The Supreme Court sided with the plaintiff and held that paying a daily rate―even to a highly compensated worker―is not paying on a “salary basis.”
On February, 23, 2023, the U.S. Supreme Court decided Helix Energy Solutions Group, Inc. v. Hewitt No. 21-984 (U.S. Feb. 22, 2023), a highly anticipated ruling on the Fair Labor Standards Act (FLSA). The ruling is a cautionary tale for employers, warning that any cracks in their compensation structure may put them on the hook to pay overtime to high-earning employees. Hewitt determined that the FLSA required an employer to pay overtime to an offshore oil rig worker who earned over $200,000 annually because it paid him a daily, not weekly, rate. The decision is a must-read for all employers on their strategies for wage-and-hour compliance.
Background
The plaintiff, a former “tool pusher” on an offshore oil rig, filed an action against his employer in the U.S. District Court for the Southern District of Texas under the FLSA seeking to recover overtime pay.
In his role, the plaintiff typically worked 12 hours per day for 28 days straight and then had the next 28 days off work before returning to the vessel. His pay rate ranged from $963 to $1,341 per day. Under this compensation structure, he earned at least $200,000 annually throughout the course of his employment.
In response to the lawsuit, the employer argued that the plaintiff qualified for the FLSA’s “executive” exemption and was therefore not entitled to overtime.
The FLSA generally exempts from its overtime requirements employees who: (1) receive at least the minimum salary level (currently $684) per week paid on a salary basis (the salary basis test) and (2) satisfy the job duties standard for the applicable exemption (the job duties test). The FLSA rules relax the job duties test for highly compensated employees (currently defined as employees earning over $107,435 annually).
The FLSA rules provide further guidance on the salary basis test. Under section 541.602(a), “salary basis” generally means that the employee “receives each pay period on a weekly, or less frequent basis, a predetermined amount… not subject to reduction because of variations in the quality or quantity of the work performed.”
Section 541.604(b) also addresses compensation for exempt employees. It provides that:
An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.
The plaintiff argued that his compensation did not meet the salary basis test because his employer paid him a daily rate, not a weekly salary.
The district court disagreed with the plaintiff’s analysis and granted summary judgment in the employer’s favor.
The Court of Appeals for the Fifth Circuit reversed and held that the plaintiff’s pay did not meet FLSA’s salary basis requirement. In so holding, the Court of Appeals reasoned that: (1) a daily rate employee does not receive the weekly preset salary required by Section 541.602(a), and (2) the plaintiff’s pay did not satisfy the conditions of the special rule of Section 541.604(b) that authorizes pay for exempt employees on an hourly, daily or shift basis. The Supreme Court granted certiorari and affirmed.
The Supreme Court’s Decision
The Supreme Court sided with the plaintiff and held that paying a daily rate―even to a highly compensated worker―is not paying on a “salary basis.”
The opinion, authored by Justice Kagan and joined by Chief Justice Roberts and Justices Thomas, Sotomayor, Barrett and Jackson, spells out the only two compensation structures that pass the “salary basis” test under the rules:
- The employer satisfies Section 602(a) by paying the employee a pre-determined salary of at least the minimum salary level (currently $684) computed on a weekly (or less frequent) basis regardless of hours, days or shifts worked; or
- The employer satisfies Section 604(b) by computing the employee’s pay on an hourly, daily or shift basis, but guarantees a weekly amount of at least the minimum salary level (now $684) and ensures that a “reasonable relationship” exists between the guaranteed amount and the amount actually earned.
In other words, the only way to pay properly a daily (or hourly or shift) rate to an exempt employee is to satisfy the conditions of Section 604(b).
The employer acknowledged that the plaintiff’s compensation did not satisfy Section 604(b)’s conditions (i.e., the reasonable relationship test). The case therefore hinged on whether the employer had paid the plaintiff on a salary basis as described in Section 602(a). According to the Supreme Court, the employer had not done so: “A daily-rate worker’s weekly pay is always a function of how many days he has labored. It can be calculated only by counting those days once the week is over―not, as §602(a) requires, by ignoring that number and paying a predetermined amount.” The Court rejected the employer’s argument that Section 602(a) requires only the minimum salary amount (then $455 per week) on a weekly or less frequent basis because “a ‘basis’ of payment typically refers to the unit or method for calculating pay, not frequency of its distribution.” Section 602(a) “describes those paid a weekly rate.”
The highly compensated employee rules also did not dictate the plaintiff’s exempt status. Under the highly compensated exemption, only the job duties test is easier to satisfy; the salary basis test is the same. Thus, even though the plaintiff received a high daily rate, the Supreme Court opined that although it was “higher than lots of salaries,” he still “did not get a salary… because his weekly take-home pay could be as little as $963 or as much as $13,482, depending on how many days he worked.” The Supreme Court also dismissed concerns about the potential for “windfalls” to already high earners. In essence, the law is the law regardless of total earnings.
What This Means for Employers
The Supreme Court’s decision underscores the importance of ensuring that an exempt employee’s compensation structure meets the rules regarding the salary basis test, particularly where there is an hourly (or daily or shift) component to the exempt employee’s pay. Employers must comply with Section 604(b)’s conditions to pay properly exempt employees on an hourly, daily or shift basis.
For More Information
If you have any questions about this Alert, please contact Gerald L. Maatman, Jr., Natalie F. (Hrubos) Bare, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group or the attorney in the firm with whom you are regularly in contact.
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