Payroll Briefs

Understanding Overtime Rules for Highly Compensated Employees

March 29, 2023

With the current labor market, many businesses are running with lean teams leading to the possibility of overtime for their employees. A recent U.S. Supreme Court decision serves as a reminder that overtime rules are not always easy to follow.  

Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) establishes the minimum wage, overtime pay, recordkeeping and youth employment standards for employees in the private sector and Federal, State and local governments. It was put in place to protect workers against certain unfair pay practices. The FLSA is one of the most important laws for employers to understand, as it has a wide array of regulations for employees, whether paid by the hour or salaried. It lays out detailed rules concerning whether employees are exempt or nonexempt from the FLSA overtime regulations. The law requires overtime to be paid at a rate of one-and-a-half times the regular hourly rate, also referred to as time-and-a-half. This applies to all hours worked for nonexempt employees in excess of 40 hours during a seven-day workweek.  

To be exempt from overtime and minimum wage regulations, most employees need to be paid at least $684 per week or $35,568 annually. This is known as the salary level test. In addition, an employee must also pass the job duties test, which varies by position. Nonexempt employees are entitled to overtime pay. 

U.S. Supreme Court Case

In this case, the employee involved was a “tool pusher” whose duties included supervising other offshore oil rig workers. He was paid a daily rate of $963 to $1,341 per day, resulting in earnings of over $200,000 annually. His daily rate increased on each consecutive day worked.  

The employee filed suit claiming that his employer violated the FLSA overtime provisions. In response to his claims, the employer argued that he was exempt from overtime pay as a “bona fide executive.” To qualify for the executive exemption, an employee must meet the salary level and job duties test. In addition, the employee must also satisfy the salary basis test. Under FLSA regulations, a bona fide executive may satisfy the test if the person is a highly compensated employee (HCE). To be considered an HCE, you must earn at least $107,432 or more per year.  

The Decision

The Supreme Court decided in a 6-3 ruling that an HCE who is paid at a daily rate is not considered to be paid a salary. Therefore, the employee in question was not exempt from receiving overtime pay. In the majority opinion, the Court reasoned that the HCE rule is not only a “simple income level” test for the exemption. It noted that the employer could have satisfied the exemption if the daily rate was a weekly guarantee that satisfied applicable regulations, or if the compensation had been a straight weekly salary. The employer argued that paying a weekly guaranteed rate or a straight weekly salary would have resulted in the employee getting paid for hours he didn’t work. The Court was not swayed by the employer’s objection, citing that this further showed that the employee was not paid a salary, therefore making him ineligible for the exemption from overtime pay.   

How Does This Impact You?

The employer in this case joins many others that have been confused by the FLSA rules. If your company pays employees overtime, you need to stay on top of applicable regulations to ensure you stay in compliance. By partnering with a payroll company that is familiar with FLSA regulations and others that impact your business, you can make sure that you are taking the right steps to stay in compliance. DM Payroll Solutions’ automated tools proactively manage and simplify your compliance efforts. To learn more, contact us today.