In a decision that will impact pay practices in the oil and gas and many other industries in Texas, Louisiana, Mississippi, and beyond, the en banc U.S. Court of Appeals for the Fifth Circuit affirmed on Sept. 9, 2021, that employers paying a fixed daily rate — even one that results in annual compensation far above what is required to qualify for the Fair Labor Standards Act's overtime pay exemption for highly compensated employees — cannot meet the salary-basis requirement for the exemption unless they also satisfy the conditions set forth in 29 C.F.R. § 541.604(b) (i.e., payment of a fixed minimum weekly guarantee that bears a reasonable relationship to the employee's actual compensation). The ruling upends some employers' practices of paying a fixed daily rate regardless of the number of hours an employee works or paying a fixed daily rate for each day of a multi-day hitch.

The en banc court affirmed a prior panel's conclusion in Hewitt v. Helix Energy Solutions Group, Inc. that a former offshore rig employee, who was paid a fixed daily rate and who made more than $200,000 per year, did not qualify for the highly compensated exemption to the FLSA's overtime pay requirements. Two dissenting opinions vehemently disagreed and pointed out that the majority opinion's result — requiring overtime compensation for someone making over $200,000 per year — was not a reasonable reading of the FLSA. Nonetheless, the dissenting judges were outnumbered 12-6.

Background and En Banc Decision

The facts of the case are as follows: Helix Energy Solutions Group paid the employee, Michael Hewitt, a daily rate of at least $963 per day — which resulted in income of over $200,000 per year — to work on its offshore drilling rig. Hewitt claimed that he was entitled to overtime compensation under the FLSA, and Helix contended that he was exempt from the FLSA's overtime requirements under the exemption for highly compensated executive employees. It was undisputed that Hewitt satisfied the duties and income thresholds for that exemption; however, there was a dispute about whether Hewitt was paid on a "salary basis."

The en banc Fifth Circuit focused on the plain language of the FLSA's regulations. See 29 C.F.R. §§ 541.100, 541.601, 541.604. The regulations require the employer to show that it paid the employee on a salary basis. Although employees paid on an hourly, daily or shift basis can still satisfy the salary-basis requirement if there is both a guaranteed weekly minimum amount paid on a salary basis regardless of the number of hours worked and a reasonable relationship between the guaranteed amount and the amount that the employee actually earns, Helix failed to show that it satisfied either criteria. See 29 C.F.R. § 541.604(b).

Despite Helix's arguments to the contrary, the majority held that, to be entitled to the highly compensated employee exemption, the employer must show that the employee was paid on a salary basis, which may be satisfied by paying a daily or hourly rate only if there is a fixed minimum weekly guarantee that bears a reasonable relationship to the employee's actual compensation, no matter how high his or her compensation. Because Helix failed to show that it paid Hewitt on a salary basis under 29 C.F.R. § 541.604(b), it did not meet its burden to show entitlement to the highly compensated employee exemption.

An identical issue is currently being considered by the U.S. Court of Appeals for the Tenth Circuit following a ruling in Scott v. Antero Resources Corp., where the U.S. District Court for the District of Colorado held in May that an employee's "day rate" could be considered payment on a salary basis and therefore qualified for the FLSA's exemption for highly compensated employees. (See Holland & Knight's previous alert, "Federal Judge Rules Day Rate Can Be a Salary for FLSA Exemptions," June 2, 2021.)

Notably, the Fifth Circuit's application of Section 541.604(b) diverges from the positions taken by the First and Second Circuits, which have held that employers need not meet the requirements of Section 541.604 to establish the highly compensated employee exemption if the employer can establish the requirements of Section 541.601. Although the Fifth Circuit found that those cases involved employees who were paid a guaranteed minimum that satisfied Section 541.601 and therefore differed factually from Hewitt, the legal conclusions reached by those courts diverge from the Fifth Circuit's analysis, which sets up an argument that a circuit split exists.  

Conclusion and Considerations

Because the state of the law is in flux, any employer paying a daily rate to an employee classified as exempt should carefully examine its pay practices with counsel to determine the risk for unpaid overtime and take prompt steps to mitigate that risk.