Fifth Circuit Rules Day Rate Compensation Does Not Satisfy Requirement of Payment on a Salaried Basis for Exempt Status

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The issue of the proper application of the highly compensated employee exemption under the Fair Labor Standards Act (FLSA), as it applies to employees paid on a “day-rate” basis in the oil and gas industry, has been a hotly debated issue in recent years, especially in the Fifth Circuit Court of Appeals. In August 2019, a three-judge panel of the Fifth Circuit concluded in Faludi v. U.S. Shale Solutions, LLC, that an oil and gas consultant who was paid $1,000 for every day he worked, with annual compensation of approximately $260,000, was properly classified as exempt under the highly compensated employee exemption, rejecting the consultant’s overtime claim. The court concluded that the consultant’s day rate of $1,000 satisfied the requirement that the employee receive a guaranteed salary of at least $455 per week. Faludi, the consultant, petitioned for en banc review before the Fifth Circuit, and while that was pending, the original panel withdrew its opinion and ruled that it “need not reach” the question of the highly compensated employee exemption, as Faludi was an independent contractor and therefore not entitled to overtime compensation under the FLSA. Thus, the court sidestepped the issue. (Although the Fifth Circuit dodged the issue by ruling Faludi was an independent contractor, it reiterated its support for the legal basis of its original opinion.)

The issue emerged again in 2020, in Hewitt v. Helix Energy Solutions Group, Inc. (Hewitt I). There, a three-judge panel of the Fifth Circuit, addressing the exempt status of a “Tool Pusher” on an oil rig who supervised around 12 to 14 other employees, was paid a daily rate of $963, and earned more than $200,000 annually, concluded that payment on a day-rate basis was not payment on a salaried basis. Therefore, he was not properly classified as an exempt, highly compensated employee, and he was entitled to overtime compensation. Later in 2020, the panel withdrew its opinion and issued a substitute opinion (Hewitt II), still ruling that payment on a day-rate basis did not satisfy the regulatory requirement of payment on a salaried basis. Judge Wiener, who initially agreed with the decision in Hewitt I, authored a strong dissenting opinion in Hewitt II, foreshadowing further debate on the issue.

Helix Energy Solutions Group, Inc., petitioned for rehearing en banc, and the decision of the Fifth Circuit was vacated pending en banc review. On September 9, 2021, the Fifth Circuit issued its divided opinion (12–6), holding that payment on a day-rate basis “‘does not constitute payment on a salary basis’” for the purpose of the highly compensated employee exemption. In addition, the court concluded that, because the employee was paid on a day-rate basis, the employer could not take advantage of the salary-basis test under 29 C.F.R. § 541.604(b) because the guaranteed salary did not have “‘a reasonable relationship’” to the total income earned by the employee. The court concluded that the $963 daily rate was not reasonably related to the $3,846 the employee earned on average each week. Thus, the employee did not qualify for the exemption.

This has been, and still is, an extremely important issue for the oil and gas industry because of the way it staffs offshore and remote oil and gas work sites. Having to pay employees making upwards of $200,000 per year additional compensation for overtime, when they clearly meet the duties test for exempt status, was heavily briefed by the five states that weighed in on the subject, as they have much to lose if the oil and gas industry is adversely impacted by this decision. Amicus briefs filed by the oil and gas industry pointed out that cases in two other circuits (the First Circuit and the Second Circuit), reached polar opposite results. In addition, the U.S. District Court for the District of Colorado found in 2021 that employees working as “Drilling Consultants” on natural gas and oil properties in Ohio and West Virginia, who were paid “at the very least $1,000 per day” and “were typically paid $1,400 or more for any day in which they worked,” were paid on a salaried basis. Since they earned at least $200,000 per year, the district court in Colorado ruled that they were properly classified as exempt, highly compensated employees who were not entitled to overtime.

The battle is not over. With conflicts among the First, Second, and Fifth Circuits, as well as conflicting cases coming out of the U.S. District Court for the Southern District of Texas, the U.S. District Court for the Western District of Texas, and the U.S. District Court for the District of Colorado, this may be an issue that will need to be resolved by the Supreme Court of the United States. In the meantime, the oil and gas industry is left to struggle in this unsettled environment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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