February 22, 2023

SCOTUS Rules Executive Making Over $200K is Owed Overtime

An employee worked on an oil rig. He reported to the captain, oversaw various aspects of the rig’s operations and supervised 12 to 14 workers.  Every two week pay period, he was paid his daily rate times the number of days he had worked in the pay period, earning more than $200,000 per year. Despite those earnings, he filed a lawsuit asserting he was improperly classified as exempt and should have been paid overtime for all the hours he worked over 40 in each work week.  No way?  Way!

On February 22nd, the U.S. Supreme Court ruled the employee was not properly classified as exempt from the overtime requirements of the Fair Labor Standards Act (FLSA). How and why? Let me try to whittle down this 31-page decision.

To be properly classified as exempt, an employee must meet three tests: (1) a minimum salary level; (2) a salary basis test; and (3) one of three primary duties tests: executive, administrative or professional.  A person may meet the executive exemption through one of two separate and slightly different rules. One “general rule” applies to employees making less than $100,000 in annual compensation, and a different rule addressing “highly compensated employees” (HCEs) who make at least $100,000 per year. The HCE rule relaxes only the duties test, not the minimum salary or salary basis test. The parties did not dispute that this employee met the duties and minimum salary test. The sole question in this case was whether the employee was paid on a salary basis; “the parties have taken all other issues off the table.”

An employee can be paid on a salary basis in either of two ways. The first and most commonly used is “if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to [certain exceptions], an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.” Sec. 541.602(a)

The second salary basis test (Sec. 541.604(b)) includes employees whose pay is calculated on a daily or hourly basis, so long as the employee is still paid in accordance with Sec. 541.602(a), guaranteeing a minimum salary on at least a weekly basis.

This employee was paid for each day he worked and not others. The court found that does not comport with the requirement to pay “a predetermined amount, without regard to the number of days…worked.” As a result, SCOTUS wrote, “The answer is no.” The employee was not paid on a salary basis, so he could not be properly classified as exempt.

Lessons learned?

  • Review your pay practices. For any employee classified as exempt, ensure they are paid a guaranteed minimum salary, regardless of hours worked, and not subject to deductions except for five (5) limited exceptions.
  • Know your state rules! There are at least 20 states that have rules regarding employee classification that are stricter than the federal rules.
  • Stay tuned. The U.S. Department of Labor has announced it plans to issue a proposed rule to increase the minimum salary test and one or more of the duties tests.
  • Join us! In the interim, join the March 22nd webcast, “Employee Classification: Exempt or Non-Exempt“!