On April 1, a U.S. appeals court showed that the salary basis requirement is alive and well, regardless of how highly compensated an employee might be.
The decision is a reminder to businesses that simply paying a guaranteed weekly amount might not be enough to make an employee "salaried" and exempt from the overtime requirements of the Fair Labor Standards Act.
Pickens v. Hamilton-Ryker IT Solutions
Lynwood Pickens was employed by Hamilton-Ryker IT Solutions, a labor contracting firm, as a pipeline inspector assigned to a job in Texas. He was paid a guaranteed $800 a week for any week in which he worked and $100 an hour for all hours worked over 8 in any workweek.
In other words, Mr. Pickens was very well paid. He averaged 52 hours a week, or $270,400 a year. The company classified Mr. Pickens as a salaried exempt employee, so he did not receive overtime pay for any hours worked in excess of 40 per workweek.
But Mr. Pickens believed that he was essentially an hourly worker entitled to overtime pay. He sued the company in the Middle District of Tennessee for violations of the FLSA. The court sided with the company and found that Mr. Pickens was indeed paid on a salary basis. The court granted summary judgment to the company, and Mr. Pickens appealed to the U.S. Court of Appeals for the Sixth Circuit.
The Court’s ruling
Mr. Pickens was not paid a salary.
Relying heavily on the Supreme Court’s recent decision in Helix Energy Solutions Group v. Hewitt, the Sixth Circuit found that Mr. Pickens was not properly paid a “salary” under the FLSA and instead was paid on an hourly basis.
According to the court, under the FLSA, being paid on a salary basis means receiving a fixed, predetermined amount each pay period regardless of the quantity of work performed. The court interpreted this to mean the guaranteed amount must serve as the fundamental payment for a week's worth of work. The court said, “Unlike a weekly rate, which compensates an employee for a week’s work, no matter the number of hours worked, the [$800] rate Pickens received compensated him for either an hour’s work or eight hours’ work,” and “[this] . . . ‘salary’ did not come close to compensating him for his regular 52-hour workweek.”
The court emphasized that a true salary provides employees with stability and security. Because Mr. Pickens' total weekly pay varied greatly depending on his hours worked in excess of the initial 8 hours, it didn't function as a true salary.
“Salary Basis Test” is still valid . . . for now.
The company also questioned the validity of the “salary basis test” and whether it comports with the FLSA. This was a hot topic mentioned by several Justices during oral argument in Helix, but the validity of the “salary basis test” regulation was not an issue before the Supreme Court in Helix. Because the Supreme Court did not rule on the validity of the regulation, and because “every court of appeals to consider the question has upheld [the regulation’s] validity,” the Sixth Circuit in Pickens followed suit, dismissing the argument. If the company seeks review of Pickens, the validity of the regulation could be revisited.
Fifth Circuit weighs in, too
In a similar case, a three-judge panel of the U.S. Court of Appeals for the Fifth Circuit has ruled that the authority of the U.S. Department of Labor to “define and delimit” the FLSA exemptions includes the authority, within limits, to impose a salary-level test. The Fifth Circuit panel found that a minimum salary requirement is “consistent with DOL’s statutorily conferred authority,” both as to defining “what it means to work in an [exempt] capacity” and as to delimiting the scope of the exemptions.
Implications for employers
The Pickens decision serves as a crucial reminder for employers that high compensation does not guarantee exemption from the FLSA’s overtime requirements. Even highly compensated employees may be entitled to overtime pay if their pay structure does not meet the technical requirements of the “salary basis test.” Employers would be wise to re-examine the compensation structures of their exempt employees to ensure compliance with the “salary basis test.”
We will provide further updates and analysis as they become available. If you need guidance, please contact any member of Constangy’s Wage and Hour Practice Group.