By Cameron R. Neubauer, Esq.
A recent case decided by the United States Supreme Court is prompting employers everywhere to examine the manner in which “daily rate” employee compensation is calculated and paid. In Helix Energy Solutions Group, Inc. v. Hewitt, the Court held that a high-earning professional can only be an overtime-exempt employee if paid on a salary basis. The case revolved around a “highly compensated employee” who was paid on a daily rate basis and examined whether that employee was exempt from overtime pay. The Court looked into several different tests under the Federal Labor Standards Act (the “FLSA”) to determine whether or not the employee was properly compensated. The FLSA provides overtime pay of 1.5 times the employee’s regular hourly rate of pay for employees who work more than 8 hours daily and/or 40 hours weekly. There are of course exemptions from such overtime pay, which many high-earning professionals fall under. However, high earnings alone are not determinative of an employee’s exempt or non-exempt status. It’s important for employers to get it right or face liability on a host of misclassification and derivative claims.
First, a brief refresher on the common exemptions:
THE BONA FIDE EXECUTIVE EXEMPTION
Employees are exempt from overtime wages if the employee is “employed in a bona fide executive, administrative, or professional capacity.” The “bona fide executive” standard is determined based on a three-step test. The first is the salary basis test: “an employee can be a bona fide executive only if he receives a ‘predetermined and fixed salary’– one that does not vary with the precise amount of time he works.” The second is the salary level test: a straightforward threshold standard that the salary of the employee must surpass. The third test is the duties test: whether the responsibilities and duties of the employee render that employee exempt. If all three tests are met, the employee is considered a “bona fide executive” and is an exempt employee that is not eligible to receive overtime compensation.
THE HIGHLY COMPENSATED EMPLOYEE
In addition to the above, the FLSA also exempts employees from overtime pay if they qualify as “highly compensated employees.” For “highly compensated employees,” a different test applies. The nature of the test is dependent on whether the employee makes more or less than $107,432 in total annual compensation (including commissions and bonuses). If the employee earns less than $107,432, the rule that applies is called the general rule. Under the general rule an employee is considered an executive (and exempt) if: (1) they are paid on a salary basis; (2) at a rate not less than $684 a week; and (3) have the responsibilities of managing the enterprise, directing other employees, and have the authority to hire and fire. However, if the employee earns more than $107,432 in total annual compensation, as was the case in Helix, the first two parts of the rule regarding salary are the same but the final prong is slightly different. The third prong is relaxed and only requires the employee to satisfy one of the three employment duties as opposed to all three.
THE HELIX CASE: ARE DAILY RATE EMPLOYEES EXEMPT?
At issue in Helix was whether or not an employee paid on a daily rate basis is salaried, and therefore exempt from overtime laws. The Helix Court found that an employee paid on a daily rate is not considered a salary basis employee and thus not exempt under the FLSA. Regardless of income level, an employee paid on a daily rate basis is not earning a salary, and thus is not exempt from overtime wages. This means that even a highly compensated employee making in excess of $107,432 must be paid on a salary. The Court went on to clarify that an employee’s pay can be computed on a daily basis so long as the employee receives a minimum guaranteed weekly amount regardless of the number of days worked and a reasonable relationship between the guaranteed amount and amount earned exists.
It is of paramount importance that employers who pay their employees on a daily rate basis seek the advice of an employment attorney. These recent changes could lead to liability under the Labor Code if certain changes in your payroll practices are not properly executed, which could result in damages, penalties and interest in the high six-figure range.
Cameron Neubauer, Esq., is an associate attorney with the law firm of Dunn DeSantis Walt & Kendrick. Cameron’s practice is focused upon representing businesses and business owners. He is regularly involved in transactional matters, including contract negotiations and contract formation, as well as business and employment litigation.
Dunn DeSantis Walt & Kendrick provides a broad spectrum of legal services to businesses of all sizes, from small, local start-ups and non-profits to large, national companies. DDWK’s real estate development and construction practice includes representing all segments of the development and construction industries on both private and public projects.
You can find additional information and resources related to helping business owners and their businesses on the DDWK website.