). Thus, shift basis payment is expressly permitted in this portion of the regulations, but subject to some limitations.
The FLSA regulations allow employers to pay on one of these bases (including by shift) only so long as:
The employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis, regardless of the number of hours, days, or shifts worked; and
A reasonable relationship exists between the guaranteed amount and the amount actually earned.
Id.
The regulations also provide that this “reasonable relationship” test is met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal scheduled workweek. Id. Here’s where the rubber meets the road. The regulations provide some limits on the ratio of guaranteed pay to the shift premium pay. For example, a salary of say $500 a week is reasonably related to weekly earnings of $600-$750 including shift premiums. See 29 C.F.R. 541.604(b). Thus, a 1.5 to 1 or less ratio of guarantee to actual earnings is a reasonable relationship. See also Brown v. Aleris Specification Alloys, Inc. , 2016 WL 1183207 at *2, *4 (N.D. Ind. 2016); Hass v. Behr Dayton Thermal Products, LLC, 2008 WL 11351383 at *13 (S.D. Ohio 2008).
Instances where employers want to pay shift differentials to FLSA exempt employee cases are likely to be rare. However, given the DOL regulations, I see no reason why shift differentials would be treated any differently than the $70 an hour extra compensation provided to professional engineers in a relatively recent DOL Opinion Letter. See FLSA2018-25 dated November 8, 2018 reprinted at https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/2018_11_08_25_FLSA.pdf. There DOL found a reasonable relationship since the guaranteed salary of $2,200 compared to usual weekly earnings of $3,150 satisfied the 1.5 times test. If you go materially over this 1.5 ratio, then it is likely that payments would not be roughly equivalent to the weekly guarantee. Employers are wise to take caution if the ratio is much above that range.
In short, provided the employer offers a guaranteed minimum salary for all hours worked equal or in excess to the salary basis requirements, the fact that it also pays exempt employees an additional shift differential (by itself) will not work to destroy the exemption, unless the ratio of the total earnings including the shift premium exceeds 1.5 times the ordinary salary compensation. So, the basic idea for employers is don’t go wild with your shift premium amounts. Keep them reasonable. Don’t make the salary into a sham. It is a good rule for both exempt and nonexempt workers. If you do make the shift premium payments more than 50% of the salary, then the compensation becomes hourly, and you can lose the exemption status. Then, the shift premium you paid is going to boost up the amount of overtime pay due.