Supreme Court Knocks the Wind Out of the Highly Compensated Employee Exemption

The U.S. Supreme Court recently shocked the business community with a decision sharply limiting the Highly Compensated Employee (HCE) exemption from overtime compensation. The Court ruled that employees paid on a day rate basis, no matter how high the daily pay, without any guaranteed pay on a weekly basis, disqualifies the employee from being exempt under the HCE category. The employee in question made over $200,000 per year, and thus easily satisfied the Fair Labor Standards Act (FLSA) minimum total annual compensation requirement for the HCE exemption (at the time $100,000/year).  

The court noted that under the regulations issued by the Department of Labor (DOL), a worker may be exempt if the employer pays the worker on a salaried basis. The court looked at two regulatory provisions defining payment on a salaried basis and noted that one (29 CFR 602(a)) explicitly excludes employees paid on a daily basis.  

This left only the second provision (29 C.F.R. 604(b)) to save the employer from the obligation to pay overtime. However, the Court found that the employee did not have a guarantee that each week he would receive an amount bearing a “reasonable relationship” to the weekly amount he usually earned, as required by the regulation. Ergo, no exemption applied, and the employee involved will proceed to receive an extraordinary windfall due to the resulting overtime payments owed.
 
What should employers take from this decision?  Three takeaways:
 

1. No safe harbor exists if employees receive daily rate pay, no matter how high the pay. Wise employers will either pay overtime, or pay a sufficient guaranteed weekly salary (and make sure the job position duties qualify for an FLSA exemption);
2. Independent Contractor status may be an alternative approach, but make sure ALL the requirements for such status stand satisfied (we suggest conferring with counsel on those requirements);
3. Any employer currently embroiled in this type of dispute may look to Justice Kavanaugh’s dissent where he suggests the regulations themselves violate the FLSA, an issue which the employer failed to raise in a timely fashion, according to the Court. Thus, a challenge to the DOL regulations appears warranted and supported by Justice Kavanaugh. Specifically, the statute seems plainly designed to exempt highly compensated workers from overtime, and the DOL regulations create overly technical roadblocks thwarting Congress’s original intent.

If you have questions, please contact David J. Carr, Paul Sweeney, or another member of the Workplace Solutions Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.