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Employers Beware: Most Highly Compensated Employees Still Must Meet the FLSA’s Salary Basis Test to Be Exempt from Overtime Pay

Many employers remain unaware that employees making over six figures can still be entitled to overtime pay under the federal Fair Labor Standards Act (the “FLSA”).  While there is a separate exemption for highly compensated employees (the “HCE exemption”), which reduces the showing that must be made under the “duties” portion of this exemption, a question arose as to whether the “salary basis test” still applied under the HCE exemption.  In Helix Energy Solutions Group, Inc. v. Hewitt, the U.S. Supreme Court recently resolved that question, holding that the salary basis test did indeed apply to the HCE exemption.  This ruling reinforces the importance of providing sufficient weekly or monthly guaranteed compensation to even some of the most well-paid employees, and not relying solely on commissions or another compensation structure unless some other exemption would apply.

In Helix, Michael Hewitt worked for Helix Energy Solutions Group on an offshore oil rig.  Hewitt supervised 12 to 14 workers and typically worked 12 hours a day, seven days a week, during a 28-day shift.  He then had 28 days off before reporting back to his vessel.  Helix paid Hewitt on a daily-rate basis, with no overtime compensation and the rate ranged from $963 to $1,341 per day.   Hewitt was paid every two weeks, and his paycheck amounted to his daily rate times the number of days he worked.  In other words, if Hewitt only worked one day, his paycheck would only reflect a single day rate of $963, whereas, if he worked all 14 days, his paycheck would reflect all 14 day worked, amounting to $13,482.

The sole issue before the Court was whether Hewitt was paid on a salary basis for the purposes of upholding the HCE exemption.  The Court held he was not.  First, the Court held that Hewitt did not fall within the salary-basis provisions of 29 C.F.R. § 541.602(a), which provides “an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.”  The Court reasoned that § 602(a) applied only to employees paid by the week or longer and such employees must receive the full salary for any week in which they work.  This amount cannot be changed due to the number of days or hours actually worked.  Second, the Court looked at the broader regulatory structure of § 604(b), which provides “[a]n exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if 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.”  The Court held that § 604(b) confirmed its reading of § 602(a) (i.e., that § 602(a) does not cover daily and hourly-rate employees).

The Helix decision highlights the importance of applying the HCE exemption correctly.   A generous overall compensation package is not enough to classify an employee as exempt from the FLSA’s overtime provisions.  Instead, the employee must be paid a guaranteed salary of at least $684 per week.  Other incentive compensation can be part of the employee’s compensation structure, but employers must meet this guaranteed salary requirement to rely upon the HCE exemption.  Of course, they must also meet the duties requirements as well.  Additionally, state laws may also apply further complicating the classification analysis.

If you have any questions about applying HCE or any other FLSA exemption, or need assistance reviewing and updating your business’ policies and procedures, please contact one of Honigman’s Labor and Employment attorneys.

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