Episode 9: Highly Compensated Employee

Hear how a decades-old landmark law guides today’s employers on some of the most pressing issues facing companies. Bill Martucci, who leads Shook, Hardy & Bacon’s national Employment Litigation and Policy Practice, shares insight in these bite-sized podcasts focusing on the Fair Labor Standards Act. Whether you’re a seasoned general counsel or just finding your way through the myriad of state and federal wage and hour laws, listening to Bill’s soothing discourse is time well spent.

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TRANSCRIPT

You’re listening to “A Window into Wage and Hour,” a podcast series that shines the light on time and money laws impacting your business today.

Good day. Thanks so much for joining us. This is Bill Martucci with Shook Hardy as the National Employment Litigation & Policy practice leader. And today under the Fair Labor Standards Act analysis, we’ll look at the highly compensated employee exemption. We have discussed the big three white collar exemptions of executive, administrative and professional employees who, if they meet the duties test and the salary test, are exempt. We have also looked at the computer exemption and the outside sales exemption.

But what is at the core of the highly compensated employee exemption? This was added a number of years ago to provide greater flexibility, so that employers who pay certain highly compensated employees may consider them exempt and, therefore, not entitled to hourly overtime. What are the critical components of a highly compensated employee? How does it differ from the other big three—as we have referred to them—white collar exemptions?

There are three critical elements for the highly compensated employee to be exempt under the Fair Labor Standards Act. The employee must earn a total annual compensation of a certain amount or above and that amount must include at least the salary basis that is typically thought of in connection with the white collar exemption. In this particular first requirement, the current annual compensation number is $107,432. So we’re talking about the range of over $100,000 but it must exceed $107,432. Second, the employee who is highly compensated must have as the primary duty performing office or non-manual work. And third, the employee customarily and regularly performs at least one of the exempt duties or responsibilities of an exempt executive, administrative or professional employee.

In that respect, for example, let’s consider the executive exemption. We know in that context, an employee’s primary duty must be managing the enterprise or department or subdivision of the enterprise. The employee must customarily and regularly direct the work of at least two employees and have the authority to hire or fire or effectively make recommendations concerning hiring, firing and related matters. In contrast, the highly compensated employee may qualify for exempt status if, for instance, the highly compensated employee directs the day-to-day workforce of two or more employees but does not participate in the decision or the recommendation with respect to hiring and firing. Under the highly compensated employee exemption, we are looking for some element of duties, but it’s less than what would otherwise be required to fully meet the duties test of the executive exemption that we just discussed or the administrative exemption, or the professional exemption.

The concept is the fact that this particular highly compensated employee earns a certain income is such to reduce what would otherwise be the full application of the duties test as it would apply to the other white collar exemptions. Let’s look at an example that really permits this to come to life. In the case of Daniel Smith v. Ochsner Health System, arising out of Louisiana, going before the Fifth Circuit Court of Appeals decided in April of 2020, the question was whether Daniel Smith, who worked for a good number of years as an organ procurement coordinator—was he considered to be exempt under the highly compensated employee exemption? The court noted that he’d never graduated from high school; that he had no advanced degrees, licenses or certificates; and the court further noted that as a procurement coordinator, Smith acted as the first line of communication between the hospital and the organ procurement agency when organs became available. His job duties included responding to calls at any time of day or night regarding organs being offered to the hospital for transplant purposes, evaluating the medical charts and medical history of the donors, verifying the donor’s consent, communicating pertinent information about the donors to the surgeons, obtaining the surgeon’s acceptance of the organs, preserving and arranging for the organ’s transportation, and completing any associated reports for filing.

From hearing that factual account from the court, we realize this particular job that Mr. Smith holds will not qualify for the executive exemption. It will not qualify for the professional exemption. The question is, would it qualify—would the administrative exemption apply, or what about the highly compensated employee exemption? The court went through a full analysis and determined that the administrative exemption did not apply because there was not sufficient independent discretion and judgment in connection with the work that Mr. Smith performed. However, the court found that the primary duties that Mr. Smith performed were, in fact, directly related to the business’s customers and therefore that element was established. And the court further found that when it looked at the definition concerning work directly related to management or general business operations, that definition included such functional areas as tax, finance, accounting, budgeting, auditing, insurance, quality control, purchasing and procurement. The court noted that in this context, even if one assumes that procurement is the only exempt duty that was included here, it was sufficient because it was one in which Mr. Smith customarily and regularly engaged. And the court noted in language that is particularly helpful for a number of other cases, that the exemption was designed to be such that it could be applied in other situations without the rigors of the duties test being applied as fully as otherwise would in connection with other white collar exemptions.

The highly compensated employee exemption is a meaningful one. It’s alive and well. There must be compensation above $107,432 on an annual basis. And in that regard, the total annual compensation may include commissions, nondiscretionary bonuses and other nondiscretionary compensation, if it’s earned during a 52-week period. But in addition to that, the duties aspects are much more limited, they are much more favorable to the employer, as long as one aspect of a duty as it might apply under the executive or administrative or professional exemption can be applied.

Unquestionably, in today’s highly compensated world, for those who are involved in office or non-manual work, the highly compensated employee exemption is incredibly important and significant, but as the Fifth Circuit decision highlights, nonetheless, a great deal of care must be applied in its application.

Thanks so much for being with us today. We will continue soon with other topics.