New Way to Pay Day Rate: 5th Circuit Rules on FLSA Day Rate Overtime Exemption

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Are you paying employees using a day rate under the FLSA? If so, you may want to read the Fifth Circuit’s recent ruling in the latest string of Helix Energy cases. According to the Fifth Circuit, companies who do business in Texas, Louisiana, and Mississippi that pay employees based on a day rate must now pay those employees overtime even if their annual compensation far exceeds the FLSA’s highly compensated employee (HCE) exemption threshold.

What Happened in the Helix Energy Cases?

Helix Energy employed Michael J. Hewitt to work as a toolpusher on an offshore oil rig. In that position, Hewitt managed other employees while on monthly hitches. Helix Energy paid Hewitt at a daily rate of $1,341.00 on a bi-weekly basis. Hewitt typically worked more than forty hours per week. In total, Hewitt was paid over $200,000.00 per year.

Hewitt sued Helix alleging that it misclassified him as exempt and improperly paid him a day rate with no overtime in violation of the FLSA. Helix responded that it was entitled to the overtime exemption under the FLSA because Hewitt was either an “exempt executive” or a “highly compensated employee.” The district court agreed with Helix Energy and Hewitt appealed.

On appeal, Hewitt argued that Helix did not pay him on a “salary basis” because the company calculated his pay using a daily rate. This dispute led to a string of Helix Energy cases that sought to determine whether an employee who is paid a daily rate can properly be classified as exempt.

How We Got Here—Faludi, Helix Energy I, and Helix Energy II

The Fifth Circuit has been wrestling with the issue of whether an employee who is paid a daily rate can properly be classified as exempt since August of 2019.

In Faludi v. U.S. Shale Sols, Mr. Faludi was an attorney with a suspended law license who worked in a consulting position at U.S. Shale Sols. Mr. Faludi was paid $1,000.00 for each day he worked in Houston and $1,350.00 for each day he worked outside of Houston. Mr. Faludi annualized $260,000.00 in compensation during his engagement with U.S. Shale Sols. After Mr. Faludi’s relationship with the company ended, Mr. Faludi sued U.S. Shale Sols under the FLSA claiming he was compensated based on a daily rate and should have been paid overtime. The Fifth Circuit held that Mr. Faludi fell within the HCE exemption of the FLSA and, therefore, was not entitled to overtime compensation. The dissenting judges in Faludi disagreed, concluding that, based on the FLSA’s definition of “salary basis,” an employee is not paid on a salary basis—and, therefore, is entitled to overtime—if the employee is paid a daily, rather than a weekly rate.

Picking up on the Faludi dissent’s reasoning, the Fifth Circuit in Helix Energy I concluded that because Hewitt was paid a day rate rather than a salary, Helix Energy owed him overtime wages. The decision in Helix Energy I overturned the decision in Faludi, which companies had relied on to pay HCEs a day rate. However, the Fifth Circuit later withdrew the opinion in Helix Energy I and instituted a revised decision in Helix Energy II.  In Helix Energy II, the Fifth Circuit clarified that day rate employees can qualify for the HCE exemption if they meet the requirements of Section 541.604(b) of the FLSA, which provides that a day rate employee’s compensation arrangement:

  • must guarantee at least a minimum weekly required amount paid on a salary basis regardless of the number of hours, days, or shifts worked (the “minimum guarantee condition”); and
  • must contain a reasonable relationship between the guaranteed pay amount and the amount actually earned (the “reasonable relationship condition”).

The Fifth Circuit in Helix Energy II ultimately determined that Helix Energy did not satisfy these conditions and that Hewitt was entitled to overtime compensation.

The Most Recent Helix Energy Decision

Dissatisfied with the ruling in Helix Energy II, Helix Energy requested that the Fifth Circuit conduct a rehearing of the decision en banc (i.e., a request to have all of the Fifth Circuit judges to hear the case) due to the importance of the matter. The Fifth Circuit agreed to conduct the rehearing and issued a final decision in the Helix Energy III case on September 9, 2021.

In Helix Energy III, the Fifth Circuit held that because the FLSA defines “salary” as compensation paid “on a weekly, or less frequent basis” and “without regard to the number of days or hours worked,” a daily rate can be classified as a “salary.” However, the court held that the employer must satisfy both the minimum guarantee and reasonable relationship conditions of Section 541.604(b) of the FLSA before a daily rate can be a “salary” that satisfies the HCE exemption. The court further explained that Helix Energy could have satisfied this requirement by offering a minimum weekly guarantee of $4,000.00 based on Hewitt’s daily rate of $963.00 but failed to do so. Hewitt, therefore, was entitled to overtime compensation.

Helix Energy III now guides Texas, Louisiana, and Mississippi companies in the compensation of day rate employees.

The Effect of Helix Energy III on Pay Practices

In light of Helix Energy III, companies are now faced with two options when compensating day rate employees: (1) pay overtime wages even if compensation exceeds the FLSA’s HCE overtime exemption; or (2) provide a minimum weekly guaranteed amount paid on a salary basis—regardless of the number of hours, days, or shifts worked—according to actual earnings. If companies continue compensating their day rate employees without factoring in overtime hours or the requirements of Section 541.604(b) of the FLSA, they will likely have to defend lawsuits.

The Fifth Circuit’s application of Section 541.604(b) to day rate employees departs from the First and Second Circuits (although based on slightly differing facts). This creates a split among the circuits that could potentially lead to a future decision by the United States Supreme Court or a change in the law by Congress. However, companies in the Fifth Circuit are stuck with Helix Energy III for now and should consider adjusting their pay practices accordingly.

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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