Second Circuit Clarifies Application of the Highly Compensated Employee Exemption

In Anani v. CVS RX Services, Inc., the U.S. Court of Appeals for the Second Circuit affirmed a New York district court decision finding a pharmacist exempt from overtime under the Fair Labor Standards Act because he met the “highly compensated employee” exemption.  The decision is significant because it clarifies the relationship between two competing Department of Labor (DOL) regulations as applied to employees making more than $100,000 annually.

The employee in Anani earned a base weekly salary over $1,250 for a 44-hour work week, plus additional compensation for voluntarily working 16 to 36 extra hours per week, which increased his total compensation to over $100,000 per year.  The compensation for working extra shifts was determined by dividing the employee’s weekly base salary by 44, multiplying the result by the number of extra hours worked, and then adding six dollars per hour in “premium pay.”

Under section 541.601 of the DOL regulations, the so-called “highly compensation employee” exemption, “an employee with total annual compensation of at least $100,000 is deemed exempt if the employee customarily and regularly performs one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.”   If an employee meets the compensation requirements of this section, a relaxed standard is applied to determine whether the employee also meets the duties requirement.  In Anani, the employee agreed that he satisfied the duties test, his weekly base salary exceeded $455, and he earned over $100,000 annually, with no improper deductions from his pay, as required for the section 541.601 exemption. 

Nevertheless, he contended, the section 541.601 highly compensated employee exemption was trumped by section 541.604 of the DOL regulations, which governs circumstances where an “exempt employee’s earnings [are] computed on an hourly, daily or a shift basis” and there is a “[m]inimum guarantee plus extras.”  Under section 541.604(a) an employer may pay additional compensation to an employee without losing the exemption as long as the employee is guaranteed a minimum weekly salary of at least $455 per week.  The extra compensation may be paid on any basis, including flat sum, bonus, or a straight-time hourly amount.  However, section 541.604(b) provides that there must be a “reasonable relationship” between the guaranteed minimum and the amount actually earned.  The regulation provides that the “reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.”

The pharmacist in Anani argued that his total earnings substantially exceeded his guaranteed salary, by slightly less than a 2-to-1 ratio, and therefore the relationship between his guaranteed salary and his total earnings was unreasonable.  Accordingly, he claimed, section 541.604 precluded the application of the highly compensated employee exemption.  The Second Circuit rejected the argument that the requirements of section 541.604 must be satisfied for an employee to qualify for the highly compensated employee exemption.   If the highly compensated employee must also qualify for the exemption under section 541.604 the highly compensated employee exemption would be meaningless, the court concluded.   Rather, the Second Circuit found, the two regulations apply to different groups of employees who receive a “minimum guarantee plus extras.”  Section 541.601 deals with employees who earn over $100,000 annually, the court held, while Section 541.604 deals with employees who earn less than $100,000 annually.

Based on this decision there is now a “safe harbor,” at least in the Second Circuit, for employees classified as exempt who make at least $100,000 annually, earn the required minimum guarantee of $455 “plus extras,” and meet the relaxed duties test.  “The very structure and express language of C.F.R. § 541.601 indicate[s] that its purpose was to relax the duties requirement in order to exempt employees from the time-and-a-half requirement because they earn over $100,000 annually.” 

Photo credti: DigitalZombie

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.