Much attention has been paid to the minimum salary and exempt duties required to be exempt under a white-collar exemption from the Fair Labor Standards Act’s (FLSA’s) overtime requirement. However, the salary basis requirement must be satisfied as well.
Under the FLSA, for an employee to be exempt from overtime under a white-collar exemption, three requirements must be met:
- The employee’s primary duties must be exempt in nature.
- The employee must be paid at least the minimum salary as set by the U.S. Department of Labor.
- The employee must be paid on a salary basis.
Most litigation, as well as legal education, has focused on the first two requirements. However, the third requirement—that the employee be paid on a salary basis—is just as important, a lesson that one employer learned the hard way earlier this year, courtesy of the U.S. Supreme Court.
Supreme Court Emphasized Plain Text in Ruling
The case, Helix Energy Solutions Group Inc. v. Hewitt, involved a highly compensated employee who earned between $963 and $1,341 a day. During the relevant time period, the minimum salary to be exempt under the FLSA was only $455 per week.
On any given day, the employee earned more than double the then-minimum salary requirement of $455 per week. Even so, the Supreme Court held that the employee was not paid on a salary basis, and therefore, was not exempt from overtime.
To reach this conclusion, the court explained there are two “nonoverlapping ways” an employer can satisfy the salary basis requirement. Focusing on the plain text of the FLSA regulations, the court then found that neither applied to the employee.
The first way to meet the salary basis requirement is set forth in 29 Code of Federal Regulations (CFR) Section 541.602. This involves paying by the week or by a longer measurement. An employee is paid on a salary basis generally if they receive a fixed or predetermined salary each week or less frequently, such as biweekly.
When an employer pays an exempt employee by the week or less frequently, the fixed or predetermined salary amount cannot be subject to deductions based on the quality or quantity of the employee’s work. More specifically, subject only to certain exceptions enumerated in the federal regulations, an exempt employee must receive their full salary for any week in which the employee performs any work, without regard to the number of days or hours worked.
As noted earlier, the employee in Helix was paid on a daily, rather than weekly, basis. Therefore, the Supreme Court held that the employer could not rely on 29 CFR Section 541.602(a) to establish that the employee was paid on a salary basis.
The second way to meet the salary basis requirement is set forth in 29 CFR Section 541.604(b). This involves paying the employee by a time measurement that is less than a week. Under this regulation, even if an employee is paid on an hourly, daily or shift basis, the compensation arrangement still can meet the salary basis requirement, but only if the compensation arrangement also includes “a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.”
Because the employer in Helix acknowledged its compensation plan would not pass the “reasonable relationship” test, it could not rely on this alternative means of paying on a salary basis, and everything turned on whether Helix paid Hewitt on a salary basis as described in Section 602(a). The Supreme Court found that it did not.
But what about the fact that the employee was highly compensated? Irrelevant. The Supreme Court answered that question by focusing on the plain language of 29 CFR Section 541.601. The high-compensation exemption relaxes the duties test, not the salary basis test.
The bottom line is that regardless of how much an employee is paid, an employer must establish that the compensation arrangement is consistent with the dictates of either 29 CFR Section 541.602(a) or 29 CFR Section 541.604(b).
Employers Should Focus on Specifics of Regulations
In Helix, it may appear that the employer did not prevail because of a technicality. But the salary basis rules are technical in nature, and the Supreme Court in Helix made clear that it will interpret them in accordance with their plain text. Therefore, it is important that employers focus on the specifics of the regulations and be mindful of other legal authority interpreting this regulatory language when developing compensation arrangements.
To meet the salary basis test under either 29 CFR Section 541.602(a) or 29 CFR Section 541.604(b), it is important that no deductions be taken from an exempt employee’s guaranteed salary unless specifically authorized by 29 CFR Section 541.602(b). For example, the regulations provide that an exempt employee’s pay may be docked for a full day of absence for personal reasons consistent with the salary basis requirement. This example is straightforward, but implementation of the exceptions in the regulations is far more complex.
What happens if an employer makes deductions inconsistent with the salary basis requirement? The regulations generally provide that if there is an actual practice of making improper deductions as determined by the factors in 29 CFR Section 541.603(a), the exemption will be lost, not only for the employees subject to improper deductions but also for other employees in the same job classification reporting to the same managers responsible for the improper deductions. Yes, there is the potential for class actions.
However, the regulations also include a broad safe harbor that gives the employer an opportunity to fix improper deductions and potentially avoid class actions. The importance of the safe harbor cannot be overemphasized.
Safe Harbor's Requirements
The requirements of the regulatory safe harbor are generally as follows:
- The employer has a clearly communicated policy prohibiting improper deductions.
- The employer’s policy includes a complaint mechanism.
- The employer reimburses employees for improper deductions upon discovery or complaint.
- The employer commits to and makes a good-faith effort to comply in the future.
- The employer does not willfully violate the policy by continuing to make improper deductions after receiving an employee complaint.
—J.S. and N.B.
Jonathan A. Segal is a partner at Duane Morris in Philadelphia and a SHRM columnist. Follow him on Twitter @Jonathan_HR_Law. Natalie F. (Hrubos) Bare is special counsel at Duane Morris in Philadelphia.