Should your HCE get OT?
Highly Paid Employee & Overtime Pay
High-earning workers making more than $200,000 a year might be eligible for overtime pay thanks to a new Supreme Court ruling on February 22, 2023. The decision is a wake-up call for all employers to review their OT exemptions to ensure you are compliant with applicable federal and state requirements. To be exempt from overtime pay under the Fair Labor Standards Act’s “white-collar” exemptions, employees must earn at least $684 a week on a salary basis, among other requirements.
What is a Salary?
Nonexempt employees generally must be paid 1.5 times their regular rate for all hours worked beyond 40 in a workweek. To qualify for the FLSA’s white-collar exemptions, employees must be paid on a salary basis at least $684 a week and perform certain duties. Compliance is crucial: If an employee is misclassified as exempt, the employer could be on the hook for thousands – or even hundreds of thousands – of dollars in unpaid overtime premiums, as well as an equal amount of liquidated damages and attorneys’ fees and costs.
The judgment boiled down to determining what really is a “salary” and whether a daily minimum guarantee can be a salary. The Court relied on a strict textual interpretation of the FLSA’s regulations to hold that an employee paid exclusively with a day rate cannot satisfy the salary basis test, even if that day rate exceeds the required weekly salary level. Because the employer failed the salary basis test, the Court held that the employee was not exempt from the FLSA’s overtime requirements.
The majority noted that an employee paid with a day rate can satisfy the salary basis test under a “special rule” if the employer guarantees the minimum weekly salary level and the employee’s actual weekly earnings have a reasonable relationship to the guaranteed amount of pay.
What does this mean for you?
Review your practices for compliance. In particular, employers in the energy, oil, and gas industries – which commonly use a daily rate pay model – will need to carefully review your practices. But any business that pays highly compensated employees on a day rate, shift rate, or similar method should work with experienced legal counsel to review your employee classifications and ensure compliance with the ruling.
Spotlight on weekly guarantee. Employers will need to guarantee a substantial portion of employees’ weekly pay (on a salary basis) in order to satisfy the highly compensated employee exemption. The safest route is to include weekly (or less frequent, such as bi-weekly or monthly) salary guarantees in compensation packages for these employees.
Note that state rules vary. Be aware that not all states recognize a highly compensated employee exemption. If you have employees in a state that does not recognize this exemption, you need to adopt payroll policies for those employees that comply with the applicable state’s laws.
Commentary by: Raylea Stelmach
Edited by:
