On February 22, 2023, the Supreme Court of the United States ruled that an employee who is paid a daily rate for each day worked, no matter how high the rate, is not exempt from the overtime provisions of the Fair Labor Standards Act (FLSA) and, therefore, entitled to overtime pay for hours worked over 40 in a work week. The Court found that although the employee was highly compensated, his daily wage did not meet the salary basis requirements for exempt status under the FLSA and its implementing regulations.
In Helix Energy Solutions Group Inc v. Hewitt, No. 21-984, 598 U.S. ___ (2023), the employee, an oil rig worker, made $200,000 a year. A federal district court in Texas found that the worker, who was paid a daily rate of between $963 and $1,341 for each day worked, was paid on a salary basis when the evidence showed he was paid at least $455 a week (the salary basis threshold for exemption at the time) for each week that worked, regardless of the quantity or quality of his work. Hewitt v. Helix Energy Solutions Group, Inc., No. 4:17-CV-2545 (S.D. Tex. Dec. 21, 2018).
The Fifth Circuit Court of Appeals reversed, holding that a “daily-rate employee (like Hewitt) does not fall within the main salary-basis provision of 541.602(a) … [and] ‘daily-rate’ workers can qualify as paid on a salary basis only through the ‘special rule’ of 541.604(b), which focuses on workers whose compensation is ‘computed on an hourly, a daily or a shift basis.’” The Fifth Circuit found that because the conditions of 541.604(b) were not met, Hewitt was not exempt from the FLSA’s overtime rules. Hewitt v. Helix Energy Solutions Group, Inc., 19-20023 (5th Cir. Dec. 21, 2020).
Helix argued that because the employee was paid more than the weekly salary basis threshold as a daily rate, he was guaranteed to satisfy the salary threshold for any week in which he worked. Under FLSA regulations, exempt employees need not satisfy the salary threshold for any week in which they perform no work. The company also argued that the Fifth Circuit decision was incompatible with the FLSA, which was intended to protect front line workers, not highly compensated supervisors, and would deal a blow to the oil and gas industry, among others, where daily compensation arrangements are common.
The Supreme Court affirmed the Fifth Circuit’s decision, holding that Hewitt was not exempt because Helix paid Hewitt a fixed daily wage rate, not a salary, because the amount of his compensation depended on the number of days he worked. Hewitt was not guaranteed a weekly payment regardless of the “quantity or quality of the work performed” – a requirement under the regulations – and, therefore, the payment of a daily rate did not meet the salary basis requirement for exemption under the FLSA.
The Court also held that the highly-compensated exemption, which relaxes the duties test for workers earning above an annual threshold ($100,000 at the time of the suit, currently $107,432), did not apply because it still requires that employees be paid on a salary basis and Hewitt’s daily rate, no matter how high, did not meet that standard. Although the FLSA has a path for employees who are paid on a daily, hourly or shift rate to be considered exempt, Helix conceded that Hewitt’s compensation did not satisfy the requirements of that regulation. Under that provision, 29 CFR § 541.604(b), an employee who is paid on a daily, hourly or shift basis can be exempt only if they are guaranteed a salary for each week they work that at least satisfies the threshold ($455 at the time of the suit, currently $684), and the total amount of their weekly compensation bears a reasonable relationship to the guaranteed pay. The Department of Labor has pegged that “reasonable relationship” at no more than one-and-a half times the employee’s guaranteed salary.
The takeaway for employers is that paying individuals a high daily, hourly or shift rate that equates to or even guarantees that they earn an amount over the salary basis threshold in any one week is not enough to make them exempt.
It is worth noting that at oral argument before the Supreme Court, and in his dissenting opinion, Justice Kavanaugh suggested that the regulations themselves are invalid because they improperly limit the broad exemptions the FLSA provides. Helix had not challenged the validity of the regulations themselves in this case, so this issue was not addressed by the Court majority. There is little doubt that other litigants will look for the opportunity to bring that issue before the Court in a future case, suggesting that this may not be the end of litigation over this issue. However, employers must now comply with the current Supreme Court precedent.
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