Highly Compensated and Thus More Easily Exempted

“Don’t think money does everything or you are going to end up doing everything for money.”

-– Voltaire

Employees who are “highly compensated” within the meaning of applicable Department of Labor (DOL) regulations are subject to a relaxed duties test for the purpose of establishing that the worker is an exempt executive, administrative, or professional employee. That would mean they don’t have to be paid Fair Labor Standards Act (FLSA) minimum wages or overtime, or Service Contract Act (SCA) prevailing wages or benefits. If the employee is highly compensated, the employee just needs to have one exempt duty so long as the employee’s primary duty is the performance of office or nonmanual activities. To be highly compensated, currently the employee must be paid on a salary basis and make over $100,000 a year (the Obama era 2016 regulation says $134,000, but a final injunction against that regulation is in effect). An employee is paid on a salary basis if the employee receives a guaranteed sum every pay period that does not fluctuate improperly.

With regard to the highly compensated test, the key issue is whether certain events that affect annual compensation can be accounted for in applying that test. Specifically, employers want to know whether the compensation paid may be pro-rated over a shorter period for: (1) employees who have not worked an entire year; (and 2) employees who were recently promoted from a nonexempt position to an exempt position during the 12-monthh period.

We know that employees who have not worked an entire year can be measured under a prorated time period. See 29 C.F.R. § 541.601(b)(3). The regulation states that an employee who has not worked for the entire year will qualify as a highly compensated employee if “the employee receives a pro rata portion of the minimum amount… based upon the number of weeks that the employee will be or has been employed.” For example, in Zelenika v. Commonwealth Edison Co., No. 09 C2946 2012 WL 3005375 at *5 (N.D. Ill. Jul. 23, 2012), the plaintiffs were found to have been highly compensated because they received a pro-rated salary that, if extended to a 12-month period, would have equaled more than $100,000. This case ostensibly applies only to those who were hired and then quit work, were laid off, or were fired, and as a result worked less than 12 months.

It also appears likely that employees who have been recently promoted will be evaluated purely in their new position. In a footnote in McCoy v. North Slope Borough, No. 3:13–CV–00064– 2013 WL 4510780 (D. Alaska Aug. 26, 2013), the court applied the prorata approach to pilots who worked in an exempt position for part of the year, and in a nonexempt position other portions of the year. The court mentioned that the regulation would have applied to such a circumstance if the employees in the case were in that situation. Id. at n. 79. It appears the court was saying that newly hired employees and newly promoted employees are treated the same for the purposes of this prorata regulation. The McCoy case shows the power of the highly compensated regulation, since DOL otherwise has a formal rule which states that pilots are nonexempt. But even in the face of that usual rule, a highly compensated pilot may be exempt under the relaxed duties test.

As to the scope of the highly compensated test exemption, there is another case that could impact this issue. There is a 2018 U.S. Supreme Court ruling rejecting narrow interpretations of FLSA exemptions for a plain meaning rule. See  Encino Motorcars, LLC v. Navarro, 584 U.S. __ (2018) (Docket # 16-1362).  If that decision is operable here, the so-called “narrow reading” exemption test which was applied by the McCoy court may no longer be controlling.  In that event, the proration exception might be stretched to include other situations deemed to be within the plain meaning and intent.

As for what other situations involve the highly compensated test, that largely awaits future clarification by the courts or DOL. As they say, consult your legal advisor.