This morning, a divided (6-3) Supreme Court vacated an employer’s summary judgment on an FLSA overtime compensation claim brought by a Highly Compensated Employee because the employee’s daily pay rate did not satisfy the salary basis test for the highly paid executive “white collar” exemption in the FLSA regulations. Helix Energy Solutions Group, Inc. v. Hewitt, No. 21-984 (U.S. 2-22-23). The Court rejected the employer’s FLSA exemption argument even though the employee was always paid more than $455/week in which he performed any work, was paid more than $200K/year and typically worked 84 hours/week on an oil rig. The Court held that even though his daily rate was far in excess of $455 and he was highly compensated, the employee was not paid on a salary basis and, therefore was not entitled to the FLSA overtime pay exemption, where he was paid based on the number of days he worked. In short, the salary basis test applies to both highly compensated and lower income employees.
According to the Court’s opinion, the plaintiff supervised
various aspects of the operations of an oil rig and supervised more than 11 workers.
He typically, but not invariably, worked 12 hours a day, seven days a week—so
84 hours a week—during a 28-day “hitch.” He then had 28 days off before
reporting back to the vessel. He was
paid every two weeks based on a day rate of over $950/day. After the plaintiff employee sued for
overtime compensation, the District Court granted the employer summary judgment
on the grounds that the plaintiff was a Highly Compensated Executive exempt from
the FLSA’s overtime compensation requirements.
The en banc Fifth Circuit
reversed on the grounds that he was not paid on a salary basis when his
compensation was based on a day rate.
The salary basis test has been part of the FLSA white collar
exemptions since the 1940’s. “The basic
idea is that . . . an employee can be a bona fide executive only if he receives
a “predetermined and fixed salary”—one that does not vary with the precise
amount of time he works.” The other two
parts of the test involve a duties analysis and whether the salary exceeds a
certain threshold (i.e., over $455/week). In 2015, the DOL relaxed the duties test for
Highly Compensated Employees (who are paid more than $100K/year), but retained
the salary basis test and salary threshold. The salary basis test described in the FLSA
regulations at 29 C.F.R. §541.602(a) provides in relevant part that:
An employee will be considered to be paid on a ‘salary basis’ . . . if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to [certain exceptions], an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked . . .
. . . .
Another provision, §541.604(b), focuses on workers whose compensation is “computed on an hourly, a daily or a shift basis,” rather than a weekly or less frequent one. That section states that an employer may base an employee’s pay on an hourly, daily, or shift rate without “violating the salary basis requirement” or “losing the [bona fide executive] exemption” so long as two conditions are met. First, the employer must “also” guarantee the employee at least $455 each week (the minimum salary level) “regardless of the number of hours, days or shifts worked.” Ibid. And second, that promised amount must bear a “reasonable relationship” to the “amount actually earned” in a typical week— more specifically, must be “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.” Ibid. Those conditions create a compensation system functioning much like a true salary—a steady stream of pay, which the employer cannot much vary and the employee may thus rely on week after week. See 69 Fed. Reg. 22184 (explaining that §604(b)’s conditions ensure that daily or hourly pay is “[]consistent with the salary basis concept”).
The Court concluded that paying an employee based on a daily
rate does not satisfy the salary basis test which requires a rate based
on at least one week:
That section applies solely to employees paid by the week (or longer); it is not met when an employer pays an employee by the day, as [the employer] paid [the plaintiff]. Daily-rate workers, of whatever income level, are paid on a salary basis only through the test set out in §604(b) (which, again, [the employer’s] payment scheme did not satisfy).
The employer had argued that it met the salary basis test
for HCE employees because the plaintiff always received more than $455/each
week whenever he performed work (because his minimum day rate was far in excess
of $455/week).
[A] “basis” of payment typically refers to the unit or method for calculating pay, not the frequency of its distribution. Most simply put, an employee paid on an hourly basis is paid by the hour, an employee paid on a daily basis is paid by the day, and an employee paid on a weekly basis is paid by the week—irrespective of when or how often his employer actually doles out the money. The inclusion of the word “receives” in §602(a) does not change that usual meaning.
. . .
a worker can be paid on a salary basis even if he additionally gets non-salary compensation, like a bonus. But the employee still must be paid a salary. And [the plaintiff] was not. He received a high day rate (higher than lots of salaries); but he did not get a salary (of $963 or any other amount) because his weekly take-home pay could be as little as $963 or as much as $13,482, depending on how many days he worked.
The Court also rejected the employer’s argument that the
daily rate permitted for exempt employees under §641.602 did not apply to HCE.
For §602(a) cannot change meanings depending on whether it applies to the general rule or the HCE rule. It applies to both, and must mean the same thing in either context. So even supposing that the HCE rule incorporates only §602(a), and not §604(b), the two provisions still must be read to complement each other.
. . . The HCE rule refers to the salary-basis (and salary-level) requirement in the same way that the general rule does.
The Court also rejected the argument that its holding would result in a “windfall”
for highly compensated employees and grave liability for employers.
It is in fact [the employer’s] position that would create disturbing consequences, by depriving even workers at the heartland of the FLSA’s protection—those paid less than $100,000 annually—of overtime pay. The problem arises because, as explained above, §602(a) applies not only to the HCE rule but also to the general rule, exempting lower-earning employees as bona fide executives. See supra, at 3–4, 14. And §602(a) must mean the same thing as applied to both rules; not even [the employer] argues otherwise. So on [its] view, any daily-rate employee who meets the general rule’s three-part duties test; gets a paycheck no more frequently than every week; and receives at least $455 per week (about $24,000 per year) is excluded from the FLSA’s overtime protections. . . . Some nurses working on a per-day or per-shift basis are likely to meet the general rule’s duties test; and their employers would assure them $455 per week in a heartbeat if doing so eliminated the need to pay overtime. And nurses, in the Government’s view, are not alone: They “are just one of the many examples” of workers paid less than $100,000 a year who would, if Helix prevailed, lose their entitlement to overtime compensation.
NOTICE: This summary is designed merely to inform and alert
you of recent legal developments. It does not constitute legal advice and does
not apply to any particular situation because different facts could lead to
different results. Information here can change or be amended without notice.
Readers should not act upon this information without legal advice. If you have
any questions about anything you have read, you should consult with or retain
an employment attorney.
