Sixth Circuit Finds Employee’s Guaranteed Weekly Salary Was Based on Daily Rate, Defeating Exempt Classification

Despite an employee’s being highly compensated, the Sixth Circuit reversed a summary judgment order from the district court, finding that even though the pipe inspector was highly compensated, his pay was calculated on a daily basis, making him eligible to receive overtime under the Fair Labor Standards Act.  

In Pickens v. Hamilton-Ryker IT Solutions, the Sixth Circuit examined whether a pipe inspector earning a “guaranteed weekly salary” of $800, the equivalent of one eight-hour day at $100 per hour, met the salary basis test to qualify as exempt from overtime. Notably, if the employee worked more than eight hours in any given week, he received an additional $100 per hour. The company did not pay him overtime (time and a half or $150 per hour) because the company classified him as a salaried worker, making him exempt from the Fair Labor Standards Act. 

In its review, the Sixth Circuit acknowledged that under 20 C.F.R. § 541.602(a) a salary may be “all or part of [an] employee’s compensation,” and that an employer may pay a salaried employee “additional compensation without losing the exemption.” However, aligning with the reasoning of the U.S. Supreme Court in Helix Energy Solutions Group, Inc. v. Hewitt,¹ the Sixth Circuit held an employee paid on a daily rate is not paid on a salary basis and therefore is entitled to overtime, regardless of the amount the employee is paid or whether the employee is paid weekly.  In so holding, the Court noted, under the regulation the examples of such additional compensation included “commission on sales, a percentage of . . . profits,” or hourly pay for “hours worked . . . beyond the normal workweek.”  Based on Helix, the court stated that to be exempt, an employee must be paid a “weekly rate, rather than a daily or hourly one.” Here, the Sixth Circuit found, that despite receiving a guaranteed weekly salary, the employee was paid based on an hourly rate for hours worked “within the normal workweek.”  

In dissent, Judge Murphy argued that: 

the salary-basis definition has one unambiguous meaning: an employer must pay the predetermined amount each week that an employee performs work, no matter how much work the employee performs. And [the employer’s] $800 weekly payment to [the employee] meets this test…. [H]e got the $800 if he worked one day, two days, or all seven. He thus was paid the $800 on a weekly basis in a way that [the plaintiff in Helix] was not.  

In contrast to the Sixth Circuit’s decision in Pickens, the Fifth and Tenth Circuits have found that employees who were paid bonuses at an hourly rate in addition to their salary satisfied the requirements of 20 C.F.R. § 541.602(a), and were exempt from overtime.²  In support of its conclusion, the Tenth Circuit emphasized that the bonus paid to the employees “fits within §541.604(a) because the regulation expressly states that ‘additional compensation may be paid on any basis,’ including as a ‘flat sum, bonus payment, straight-time hourly amount, time and one-half or any other basis.’”

 Similarly, the Fifth Circuit addressed the claim by the plaintiff that he did not satisfy the “reasonable relationship” test under 20 C.F.R. § 541.604(b), which provides that an exempt employee’s earnings may be computed on an hourly, daily or shift basis, without losing the overtime exemption or violating the salary basis requirement if there is a reasonable relationship between the guaranteed weekly amount paid to the employee and the employee’s actual earnings.  Rejecting the plaintiff’s claim, the Fifth Circuit held that the reasonable relationship test does not apply if an employee is paid a salary plus additional compensation under §541.604(a).

 In light of the continuing issues and contrasting decisions about the salary basis test and exemption standard post-Helix, employers should carefully review the basis of their employees’ pay to determine whether the employee is properly classified as exempt from overtime under the FLSA.