Supreme Court Clarifies a “Day-Rate” Does Not Meet the FLSA “Salary Basis” Test, Even for Highly Compensated Employees
The Fair Labor Standards Act of 1938 (“FLSA”) created the right to a minimum wage and overtime pay. The FLSA also provides exemptions to overtime pay requirements for certain employees. Under the “bona fide executive” exemption, “highly compensated employees” are exempt from overtime if performing at least one qualifying job duty. However, on February 22, 2023, the United States Supreme Court, in its 6-3 decision in Helix Energy Solution Group, Inc. v. Hewitt, clarified that highly compensated employees paid on a “day-rate” do not qualify for this exemption because a day-rate does not satisfy the salary basis test.
The Bona Fide Executive Exemption for Highly Compensated Employees
The FLSA guarantees overtime pay to covered employees who work more than 40 hours in a workweek. An exemption exists however for bona fide executives, administrators, or professionals who meet one of two separate and slightly different rules, one applying to lower-income employees and the other to higher-income ones. Under the “general rule,” to qualify for this exemption, a three part test must be met: (1) the “salary basis” test, meaning the employee receives a predetermined and fixed salary that does not vary with the amount of time worked; (2) the “salary level” test, meaning the employee must earn in excess of $684 per week ($455 at the time litigation in Helix began); and (3) the “job duties” test, meaning the employee manages the enterprise, directs other employees, and exercises the power to hire and fire.
However, a second rule applies to highly compensated employees (“HCE”) who earn at least $107,432 in annual compensation ($100,000 at the time litigation in Helix began). Under this HCE rule, both the “salary basis” and “salary level” test remain the same, however the HCE only needs to meet one of the three “job duties” requirements (i.e., the employee either manages the enterprise, or directs other employees, or exercises the power to hire and fire.) If either the general or HCE rule is satisfied, an employee may be exempt from overtime pay requirements.
Helix Energy Solution Group, Inc. v. Hewitt
In Helix, Michael Hewitt, a former “toolpusher” on an oil rig sued his former employer, Helix Energy Solutions Group, Inc. (“Helix”) in federal court, alleging he was misclassified as overtime exempt because he was paid on a day-rate. Hewitt’s schedule consisted of daily 12-hour shifts for 28-day “hitches,” resulting in a typical 84-hour workweek. Despite exceeding 40 hours in a workweek, Hewitt was not paid overtime.
Helix argued Hewitt was exempt from overtime as an HCE under the bona fide executive exemption. First, Hewitt’s day-rate compensation structure came out to over $200,000 in annual compensation, making him an HCE. Second, his day-rate was between $963 and $1,341, meaning that even if Hewitt only worked one day, his compensation far exceeded the $455 weekly “salary level” test. Third, as a “toolpusher,” Hewitt had a supervisory rule, meeting the “job duties” test.
The District Court held in Helix’s favor. However, the Court of Appeals for the Fifth Circuit reversed, deciding Helix could not satisfy the “salary basis” requirement of the exemption because Hewitt was not paid a predetermined salary on a weekly or less frequent basis. The Supreme Court, in an opinion authored by Justice Kagan, affirmed the decision of the Fifth Circuit, holding that a day-rate employee does not fall within the salary-basis provision.
As the basis for its decision, the Court relied on 29 C.F.R. section 541.602(a), which sets out the salary basis test. Section 541.602(a) states “salary basis” means an employee “regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount… which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” The Court held that under a day-rate compensation structure, an employee is not receiving a “predetermined amount” on a weekly or less frequent basis. Additionally, given an employee on a day-rate is not compensated for days they do not perform work, their pay necessarily varies with the quantity of work performed. With no “steady and predictable stream of pay,” the Court determined a day-rate employee is not paid on a salary basis and is thus entitled to overtime.
The Court also clarified that 29 C.F.R. section 541.604(b), which allows an exempt employee’s compensation to be “computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement,” was inapplicable to employees paid on a day-rate. Section 541.604(b) still requires a guarantee that the employee receives a minimum weekly amount bearing a “reasonable relationship” to the employee’s usual weekly earnings. Since a day-rate structure provides no weekly guarantee related to typical weekly earnings, Section 541.604(b) could not apply.
Solutions Proposed by the Supreme Court
The Court did provide two possible solutions for employers who want to pay on a day-rate compensation structure. One solution would be adding onto a daily-rate a weekly guarantee that did not take into account the number of days actually worked. A second solution proposed by the Court is simply converting Hewitt’s pay into a straight weekly salary for the time Hewitt worked.
Insight
Employers who rely on the “bona fide executive” exemption for employees paid on a day-rate, whether HCEs or not, should take caution and re-examine their compensation structure. However, this decision highlights the Court’s strict interpretation of “salary” and the need for predictable compensation on a frequency of no less than one week.
