On February 22, 2023, the United States Supreme Court decided Helix Energy Solutions Group, Inc. et al v. Hewitt, a case involving a recurring issue under the Fair Labor Standards Act: what constitutes a “salary.” Specifically, the Court answered whether a “daily rate” pay structure can be a “salary.” The Supreme Court’s decision is one that could have a significant impact, particularly in the oil and gas industry where many workers are paid a “daily rate.”
Background on the Helix Case
The FLSA, passed in 1938, is the federal law that governs, among other things, the payment of minimum wage and overtime to employees. The FLSA requires all employers subject to the FLSA to pay their employees 1.5 times their regular hourly rate for every hour they work over 40 in a workweek, unless those employees satisfy one of the exemptions to the FLSA. By requiring overtime payments, the FLSA seeks to minimize long work hours and encourage employers to spread available work amongst their employees.
There are a number of exemptions under the FLSA, but the most popular ones—the administrative, executive, and professional exemptions—require the employee be paid on a “salary basis” and “receive” that pay “on a weekly, or less frequent basis.” The employee’s job must also satisfy a list of duties specific to that particular exemption. Finally, the employee’s pay must meet a minimum salary amount, which for the Helix case was $455 per week (which is now $684). There is also an exemption for highly compensated employees which applies when annualized earnings exceed a certain amount—in Helix, $100,000 (now $107,432)—and requires a significantly less stringent duties test.
The issue in Helix was whether an oil rig worker named Michael Hewitt, who was paid between $963 and $1,341 per day and earned over $200,000 per year, was paid a “salary.” Hewitt typically worked 12 hours per day, 7 days per week, for an average of 84 hours per week, during a 28-day hitch. He therefore claimed he was owed overtime payments for 44 hours per week because he was not paid a “salary” and thus was not exempt from the FLSA’s overtime requirements.
In 2018, the federal district court in Houston dismissed Hewitt’s claims on summary judgment, finding the daily rate Hewitt was paid was a salary under the FLSA and that Hewitt was therefore exempt under the highly compensated employee exemption and not entitled to receive overtime payments. In 2021, a full panel of the Fifth Circuit Court of Appeals reversed, holding the daily rate was not a salary, and therefore the exemption did not apply.
Analyzing the regulations governing what constitutes being paid on “salary basis” and the highly compensated employee exemption, the Supreme Court, in an opinion authored by Justice Kagan, found that a daily rate, even one that exceeded the weekly salary minimum, did not satisfy the “salary basis” test required by the regulation because it constituted a guaranteed payment per day, not per week.
Why Helix Matters
While all this may seem like arcane employment minutiae, the ruling is significant for a few reasons. First, the FLSA is one of the least intuitive employment laws on the books. Employers often believe if they pay an employee more than the minimum salary amount required in a week, they have satisfied the salary basis. After all, if Hewitt was paid $1,341 per day, how could that not satisfy the requirement that he be paid $455 per week? That is because the FLSA also says the structure or method of how the amount is paid must be on a salary basis. Because the FLSA is not intuitive, it is often violated with the best intentions, and not only by smaller or less sophisticated companies.
Second, just because an employee is highly paid does not mean he or she is not entitled to overtime. An employee who is highly paid but is docked for time he or she is unneeded—like the days Hewitt did not work and did not receive pay—is not paid a salary. The FLSA’s salary basis requires an employee receive a predetermined and fixed weekly (or longer) payment that does not vary with the precise amount of time worked. A salary structure is meant to provide the stability and security of a steady stream of pay, regardless of fluctuations in work. Whenever the employee works at all during the workweek, he or she can generally count on the entire weekly amount. On the other hand, just because an employee is not highly paid does not mean he or she is entitled to overtime under the FLSA.
Third, many employers have become wedded to the idea of a daily rate, particularly those in the oil and gas industry. In an industry where work hours are unpredictable, fluctuate from day to day, and can sometimes exceed 12 in a day, a promise to pay a flat daily rate makes labor costs more predictable. Recognizing the risk of paying a daily rate under the FLSA, given the previously unsettled nature of the issue, oil and gas companies have utilized staffing firms to provide employees and assume the risk of FLSA compliance. Now, however, what was previously a risk has become reality, and companies utilizing daily rate pay models or contracting with others who do so will need to reconsider their pay practices and policies to come into compliance.
Where We Go from Here
As Justice Kagan mentioned in Helix, there is a way to satisfy the salary basis test for those employers wanting to pay an employee for days in addition to the normal workweek. They must pay the employee a defined weekly amount, along with a day rate for extra days, so long as there is a reasonable relationship between the weekly guarantee and the total amount actually paid. The remaining open question is what constitutes a reasonable relationship? There is no regulation on the issue, only Department of Labor guidance.
The absence of a regulation means the assurance of litigation, so companies with a daily rate compensation system should consult with counsel regarding that practice.
