Publication

In another important employment decision decided this past week, the Supreme Court in Helix Energy Solutions Group, Inc. v. Hewitt clarified the “salary basis” test for exceptions to the Fair Labor Standards Act’s (“FLSA”) requirements of minimum wage and overtime pay. Although the plaintiff was highly-compensated, earning more than $200,000 a year, he was not exempt from the FLSA requirements for overtime pay because he was paid based on a daily rate rather than on a salary basis as required to qualify for the bona fide executive exemption.  Accordingly, the Supreme Court ruled that Hewitt was entitled to substantial overtime compensation in addition to his already hefty base pay. The key takeaway for employers is that how employees are paid matters at least as much as how much they are paid.

Background

Hewitt, the plaintiff, worked as a tool-pusher on an offshore oil rig, and supervised other workers. He earned between $936 and $1,341 per day, no matter how many hours he worked, although he was only paid for the days he worked. In other words, as the term is typically understood, he was not a “salaried” employee. Ultimately, Hewitt was fired and, as often is the case, turned to an employment lawyer for redress. Although presumably satisfied with his high compensation for many years, he sued, ultimately successfully, for unpaid overtime.

The District Court initially sided with the employer, finding that although Hewitt did not work every day—and was therefore not paid on a salaried basis—the pay he received exceeded the minimum amount to exempt Hewitt from the overtime provisions of the FLSA. However, the Fifth Circuit Court of Appeals disagreed, because the plaintiff was paid a daily rate and was not a “salaried” employee, as required under the applicable FLSA exemption. Despite noting that Hewitt was already in the top 6% of income earners in the United States, because his payment method did not strictly comply with the exemption requirements, Hewitt was also entitled to overtime compensation. In a landfall win for Hewitt, the Supreme Court affirmed the Fifth Circuit’s decision, entitling Hewitt to substantial overtime pay that neither employer nor employee likely expected or bargained for while Hewitt was still working for Helix.

FLSA Exemption for Bona Fide Executives and Highly Compensated Employees

The FLSA contains several exemptions to its provisions mandating overtime pay. Among the most well-known exemptions are the “white-collar” exemptions: those for executive, administrative, and professional employees. Under those exemptions, employees must meet certain tests regarding their job duties (rather than merely their job titles), and be paid on a salary basis at a rate not less than $684 per week (or $35,568 per year assuming 52 weeks of work).[1]

To qualify as a “bona fide executive,” an employee must meet three separate requirements:

(a) The employee must be paid on a salary basis (the employee receives a predetermined and fixed salary that does not vary with the amount of time worked);
(b) The employee must be paid a minimum of $684 per week; and
(c) (1) The employee’s primary duty must be managing the enterprise or a department or subdivision thereof; (2) the employee must customarily and regularly direct the work of at least two full-time employees (or their equivalent); and (3) the employee must have the authority to hire and fire other employees, or the employee’s suggestions and recommendations as to hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight.

Only if all criteria are met is the employee excluded from the overtime and minimum wage provisions of the FLSA.  

Highly-compensated employees (“HCE”), or those performing office or non-manual work and paid a minimum annual compensation of $107,342[2] (which must include at least $684 per week) are subject to a relaxed “job duties” test. Instead of needing to meet all three responsibilities—managing the enterprise, directing other employees, and exercising the power to hire and fire—HCEs are required to regularly and customarily perform only one of the three duties identified. In other words, the “and” reflected in the third part of the test is changed to an “or.”

The Meaning of “Salary Basis”

Hewitt agreed that he met parts (b) and (c) of the test reflected above and that he was a highly-compensated employee. In other words, he acknowledged that he was paid a minimum of $684 per week and performed at least one of the three duties required by bona fide executives. He also acknowledged that he was compensated well over the $100,000 minimum at the time to qualify as an HCE. The only dispute was whether he was paid on a “salary basis,” as required.

The relevant regulation states that an employee is paid on a “salary basis” “if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation . . . . [A]n exempt employee must receive the full salary in any week in which the employee performs any work without regard to the number of days or hours worked.” 29 CFR §541.602(a) (emphasis added).

Giving the language in the regulation its ordinary meaning, six of the nine justices concluded that nothing in the description fit a daily-rate worker, who did not receive a predetermined amount on a weekly basis, and whose compensation depended on the number of days worked in any given week. Instead, the concept of salary is linked “as a matter of common parlance” to “the stability and security of a regular weekly, monthly, or annual pay structure” and connotes a “steady and predictable [weekly, monthly, or annual] rate of pay.”

Lessons Learned

Undoubtedly, Hewitt’s employer would not have paid him a daily rate of over $1,000 a day if it understood that it would also be on the hook for overtime compensation. Hewitt’s employer could have taken several steps to insulate itself from his belated claim for overtime compensation. First, it could have paid Hewitt a lesser daily rate and provided him with overtime compensation. Second, it could have paid him a fixed weekly, monthly, or annual salary but conditioned his employment on working a certain number of days. Or third, it could have availed itself of the exemption contained in 29 CFR §541.604(b) by still paying Hewitt a daily rate but guaranteeing a weekly payment roughly equivalent to what he usually earned. In all three examples, Hewitt’s total compensation could have been equal, and he would not have been subject to the FLSA’s minimum wage or overtime provisions. 

Employers, particularly those in the energy, oil, and gas industries, which commonly use a daily rate pay model, should carefully review their practices and work with experienced legal counsel, such as Jason D. Goldwater and Jeffrey M. Schagren, to ensure that their pay policies do not run afoul of the FLSA. In addition, employers should be aware that the Department of Labor is expected to propose a substantial increase to the salary thresholds required to qualify for the so-called “white-collar” exceptions. Finally, wage and hour laws regarding minimum wage, overtime compensation, and other conditions of employment such as meal and rest breaks vary considerably at the state and local levels and often impose requirements that are far more stringent than the FLSA’s, as is the case with the California Labor Code. 

Gordon Rees Scully Mansukhani’s experienced employment attorneys are particularly well suited to advising employers in all states and industries on Federal employment and labor laws, as well as those state and local variations, through the firm's unique 50-State Platform.