The United States Supreme Court just issued a new ruling on the salary basis test for exempt executive employees. Before we get to that, here is a quick background on the salary basis and executive employee tests, which are important to understand as we look at this new case.
The Fair Labor Standards Act provide an exception to the minimum wage and overtime requirements for “any employee employed in a bona fide executive, administrative, or professional capacity.”
To be an exempt executive under the regulations the employee must (a) be paid on a salary basis, (b) of a certain minimum amount, and (c) meet the duties required for the exemption.
The DOL has also enacted two separate rules for executive employees.
- For those making less than $100,000 annually, they must be compensated on a salary basis at a rate not less than $455 per week and carry out three listed responsibilities; manage the enterprise, direct other employees and exercise the power to hire and fire employees.
- For those making $100,000 or more, they must also be compensated on a salary basis at a rate not less than $455 per week, but they only need to regularly perform one of the above three duties.
The DOL defines the “salary basis test” in two regulations.
Under the “602 Test” an employee will be considered to be paid on a salary basis if he or she receives each pay period a predetermined amount (which must be at least $455 a week) that is not subject to reduction because of variations in the quality or quantity of work. Thus, subject to certain exceptions, the employee must receive his or her full salary for any week in which the employee performs any work.
Under the “604 Test” an employee may be compensated on an hourly, daily or shift basis, rather than a weekly salary, without violating the salary basis requirement if the employer (1) guarantees the employee at least $455 each week regardless of the number of hours, days or shifts he or she works, and (2) the guaranteed amount bears a “reasonable relationship” to the amount actually earned by that employee in a typical week and is roughly equivalent to the employee’s usual earning for his or her normal scheduled workweek.
The case before the Supreme Court was interesting in that the employee was being paid on a daily basis, which would seem to require him to meet the 604 Test. However, the employee did not receive a guaranteed amount that bore a reasonable relationship to the amount he earned in a typical week. That is because if he worked one day, he received one day’s pay. If he worked three days, he received that pay times three. If he worked seven days, he received the daily rate times 7. Therefore, the employee did not meet the second half of the 604 Test.
Instead, the employer argued that the language in the 602 Test that the employee must “receive” each pay period a predetermined amount (which must be at least $455 a week) meant only that the employee receives at least $455 a week in pay. Because the employee was paid every two weeks, and that pay exceeded $455 a week, the employer argued that he did “receive” his pay in a predetermined amount (his daily rate) in accordance with the 602 Test and therefore met that the salary basis test.
The employer also argued that the rule for highly compensated employees only incorporated the 602 Test, so the 604 Test did not apply to them and instead the 602 Test did regardless of how they were paid.
The Supreme Court rejected both arguments. It found that the employer was mis-reading the 602 Test in making the argument that it only required that a paycheck be received each pay period. Rather, the text of the 602 Test is clear that it requires a guaranteed weekly salary. It is the 604 Test, and only the 604 Test, that allows a daily rate. In fact, the two tests work in tandem, with one governing an executive who receives a weekly salary and the other governing an executive who is paid on an hourly, daily or shift basis. Therefore, the 602 Test make it clear that whenever an exempt executive employee works at all in a week, he or she must be paid his or her full salary for that entire week, in a predetermined amount. This must be paid without regard to the number of days or hours worked. Paying an employee on a daily rate, such as the employee in that case, is exactly the opposite. A daily rate pays the employee based entirely on the number of days worked. The Court held that paying a fixed amount regardless of how many days worked is the embodiment of the meaning of the word “salary.”
The Court also held that that there was nothing in the regulations that suggested that only the 602 Test applied to highly compensated employees, not the 604 Test.
The Court therefore concluded that an exempt executive employee, whether highly compensated or not, may not be paid on a daily rate under the 602 Test, but only under the 604 Test. If the employee does not meet all the standards of the 604 Test, then he or she is not exempt and is entitled to overtime.
Take Away – Regardless of whether an executive is highly compensated or not, the employee should typically receive a guaranteed weekly salary of at least $455. The only exception to that is that he or she may be paid on an hourly, daily or shift basis, but even then they must still receive a weekly guaranteed amount of at least $455 and that weekly guaranteed amount must bear a reasonable relationship with the amount actually earned by that employee in a typical week.
