“Highly Compensated Employee” Exemption Requires Payment on a Salary Basis

A highly-paid offshore tool pusher worker sued Helix Energy Solutions because he was not paid overtime. He was considered exempt under the “highly compensated employee” exemption (Wage and Hour law) but was paid on a day rate, not a salary. In late February, the Supreme Court decided that the worker must be paid overtime because the exemption required that an employee be paid on a “salary basis”. Day-rate compensation plans do not qualify for the exemption. This rule applied even though the employee received day-rate compensation that netted him over $200,000 per year.

The Fair Labor Standards Act (FLSA) regulations contain a special rule for “highly compensated” employees who are paid total annual compensation of $107,432 or more. A highly compensated employee is deemed exempt under Section 13(a)(1) if:

  1. 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;
  2. The employee’s primary duty includes performing office or non-manual work; and
  3. The employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

Additionally, the weekly salary amount of $684 must be paid in its entirety. Employers may not use nondiscretionary bonuses and incentive payments (including commissions) to satisfy any portion of the weekly standard salary level for HCEs.

The Supreme Court concluded that the day rate did not satisfy the salary basis test, and the employee was entitled to overtime because a day rate is not a fixed salary paid regardless of the amount of time worked or pay received.  Although there are some very limited circumstances under which an employee can receive a “day rate” and still satisfy the salary basis test, for those exceptions to apply, there must be a pre-determined, minimum amount of pay, and a reasonable relationship must exist between the guaranteed amount and the amount actually earned.  The easiest solution to avoid problems is to stop using the day rate method and put employees that satisfy the duties test of an overtime exemption and put them on salary.

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