The fundamental premise of the Fair Labor Standards Act (FLSA) is that all employees are covered by its base requirements. 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 all employees are covered unless they fit within specific, narrowly defined exemptions. One problem is that it was designed for the Model T manufacturing plant and has grown in sometimes haphazard and inconsistent ways.

Exemptions

Various exemptions exist, but the most commonly used are executive, administrative, and professional exemptions. For any exemption to apply, however, the standard test must be met:

• All payments must be made on a salary basis.
• The amount paid annually must meet the specified minimum.
• Employees 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. The U.S. Department of Labor (DOL) makes it clear employees must receive “a predetermined amount of compensation each pay period on a weekly or less frequent basis.”

Additionally, this amount can’t be reduced because of the quality or quantity of an 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.”

Employers may not deduct from wages for work stoppages or slowdowns because of operating requirements, but deductions are allowed when they’re taken from a bona fide plan or policy, such as a paid-time-off (PTO) bank, to offset items such as jury duty or military pay. Employers are also allowed to use unpaid disciplinary suspensions of one or more full days, though deductions from things such as a PTO bank are treated differently than deductions from a guaranteed wage range.

Time taken for Family and Medical Leave Act (FMLA) leave may also be deducted from wages under special rules related to the FMLA. In general, however, 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.

Highly paid workers

In the recent U.S. Supreme Court case Helix Energy Solutions Group, Inc., et al. v. Hewitt, a highly paid worker paid on a day rate alleged his employer owed him overtime.

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, which resulted in his paycheck being his daily rate times the number of days he worked in a pay period. His resulting annual income was over $200,000.

Helix asserted Hewitt was exempt as an executive, which required the Supreme Court to apply the exemption test. It determined he did fit the duties test for the exemption. Ultimately, the U.S. 5th Circuit Court of Appeals and the Supreme Court determined the daily rate Hewitt was paid didn’t fit within the salary basis provision.

As noted, the FLSA is very specific about what a salary basis is, which includes the fact 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 Hewitt took a day off, his paycheck didn’t reflect the day rate, therefore resulting in a variable pay period amount. While the court recognized that §541.604(b) of the FLSA may allow for daily rate workers to qualify, the section’s requirements hadn’t been met. It should be noted that because Hewitt fell within the highly compensated employee exemption, a dissenting opinion didn’t believe he was entitled to overtime.

It should also 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 can’t be used exclusively on the salary basis.

Big picture

From a purely practical perspective, the FLSA doesn’t allow employers to stray significantly from the wage and hour rules without substantial risk. 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 over decades, the devil is in the details.

If you choose to deviate from the standard hourly or regular exempt processes, you must be extremely careful to match all the details to the FLSA requirements. Employees’ simply earning a high wage isn’t enough to exempt them from the Act’s requirements.

Jo Ellen Whitney is an attorney with Dentons Davis Brown in Des Moines. You can reach her at joellen.whitney@dentons.com.