As most of you are aware, the Fair Labor Standards Act (FLSA) provides that employees who are covered by the Act must receive overtime pay at time and a half for all hours worked over 40 in a workweek.

However, the maze of statutes and regulations by which the FLSA exempts various employees from mandatory overtime pay can be quite confusing. A recent ruling from the 2nd Circuit provided some much-needed clarity for determining the exempt status of employees earning more than $100,000 per year. In its decision, the court was forced to grapple with competing regulations.

Navigating the FLSA's exemption requirements

The FLSA has a host of specific overtime exemptions. At times, the requirements of the exemptions overlap and conflict with each other. For example, the requirements of the FLSA's "white-collar employee" and "highly compensated employee" exemptions are quite similar. To fall within either exemption, employees must satisfy both a "salary" and a "duties" requirement. However, the FLSA applies a relaxed "duties" requirement for employees who satisfy the highly compensated employee exemption's salary requirement.

The white-collar employee exemption applies to employees who are (1) "compensated on a salary basis of not less than $455 per week" and (2) "employed in a bona fide executive, administrative, or professional capacity." The separate but related highly compensated employee exemption applies to employees who (1) earn at least $100,000 in total annual compensation and (2) "customarily and regularly perform one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee."

Another FLSA regulation establishes a "reasonable relationship" test that applies to otherwise exempt employees who receive a minimum salary guarantee and whose earnings are computed on an hourly, daily, or shift basis. Although FLSA regulations allow employers to pay those employees additional compensation without losing the exemption, the reasonable relationship test requires that the guaranteed amount be "roughly equivalent" to employees' actual earnings.

The FLSA regulations that address the reasonable relationship test and the highly compensated employee exemption do not explain how to resolve conflicts between the provisions. Thus, the regulations leave room to argue that the highly compensated employee exemption does not apply unless the reasonable relationship test is satisfied.

CVS case

Salah Anani worked for CVS as a pharmacist from 2003 until July 2009. During his last two years of employment, Anani received a guaranteed salary of $1,250 per week based on a 44-hour workweek. Throughout Anani's employment, CVS classified him as a salaried employee who was exempt from FLSA-mandated overtime.

However, CVS paid Anani additional compensation for time he voluntarily worked over his expected base hours (44 hours per week). He typically worked 16 to 36 additional hours each week. CVS paid him for the additional hours according to an hourly "compensation rate" that was determined by dividing his weekly guaranteed salary by 44, multiplying the result by the number of additional hours, and adding "premium pay" of $6. With the inclusion of the additional compensation, Anani's total annual pay exceeded $100,000.

Anani sued his employer, seeking overtime under the theory that he did not fall within the highly compensated employee exemption because his actual earnings were more than two times his guaranteed salary. According to him, because his total earnings substantially exceeded his guaranteed salary, the relationship between the two was unreasonable. Therefore, he could not be classified as an exempt employee. In other words, Anani claimed that the reasonable relationship test trumped the highly compensated employee exemption.

The 2nd Circuit rejected Anani's argument, determining that there was no conflict and that the provisions actually worked independently of each other. The court reasoned that to conclude otherwise would render the highly compensated employee exemption meaningless and would thwart the overarching purpose of the exemption, which is to relax the duties requirement for employees who earn more than $100,000 per year. Thus, according to the court, because Anani satisfied the highly compensated employee exemption's requirements, no further inquiry was needed. Anani v. CVS RX Services.

Bottom line

This decision provides helpful guidance to employers attempting to determine which white-collar employees are exempt from the FLSA's overtime requirements by creating a "safe harbor" for employees who earn more than $100,000 per year, earn at least $455 per week "plus extras," and meet the relaxed duties test.

This article was edited by the attorneys of Bond, Schoeneck and King.