The fundamental premise of the Fair Labor Standards Act (FLSA) is that all employees are covered by the base requirements of the Act. This includes being paid minimum wage for every hour worked and time and one-half for all overtime. The FLSA is a statute of inclusion, which means that all employees are covered unless they fit within specific, narrowly defined exemptions. One problem has been that it is a law designed for the Model T manufacturing plant and has grown sometimes in haphazard and inconsistent ways.

Exemptions

Various exemptions exist, most commonly used are executive, administrative, and professional exemptions. (See Exempt or Not Exempt - That is the $47,476 Question addressing these exemptions as well as the exemption for highly compensated workers.) However, for any exemption to apply, the standard test must be met:

• all payments must be made on salary basis
• the amount paid annually must meet the specified minimum
• the employee must perform duties that fit within the exemption as their primary duties.

The issue of salary basis can be very complicated for employers. To be truly paid on a salary basis, only limited deductions may be made from an employee’s pay (see Fact Sheet No. 17G DOL.gov). The DOL makes it clear that employees must receive “a predetermined amount of compensation each pay period on a weekly or less frequent basis.” Additionally, this amount cannot be reduced due to the quality or quantity of the employee’s work, and the employee “must receive the full salary for any week in which the employee performs any work, regardless of the number of days or hours worked.” 

The employer may not deduct from wages due to work stoppages or slowdowns due to operating requirements. Deductions are permissible when those deductions are taken from a bona fide plan or policy, such as a PTO bank, to offset items such as jury duty or military pay. Employers are also allowed to do unpaid disciplinary suspensions of one or more full days, though, deductions from things such as a PTO bank are treated differently than deductions from guaranteed wage range. Time taken for FMLA may also be deducted from wages pursuant to special rules related to the FMLA. However, in general, if an employee has no PTO available but only works two days a week, actual wages may not be reduced to meet the salary basis test. 

In a recent US Supreme Court case, Helix Energy Solutions Group, Inc., et al. v. Hewitt, a highly paid worker paid on a day rate alleged overtime was due and owed to him. 

Mr. Hewitt worked for Helix as an offshore oil rig worker, working approximately 84 hours a week while stationed offshore. He was paid a daily rate with no overtime compensation, this resulted in his paycheck being the amount of his daily rate times the number of days he had worked in a pay period resulting in an annual income of over $200,000. Helix asserted that Mr. Hewitt was exempt as an executive which required the Supreme Court to apply the exemption test. The prior courts and the United States Supreme Court determined that he did fit the duties test for the exemption. Ultimately, the Court of Appeals for the Fifth Circuit and the United States Supreme Court determined the daily rate which was paid to Mr. Hewitt did not fit within the salary basis provision.

As noted, §541.602(a) is very specific as to what a salary basis is, which includes the fact that an 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.” 

In this instance, because it was a day rate, if Mr. Hewitt did not work on a day the day rate was not encompassed in his paycheck, therefore, resulting in a variable pay period amount. While the court recognized that §541.604(b) may allow for daily rate workers to qualify, the requirements of that section had not been met. It should be noted in this case the dissent stated that because Hewitt fell within the highly compensated employee exemption that the dissent did not believe that Mr. Hewitt was entitled to overtime.

It should be noted that in §604(b) the methodology for applying this exemption to those who work on a day rate is that daily, hourly, or shift rates can be considered or “may be computed on” if the employer also “provides a guarantee of a guarantee of weekly payment approximating what the employee usually earns.” So, in other words, §604(b) can be used to supplement the rate but cannot be used exclusively on the salary basis.

The Big Picture

From a purely practical perspective, working with the FLSA does not allow for significant or creative variations from the wage hour rules, without incurring substantial risk to the employer. The FLSA, at least in its practical application, tends to be fairly linear, with an “are you hourly or are you exempt” analysis, and like most complex statutes that have grown up over decades, the devil is in the details. If an employer chooses to deviate from the standard hourly or regular exempt processes, that employer needs to be extremely careful to match all of the details to the FLSA requirements. Simply earning a high rate of pay is not enough to exempt someone from the requirements of the FLSA.