SCOTUS: Daily Rate Doesn’t Satisfy FLSA’s Salary Basis Test for Exemption, Even If It’s Huge!
It’s always exciting when the Supreme Court takes up a wage and hour issue—at least for us. Earlier this week, in Helix Energy Solutions Group, Inc. v. Hewitt, the court tackled the question of whether a daily rate can satisfy the “salary basis” test for exemption under the Fair Labor Standards Act as an executive, administrative, or professional (EAP) employee when the daily rate itself far exceeds the weekly minimum salary for exemption. The answer from the high court is “no.”
The Rules in Play
With limited exceptions, to qualify as an exempt EAP employee, an employee must—in addition to satisfying certain duties requirements—be compensated on a “salary basis” of not less than $684 per week. Employees are considered to be paid on a “salary basis” if they regularly receive each pay period “a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” Subject to limited exceptions, exempt EAP employees must receive the full salary for any week in which they perform any work, without regard to the number of days or hours worked. The definition of “salary basis” is in the FLSA regulations at 29 C.F.R. § 541.602 (“Section 602”).
Under a separate rule for “highly compensated employees,” an employee with total annual compensation of at least $107,432 is deemed exempt if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an EAP employee. Under that rule, “total annual compensation” must include at least $684 per week “paid on a salary … basis.”
Yet another rule – 29 C.F.R. § 541.604(b) (“Section 604(b)”)—focuses on workers whose compensation is “computed on an hourly, a daily or a shift basis,” rather than a weekly basis. That rule states that an employer can pay an employee on an daily (or hourly or shift rate) basis without violating the salary basis requirement or losing the exemption so long as two conditions are met:
- the employer must “also” guarantee the employee at least $684 each week (the minimum salary level) “regardless of the number of hours, days or shifts worked”; and
- that guaranteed amount must bear a “reasonable relationship” to the “amount actually earned” in a typical week— more specifically, must be “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.”
The two conditions in Section 604(b), the Supreme Court wrote, “create a compensation system functioning much like a true salary—a steady stream of pay, which the employer cannot much vary and the employee may thus rely on week after week.”
What Happened in Helix
Michael Hewitt worked for Helix as a “toolpusher” on an offshore oil rig. He oversaw various aspects of the rig’s operations and supervised a dozen or more workers. Helix paid him on a daily rate basis, between $963 and $1,341 per day. The number of days Hewitt worked from week to week could vary, depending on the intricacies of his schedule. His paycheck amounted to his daily rate times the number of days he had worked in the pay period, and he earned more than $200,000 annually. And yet… he sued for overtime pay, on the ground that a daily rate—even one that far exceeds the weekly minimum salary for exemption—violates the salary basis test, and renders him non-exempt.
Helix acknowledged Hewitt’s compensation didn’t satisfy the conditions in Section 604(b), because the company didn’t guarantee that Hewitt would receive each week an amount bearing a “reasonable relationship” to the weekly amount he usually earned. So the question came down to whether Hewitt was paid on a salary basis under Section 602. As Justice Kagan put plainly, “If yes, Hewitt was exempt from the FLSA and not entitled to overtime pay; if no, he was covered under the statute and can claim that extra money.” The court’s holding was as plain:
The answer is no: Helix did not pay Hewitt on a salary basis as defined in §602(a). That section applies solely to employees paid by the week (or longer); it is not met when an employer pays an employee by the day, as Helix paid Hewitt. Daily-rate workers, of whatever income level, are paid on a salary basis only through the test set out in §604(b) (which, again, Helix’s payment scheme did not satisfy).
Helix had urged the court to consider a different issue: whether an employee who qualifies for the “highly compensated employee” exception must nonetheless satisfy Section 604(b) to be exempt. But the court did not find the issue relevant, given that the “highly compensated employee” exemption itself requires payment on a salary basis. In Justice Kagan’s words, “[t]he HCE rule refers to the salary-basis … requirement in the same way that the general rule does.”
The court noted that “[i]n demanding that an employee receive a fixed amount for a week no matter how many days he has worked, [Section 602] embodies the standard meaning of the word ‘salary’ …. [A] daily-rate worker does not qualify under [Section 602] as a salaried employee—even if (like Hewitt) his daily rate is high.”
So what of the policy arguments? Should someone earning several hundred thousands of dollars a year be overtime-eligible? The court wasn’t persuaded:
‘Even the most formidable policy arguments cannot overcome a clear’ textual directive…. Indeed, it is Helix’s own position that … would produce troubling outcomes—because it would deny overtime pay even to daily-rate employees making far less money than Hewitt…. Workers are not ‘deprived of the benefits of the Act simply because they are well paid[.]’
What about the operational consequences? The court offered this advice:
Helix could come into compliance with the salary-basis requirement for Hewitt and similar employees in either of two ways. It could add to Hewitt’s per-day rate a weekly guarantee that satisfies [Section 604(b)]. Or it could convert Hewitt’s compensation to a straight weekly salary for time he spends on the rig. Helix protests that either option would make it pay for days Hewitt has not worked…. But that is just to say that Helix wishes neither to pay employees a true salary nor to pay them overtime. And the whole point of the salary-basis requirement is to take that third option off the table, even though doing so may well increase costs.
What about the retroactive liability? After all, the daily rate practice is common in certain industries. It is what it is, according to Justice Kagan:
[W]ere [the salary basis] requirement novel, Helix’s complaint about retroactive liability could have force…. But … the salary-basis test, in largely the form it exists today, goes back to nearly the FLSA’s beginnings…. [N]othing about today’s decision should ‘come as a surprise.’
In his dissent, which characterized the majority opinion as “head-scratching,” Justice Kavanaugh took a view many employers would take on these facts: “If a worker is guaranteed at least $[684] for any day that he works, that worker by definition is guaranteed at least $[684] for any week that he works.” It’s hard to argue with that logic, but apparently not impossible.
Proskauer’s Wage and Hour Group is comprised of seasoned litigators who regularly advise the world’s leading companies to help them avoid, minimize, and manage exposure to wage and hour-related risk. Subscribe to our wage and hour blog to stay current on the latest developments.
