April 4, 2023
Employers and employees are often at odds over the issue of overtime pay. Naturally, employers are inclined to argue that an employee isn’t entitled to overtime pay when it would boost the overall compensation that must be paid to the employee. The employer’s position may be bolstered by applicable regulations from the U.S. Department of Labor (DOL). On the flip side, certain employees — even those who are paid relatively high salaries — may claim that they’re entitled to overtime pay under DOL rules and regulations.
A recent high-profile U.S. Supreme Court case was decided in favor of the employee, even though his salary exceeded $200,000 a year. (Hewitt v. Helix Energy Solutions Group, Inc., No. 21-984, February 22, 2023.)
Under the Fair Labor Standards Act (FLSA), the controlling federal law on overtime pay, employees must be paid time-and-a-half their regular pay rate for overtime above 40 hours a week, unless a specific exemption exists. FLSA exemptions exclude certain executive, administrative and professional (EAP) employees and outside salespeople from the federal overtime rules. Frequently, an employer’s highest-paid employees, including officers of the company, fall into this category.
Notably, the rules relating to the FLSA require each of the following three tests to be met for employees to be exempt and, thus, ineligible for overtime pay.
- Salary basis test. The employee must be paid a predetermined and fixed salary that’s not subject to reduction because of variations in the quality or quantity of work performed.
- Salary level test. The amount of salary paid must meet a minimum specified amount. Currently, this figure is $684 per week for EAP employees (the equivalent of $35,568 annually for a full-year employee).
- Duties test.The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the DOL regulations.
In addition, the regulations include a relaxed duties test for certain highly compensated employees (HCEs) who receive total annual compensation of $107,432 or more (increased from its previous level of $100,000) and are paid at least $684 per week under current levels.
In Hewitt, the plaintiff worked as a toolpusher on an offshore oil rig. Reporting to the captain, he had oversight of various aspects of the rig’s operations and supervised 12 to 14 workers. Typically, he worked 12 hours a day, seven days a week — in other words, 84 hours a week — during a 28-day hitch. The plaintiff then had 28 days off before he reported back to the vessel.
The employer paid the plaintiff on a daily-rate basis without any overtime compensation. Over the course of his employment, the rate ranged from $963 to $1,341 per day. His paycheck, issued every two weeks, amounted to his daily rate times the number of days he had worked in the pay period. Therefore, if he’d worked only one day, his paycheck would total (at the range’s low end) $963. However, if he had worked all 14 days, his paycheck would come to $13,482.
Under this compensation arrangement, the employer paid the plaintiff over $200,000 annually over a three-year period. It’s undisputed that the plaintiff performed executive duties in this capacity.
Eventually, the plaintiff was terminated by the employer due to performance issues. He subsequently sued the company for retroactive overtime pay, arguing that he was entitled to the extra amount because he should have been treated as a nonexempt employee. Although the employer was able to convince the local district court to reject the plaintiff’s argument, it failed to do so on appeal to the U.S. Court of Appeals for the Fifth Circuit. Thus, it asked for a final determination by the U.S. Supreme Court, which agreed to hear the case.
The Supreme Court decided in a 6-3 ruling that the plaintiff didn’t meet the standards required for the overtime exemption because he wasn’t paid on a salary basis. As a result, the Court ruled that the plaintiff was entitled to overtime pay.
In its majority opinion, the Court reasoned that the relaxed rule for HCEs isn’t just a “simple income level” test for the purposes of the exemption. It observed that the employer could have satisfied the exemption if the day rate was a weekly guarantee that satisfied the regulations or if compensation had been a straight weekly salary. But it wasn’t swayed by the employer’s objection that it would result in paying the plaintiff for days he didn’t work. In that case, the plaintiff wouldn’t be truly paid a salary and, therefore, wouldn’t meet the overtime exemption requirements.
Important: DOL regulations provide a special rule for otherwise exempt employees who are paid on an hourly, daily or shift basis if the employment arrangement also includes a guarantee of at least the minimum weekly required amount. However, the employer acknowledged that its compensation plan didn’t satisfy this requirement.
Review Your Compensation Practices
The new SCOTUS decision may give employers cause for concern. It may be wise to take a fresh look at how you classify your workers. If you treat highly paid employees as being exempt employees in similar situations, a reversal resulting from a challenge by a disgruntled ex-employee could be costly.
Also, be aware that some states have their own exemption requirements. If the state exemption requirements conflict with the FLSA duties tests, employers must provide the option that favors the employee (in other words, denying an exemption).
Even if you’re correct in classifying such employees as being exempt on the federal and state levels, defending yourself in litigation can be expensive and time consuming, not to mention damaging to labor relations.
An Ounce of Prevention
Ensuring that your company is up to date on the current standards for exempt status may be the best way to stay “healthy” in this area. Consult with your financial and legal professionals to help ensure you’re in compliance with the latest interpretations of the DOL rules and regs.