Under federal law, employers must pay employees time-and-a-half if they work over 40 hours in a workweek, unless the employees are exempt from the overtime law. Employers don’t usually think of an employee who takes home $900,000 in a year as a non-exempt employee who needs to receive overtime pay. But the case of Pierce v. Wyndham Vacation Resorts Inc. shows that these employers may need to think again, especially when those employees are mainly paid on commission.
In Pierce, a class of commissioned sales representatives sued Wyndham—a resort chain—claiming that they were not exempt from the Fair Labor Standards Act’s (FLSA) overtime provisions. Wyndham moved for summary judgment on some of the claims, arguing that certain sales reps earned more than $100,000 per year. Most made well over that amount, with some taking home upward of $700,000 or even $900,000 in a given year. Wyndham also argued that these reps performed “executive duties.”
Under the highly compensated employee exception to the FLSA, 29 CFR § 541.601, that was in effect at the time, an employee with total annual compensation of at least $100,000 was exempt from the overtime rules if the employee “customarily and regularly perform[ed] any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.”
The magistrate in Pierce found two flaws with this argument.
First, the court determined that the FLSA regulations only permit “compensation” to be paid to an “executive employee” on a “salary basis,” and these employees were not paid a salary. Rather, because these employees’ compensation was not guaranteed, they were not paid “total annual compensation” of over $100,000—on either a “salary basis” or a “fee basis.”
Second, the court ruled that he could not rule as a matter of law for Wyndham because there was a factual dispute as to whether these employees performed the executive duties that were necessary to exempt them from overtime law. Their “primary duty,” said the court, was “sales, not management.” Further, the defendants had not established beyond dispute that the representatives had the authority to hire and fire other employees, or that they “customarily and regularly” directed others’ work. Therefore, a trial was necessary.
This decision is a warning to employers to carefully consider whether their highly paid commissioned employees may still be subject to the overtime law. It’s also possible that the Department of Labor (DOL) may react to the Pierce decision and seek to clarify or change the highly compensated employee test as it applies to employees like these sales representatives.
After all, the DOL is already addressing a different component of this rule. In 2016, the Obama administration raised the compensation threshold for exempt employees paid on a salary basis from $455 per week to $913 per week (about $47,500 per year), making more, higher-paid employees eligible to receive overtime pay. A federal judge in Texas struck down that change in August of this year. Now, the DOL is reviewing comments about the exempt salary level and other issues under the overtime exemption. In light of the Pierce decision, employers who pay commissions are likely to pay even more attention to what the DOL does next.