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Employees Paid Hundreds of Thousands of Dollars Annually Eligible for Overtime Compensation under FLSA

In Pierce v. Wyndham Vacation Resorts, Inc., No. 3:13-CV-641-CCS, 2017 WL 4480199 (E.D. Tenn. Oct. 6, 2017) the United States District Court for the Eastern District of Tennessee was asked to interpret the highly compensated employee exemption under the Fair Labor Standards Act (“FLSA”) and determine whether certain employees who were paid hundreds of thousands of dollars annually were exempt from overtime compensation under the FLSA. The court ruled the employees were not exempt and they were eligible for overtime compensation.

In Pierce, the plaintiffs were Sales Representatives who alleged that they worked off the clock and were not paid for hours they worked in excess of 40 in a workweek. The plaintiffs were paid on a commission basis, with the lead plaintiffs earning between $194,259.36 and $906,457.34 annually from years 2010 through 2013. The defendant (Wyndham) argued that the plaintiffs were highly compensated executives under the FLSA and, thus, they were not eligible for overtime compensation. Wyndham further argued that the commissions paid to the plaintiffs constituted payment on a fee basis and, thus, the highly compensated employee regulation was satisfied. The plaintiffs, however, argued that based on Wyndham’s argument that they were highly compensated executives (as opposed to administrative or professional employees), they must be paid on a salary basis, not a fee basis, to satisfy the highly compensated employee exemption and their commissions did not constitute a salary or a fee.

The court logically started its analysis with the language of the highly compensated employee exemption (29 C.F.R. §541.601), which states in relevant part: “An employee with total annual compensation of at least $100,000 is deemed exempt . . . if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.” The regulation further provides that “total annual compensation” “must include at least $455 per week paid on a salary or fee basis” and “may also include commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period.”

The court noted that the regulation on its face permits a highly compensated employee to be paid on a salary or a fee basis. However, when examining other related regulations, the court found that highly compensated administrative or professional employees may be compensated on a salary or fee basis to satisfy the exemption, while a highly compensated executive must be paid on a salary basis, as the fee form of compensation did not apply to exempt executives. To this end, an exempt executive must be paid on a salary basis at least $455 per week, but it could satisfy the highly compensated employee exemption with other forms of compensation included.

The court further found that even if the fee form of compensation could apply to exempt executives, the commissions paid to the plaintiffs did not constitute a fee basis form of compensation. In reaching this finding, the court noted that Wyndham’s argument was “illogical.” The court explained that if a commission could constitute a “fee basis,” “there would be no need for the Department of Labor to include the word ‘commission’ in the second sentence of the regulation” as an acceptable form of additional compensation to reach the $100,000 annual threshold. In addition, there was no evidence that the commission paid to the plaintiffs resembled a fee, as the commission was based on sales made and not irrespective of the results of the job or amount of time invested in the job.

Lastly, the court addressed a Department of Labor Opinion Letter Wyndham relied on. The court distinguished the findings in the Opinion Letter from the facts and circumstances involving the Sales Representatives. The employees described in the Opinion Letter were paid a guaranteed minimum salary that satisfied the requirements of payment on a salary basis and they received additional compensation that satisfied the highly compensated employee exemption. The plaintiff Sales Representatives on the other hand did not receive payment of a guaranteed salary; they were paid entirely on a commission basis and, thus, they did not satisfy the requirements of the highly compensated employee exemption.

The court’s ruling in Pierce is significant in a number of respects. First, it illustrates the strict application of the highly compensated employee exemption and how it can be narrowly applied, even when employees are paid several hundred thousand dollars annually. Second, the decision illustrates how very highly compensated employees may be eligible for overtime compensation, which could expose a company to substantial overtime liability. For example in this case, some plaintiffs were paid several hundred thousand dollars on an annualized basis, which could result in millions of dollars in overtime liability, even for a relatively small number of employees. Thus, companies should make sure they have a good understanding of the highly compensated employee exemption and structure their compensation plans and exempt/non-exempt designations accordingly.

If you have any questions regarding this post, please contact Stephen B. Stern at sstern@hwlaw.com or (410) 260-6585 or Amitis Darabnia at adarabnia@hwlaw.com or (410) 260-6592.

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