Are You Paying Your High-Earning Employees Correctly?
In a recent case, the Supreme Court issued an opinion clarifying the overtime-exempt status requirements under the Fair Labor Standards Act (FLSA).
The ruling emphasizes the importance of the salary-basis requirement for high-earning employees to be overtime-exempt under the FLSA.
Here’s what you need to know: Under the Fair Labor Standards Act (FLSA), a highly compensated employee is deemed exempt under Section 13(a)(1) if all three of the following are true:
- The employee earns total annual compensation of $107,432 or more, which includes at least $684 per week paid on a salary or fee basis. The word “salary” is going to factor heavily into the Supreme Court’s decision;
- The employee’s primary duty includes performing office or non-manual work; and
- The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.
In the case of Helix Energy Solutions Group, Inc. v. Hewitt, the Supreme Court found that Helix Energy Solutions Group Inc. violated the FLSA by classifying an employee who earned over $200,000 per year as overtime-exempt, but calculated his pay on a day rate basis rather than on a salary basis. The employee made well over $107,432 in a year and met the second and third requirements of the above test. But, the Supreme Court held that the employee was nevertheless not exempt under the FLSA and entitled to overtime pay. The reason? His annual compensation did not include “at least $684 per week paid on a salary or fee basis.”
What is “salary”?
As a reminder, the FLSA defines “salary” thusly:
“Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.” Source: FLSA
Put simply, “salary” means the employee earns a set amount of pay per week or longer (example: biweekly, monthly, etc). It can’t be decreased. Pay generally also doesn’t increase with overtime if the employee works more than 40 hours in a workweek.
On the other side are non-exempt, or hourly, employees. Those who work more than 40 hours per week must be paid one and a half times their regular rate of pay for all hours worked over 40 hours.
It’s important to note that not all highly compensated executives are now overtime eligible. As long as those employees are paid on a salary basis rather than hourly (which is the vast majority), and meet the other requirements, the Supreme Court ruling would not require an employer to pay them overtime.
Note, also, that some states or localities have their own overtime laws that may apply to high-wage earners. It’s worth checking what the rules are where you live.
However, this ruling underscores the importance of the salary-basis requirement for overtime exemption tests under the FLSA. Employers must ensure that their payroll practices meet this requirement for employees otherwise classified as exempt. As always, it is a good practice to review employment classifications when new guidance or decisions are issued.
If you have any questions about determining overtime exemption under the FLSA, contact your HR partner at Nextep. We are here to help!