In a highly anticipated ruling under the Fair Labor Standards Act, the U.S. Supreme Court in Helix Energy Solutions v. Hewitt held that an employee did not qualify for the highly paid exemption from the FLSA’s overtime pay requirements because he was paid a daily rate and not a guaranteed weekly salary. The Court held that daily-rate workers, regardless of how much they earn in a year, only meet the salary basis requirement for exemption if the specific conditions set out in 29 CFR §541.604(b) of the FLSA regulations are met.

A Quick Refresher About Highly Compensated Employees and Overtime Exemptions

We all know that the FLSA requires you to pay overtime unless an employee qualifies for an exemption. To be exempt under the FLSA’s executive exemption, the Department of Labor’s regulations state that an employee must meet both a pay test and a duties test:

• Under the pay test, the employee must be paid at least $684 per week on a “salary basis.” In basic terms, “salary basis” is defined as a guaranteed weekly amount that is not subject to reductions based on the quality or quantity of the work performed. 

• Under the duties test, the employee’s primary duty must be management, the employee must direct the work of at least two other employees, and he or she must have the authority to make hiring or firing decisions or to make recommendations about hiring, firing, promotion or similar decisions, which are given particular weight by the employer. 

The FLSA regulations also contain a “highly compensated” provision, which states that the executive exemption’s duties test is relaxed if an employee’s total annual earnings are at least $107,432, part of which must be paid on a salary basis of at least $684 per week. However, the regulations also provide (in 29 CFR 604(b)) that an exempt employee’s earnings can be computed on an hourly, daily or shift basis without violating the salary basis requirement if the arrangement also includes a guaranteed amount of at least $684 per week and the guaranteed amount has a reasonable relationship to the total amount earned for the week.  

The Facts

Michael Hewitt was a supervisor over 12 to 14 offshore oil and gas rig workers. His employer, Helix Energy, paid him a daily rate of approximately $1,000 and more than $200,000 annually. He was treated as exempt from overtime, but after his employment ended, he sued Helix, claiming he should have been paid overtime because he was not paid on a salary basis and thus was not exempt under the FLSA.   

The parties did not dispute that Hewitt’s job duties met the requirements of the highly compensated exemption — his primary duty was management. The parties also agreed that Helix Energy paid him total annual pay of at least $107,432 (as required for the exemption). The dispute was about whether Hewitt met the salary-basis requirement when he was paid a daily rate of over $900 as opposed to a guaranteed weekly salary of at least $684. 

How the Supreme Court Ruled

The Supreme Court held that although Hewitt met the duties and annual pay requirements for exemption, he was not exempt because he was paid on a daily-rate basis that did not satisfy the salary-basis requirement. The Court held that the salary-basis requirement applies regardless of how much an employee earns. 

Helix argued that Hewitt was exempt under the highly compensated provision because his daily rate was over $900 and he never received less than $684 a week. The Supreme Court rejected that argument, holding that the daily rate was not a guaranteed weekly salary, regardless of how much Hewitt actually received each week. 

As noted above, the FLSA regulations (604(b)) provide that in the absence of a guaranteed weekly salary, an hourly, shift or daily rate can still satisfy the “salary basis” test for exemption if the employee is guaranteed to receive at least $684 per week and there is a reasonable relationship between the guaranteed amount and the total weekly amount earned. That option was not available to Helix because Hewitt’s pay could not meet the reasonable relationship prong because his overall pay was too high.

The end result is that Hewitt, who earned over $200,000 per year, will also receive overtime pay calculated at a very high hourly rate.  Put into perspective, if Helix had paid Hewitt a salary of $684 a week ($35,568 annually as compared to the over $200,000 he received), he would have been exempt from the FLSA’s overtime requirements. Although Helix paid him much more than that, the Court’s ruling entitles him to overtime.

Takeaways

The main takeaway is that the FLSA is very technical and its regulations can lead to results that do not seem logical.  You need to check your exempt employees to be sure they meet all the right tests because the burden is on the employer. Just because you are paying an employee a lot of money does not mean he can’t sue you for unpaid overtime.

Notably, Justice Gorsuch’s dissent tees up the more compelling issue of whether the salary basis requirement for exemption, which caused this bizarre result, is valid.  Justice Gorsuch explains that the salary basis requirement for exemption does not appear in the statute and was instead imported into the regulations by the DOL. However, that issue was not before the Court in Helix and must await another case.