‘Highly compensated exemption’ not as simple as it sounds

By Kathy Neal

Theoretically, the highly compensated exemption should simplify an employer’s Fair Labor Standards Act classification inquiry. After all, if an employee meets the highly compensated monetary threshold, that employee must only meet one duties test, right? No so fast, friend.

Let’s take a trip back in time to the Obama administration in 2016. The revisions to the FLSA white collar exemptions had been announced and were set to take effect December 1, 2016. These included an increase in the highly compensated salary requirement from $100,000 to $134,004. A Texas federal judge issued a nationwide injunction prohibiting the revisions from going into effect. The judge’s order very specifically enjoined the implementation and enforcement of the all regulations relating to the white collar exemptions. Guess what? 29 C.F.R. 541.601 – the regulation setting the salary level for highly compensated employees – was not mentioned. Perhaps this was a deliberate omission; perhaps it was merely oversight; perhaps it was a scrivener’s error. The result was that employers were left uncertain as to whether the salary threshold for highly compensated employees had increased to $134,004.

On August 31, 2017, the same federal judge issued a summary judgment order finding the proposed white collar regulations were invalid. Yet again, the highly compensated salary requirement was not mentioned. In the midst of this confusion, however, the U.S. Department of Labor (DOL) asked the public for comments and informed employers of its rulemaking efforts to revise the wage and hour regulations located at 29 C.F.R. Part 541. The DOL made it clear that, until it issues its final rule, it will enforce the Part 541 regulations that were in effect on November 30, 2016, which include the $455 per week salary threshold. Whew.

Given the DOL’s recent clarification, an employee will be considered highly compensated, and therefore exempt under the FLSA, if (a) he performs the duties described under the regulations establishing the “executive” or “administrative” exemptions, (b) he receives an annual salary of at least $100,000, and (c) he meets a salary-basis test requirements.

Seems pretty simple, right? Well, maybe not. A recent Sixth Circuit Court of Appeals decision has made things more complicated – for at least some employers. In Hughes v. Gulf Interstate Field Services, Inc., decided on December 19, 2017, the Sixth Circuit found that welding inspectors who were paid more than $100,000 annually and who performed job duties consistent with those required for an FLSA exemption may not meet the highly compensated exemption because of how they are paid.

Remember, for purposes of exemptions from the overtime requirement, a “salary” is a predetermined amount of pay, received on a weekly, or less frequent basis, that is “not subject to reduction because of variations in the quality or quantity of the work performed.” In the Hughes case, the welding inspectors were paid a day rate of $337 per day worked. They worked “six 10s,” i.e., six days per week and 10 hours per day. They were admittedly paid in a manner and at a rate consistent with being exempt, and clearly met the salary level amount for the highly compensated exemption.

However, the welding inspectors argued that the FLSA regulation requires their salaries to be guaranteed. They claimed that because their salaries were not guaranteed, the highly compensated exemption was not met and they were owed overtime pay. The Sixth Circuit found conflicting evidence as to whether the day rate payments “were matter of grace rather than right.” While there was evidence of verbal assurances to the employees that they would receive six days of pay per week without variation, and no evidence of deductions for days missed, the Sixth Circuit found that an employer must provide its employees with a guaranteed weekly salary, protected from possible reduction as a result of reduction in the number of days worked – or else forego the exemption. The case was remanded to resolve the factual dispute.

Even the Sixth Circuit recognized the irony of the case. It said, “It may seem strange, on its face, that employees who earned an annualized rate of more than $100,000 did not necessarily qualify as ‘highly compensated employees.’” Nevertheless, the court determined that it must follow the legal meaning of the terms rather than the intuitive sense of the words used.

The upshot of this case is that employers who pay by day rates may need to be more careful to document they do not intend to reduce the days paid. In Hughes, the offer letters simply referred to the day rate; there was no reference to a guaranteed amount to be paid on a weekly or other basis. If an employee paid a daily rate is highly compensated, the employer should nevertheless consider fixing part of his compensation as a guaranteed weekly salary. And remember, non-exempt employees must be paid for hours worked in excess of 40 in any workweek – even if working on a day rate basis.