A reminder: Employees are entitled to overtime for work over 40 hours a week, unless an exemption applies. For so-called white collar workers, there are three main exemptions: administrative, professional and executive. Each of these categories looks at whether the employee had certain covered “duties” (known as the “duties” test) and a minimum guaranteed weekly salary (known as the “salary” test).
Under federal law (but not state law), there is also an exemption that allows employers to not pay overtime to “highly compensated” employees over $100,000 a year. These rules have been in place for nearly 10 years, but the regulations are far from clear.
The case comes down to a fairly arcane part of the federal regulations addressing whether a “reasonable relationship” exists between the guaranteed amount an employee is supposed to receive and the amount actually earned. The Second Circuit concludes that this section does not apply when workers make over $100,000 under the FLSA.
It’s a fairly straightforward conclusion because to apply that language to highly compensated workers would render the rest of the regulation pretty meaningless. Thus, a win for the employer.
But the most interesting aspect of the decision is not its conclusion but what it suggests in a footnote. In it, the court lays out the groundwork for someone to raise an appeal on grounds that may have some success in the future:
In any future case with facts similar to the present one but for the employee’s failure to earn over $100,000 (thus rendering C.F.R. § 541.604 applicable), it would be helpful to have the following issues briefed.
First, C.F.R. § 541.604(a) states that it applies where the “employee’s earnings are computed on an hourly, daily or shift basis” with a guarantee, while C.F.R. § 541.604(b) requires that a requisite reasonable relationship exist between the guarantee and the employee’s “usual earnings at the assigned hourly, daily or shift rate” for the “normal scheduled workweek.” An open question is whether this provision requires that the reasonable relationship be between the guaranteed “hourly, daily, or shift” amount reduced to an hourly, daily, or shift rate of pay and the hourly, daily, or shift rate by which pay for extra work is calculated, rather than between the total of guaranteed earnings and total earnings. Relevant to this issue are the Section’s two examples: The first example is a worker who is guaranteed $500 per week for any week in which some work is performed and who usually works four or five shifts at $150 per shift. 29 C.F.R. §541.604(b). Such a worker is exempt from the overtime requirement because the rates of pay are reasonably related. The second example is a store manager who is guaranteed $650 per week and receives in addition a percentage of sales revenue or store profits. Id. Such an employee is not exempt because the additional compensation is not computed on an hourly, daily or shift basis. Id.
Second, the parties should consider briefing the effect, if any, of the words “normal scheduled workweek” in a case where the amount of hours worked varies each week according to the employee’s voluntary decision to work extra hours.
So, for those of us in the Second Circuit (Connecticut, New York, and Vermont), here’s an appeal on a silver platter.
For employers in Connecticut that are covered under state law, it’s also worth reminding you that the highly compensated exemption does not apply to those CT employees. The Connecticut Department of Labor has prepared a comparison of both federal and state laws that is a must read for employers trying to navigate these wage and hour waters.