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Supreme Court: Salary, Not Daily Pay, Required for FLSA Overtime Exemptions
Tuesday, February 28, 2023

Ruling on a narrow, but significant question, the US Supreme Court affirmed that the white-collar overtime exemptions under the federal Fair Labor Standards Act (FLSA) require employers to pay an employee on an actual “salary basis.”

Following the FLSA regulations issued by US Department of Labor (DOL), the Supreme Court held that these exemptions require payment of a fixed, predetermined amount for a workweek, regardless of the amount of time worked. Thus, a daily rate does not qualify. As a result, the Court’s new 6-3 decision in Helix Energy Solutions Group, Inc. v. Hewitt concluded that an employee paid over $200,000 a year ― but on a daily rate ― was eligible for overtime pay based on those high earnings.

Employer Must Satisfy Three Tests For Overtime Exemptions            

The FLSA requires payment of overtime after 40 hours in a workweek, unless an employee works in “a bona fide executive, administrative, or professional capacity,” as those “terms are defined” by DOL regulations. See 29 U. S. C. §213(a)(1). As the Supreme Court emphasized, these exemptions require an employer to satisfy three tests: (1) payment on a “salary basis”; (2) the salary level must meet at least a specified minimum; and (3) the employee must perform certain duties as his or her “primary” duties.            

Since 2020, these federal overtime exemptions require a minimum salary of at least $684 per workweek. The DOL regulations permit employers to apply nondiscretionary bonuses, incentives, and commissions to satisfy up to 10% of the salary level.

Separately, the DOL’s regulations provide for a highly compensated employee (HCE) exemption. It applies to employees paid total annual compensation of $107,432 or more, and who customarily and regularly perform at least one of the duties for the executive, administrative, or professional exemptions. This exemption likewise also requires payment on a salary basis, at least at the minimum salary level, for part of an employee’s compensation.

As Helix Energy demonstrates, the failure to meet one of these tests will result in an employee being non-exempt and eligible for overtime ― regardless of the employee’s duties or how much they earn.

“Salary Basis” Test Not Met By Daily Rate

In Helix Energy, the employee undisputedly performed duties qualifying for the executive exemption and was paid enough to qualify as overtime exempt ― if his pay method qualified as a “salary basis.” The company paid him on “a daily-rate basis, with no overtime compensation.” Over the course of his employment, the employee’s pay ranged from $963 to $1,341 per day. His paycheck amounted to his daily rate multiplied by the number of days he worked in the pay period.

This method did not constitute a “salary basis,” according to the Supreme Court. In the DOL’s regulations, the main salary basis provision requires that an employee regularly receive “each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation,” with that amount “not subject to reduction because of variations in the quality or quantity of the work performed.” See 29 CFR § 541.602(a). Subject to a few 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.” Id. The Court interpreted this definition to apply “solely to employees paid by the week (or longer); it is not met when an employer pays an employee by the day.” Thus, a daily-rate worker is not paid on a “salary basis,” as nothing in the description “fits a daily-rate worker, who by definition is paid for each day he works and no others.”

The Supreme Court recognized that daily-rate workers may qualify as exempt only through another regulation, which allows payment in part based on a “on an hourly, a daily or a shift basis.” See 29 CFR § 541.604(b). But that regulation requires an employer to “also” guarantee, as part of the employee’s compensation, payment of at least the minimum salary level, “regardless of the number of hours, days or shifts worked,” which also must bear a “reasonable relationship” to the “amount actually earned” in a typical week. Id. This provision thus also reverts back to the weekly “salary basis” test as well, which the employee in question did not satisfy.

High Pay Does Not Disqualify For Overtime

The Supreme Court further rejected the employer’s policy argument that allowing daily-rate employees to be eligible for overtime would give “windfalls” to highly compensated employees. This argument reflected the common contention that at least some highly paid employees should be considered to be paid too much to be eligible for overtime.

Despite the logical appeal such an argument may have, the Supreme Court found the DOL regulations’ plain language controlling. The Court further noted that it previously observed that workers “are not deprived of the benefits of the [FLSA] simply because they are well paid,” while Congress repeatedly rejected efforts to exempt all highly paid employees from overtime requirements.

Responding to such concerns, however, the DOL adopted the HCE exemption in 2004 during the Bush Administration (with the Trump Administration increasing the minimum amount to the current level in 2020). The Supreme Court emphasized that Congress’ statutory choice not to categorically exempt high-earners from overtime “undergirds” how the HCE exemption works, by “carving up the class of higher-income workers” and exempting some of them. As the Court noted, one exception to the HCE exemption still provides that certain employees in “maintenance, construction and similar occupations” are never overtime exempt as executives under the HCE, “no matter how highly paid they might be.” See 29 C.F.R. §541.601(d). Throughout its terms, the Supreme Court recognized, “the HCE rule reflects the statutory choice not to set a simple income level as the test for exemption. Some might have made a different choice, but that cannot affect what this Court decides.”

State Law Considerations            

Helix Energy involved the federal FLSA, yet employers also should be mindful of related state laws. While many states follow the federal FLSA standards, some states have stricter overtime rules. An employer must comply with the more restrictive provision when federal and state law differ.  For example, some states (such as California) have higher minimum salary levels for exempt employees than under the FLSA ― without considering other amounts paid. Further, some states (including California and Illinois) do not recognize the HCE exemption. Helix Energy still may be persuasive authority on the state level as well, as states (even including California) have looked to federal law to determine what constitutes being paid on a “salary basis.”

Employer Takeaways

The Supreme Court’s decision is a good reminder to employers to review compliance with overtime exemption requirements under the FLSA and state law. It makes clear that daily-rate employees generally will not qualify as overtime exempt, because such a pay method does not represent a “salary basis.” Helix Energy also serves as a good reminder that employees must satisfy all three tests (salary basis, salary level, and duties) to qualify as overtime exemption – and that high earnings do not automatically mean an employee cannot be eligible for overtime. 

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