Follow us on LinkedIn to see future News.
March 24, 2023
On February 22, 2023, the United States Supreme Court held that a highly compensated employee who received a daily rate of pay was eligible to receive overtime pay under the Fair Labor Standards Act (FLSA). See Helix Energy Solutions Group, Inc., et al. v. Hewitt, 15 F. 4th 289 (2023). Why? Because his employer did not pay him a predetermined amount per week and, therefore, he was not compensated on a “salary basis,” as the FLSA regulations require.
The facts are somewhat unusual and do not immediately transfer to ordinary employment situations. Here, Michael Hewitt worked for Helix Energy Solutions Group (HES) as a “tool pusher” for an offshore oil rig, and he oversaw 12 to 14 workers. He typically worked 12 hours a day, seven days a week, for a 28-day period, then he would take 28 days off. HES paid Hewitt on a daily-rate basis of $963 per day, with no overtime compensation. If Hewitt worked one day in the pay period, his paycheck would be $963; if he worked all 14 days in the pay period, his paycheck would be $13,482. His annual compensation was over $200,000. Despite working 84 hours some weeks, HES did not pay overtime to Hewitt. Hewett sued, and the court found for HES. Hewitt appealed, and the United States Court of Appeals for the Fifth Circuit reversed, finding for Hewitt. HES then appealed to the Supreme Court.
The Supreme Court agreed with the Fifth Circuit’s ruling and held that a high-earning employee whose paycheck is based solely on a daily rate—so that he receives a certain amount if he works one day in a week, twice as much for two days, three times as much for three days, and so on—is “not paid on a salary basis, and thus is entitled to overtime pay.”
The Court reasoned that the FLSA guarantees overtime to employees when they work more than 40 hours a week. Conversely, bona fide executive, administrative, or professional workers and highly compensated employees are exempt from overtime. To show that a worker is exempt from overtime and meets the “bona fide executive” exemption, an employer must satisfy three tests: (1) the salary basis test – the employee received a “predetermined and fixed salary” that does not vary with the precise amount of time he works; (2) the salary level test – the salary must exceed a specified amount; and (3) the duties test – the employee’s job duties must be managerial in nature. See 29 CFR § 541.601.
Both parties agreed that Hewitt satisfied tests (2) and (3), making the issue in the case narrow: whether Hewitt satisfied the salary basis test and, thus, is exempt from overtime pay, where HES paid him over $200,000 annually, calculated on a daily basis. HES argued that Hewitt was not eligible for overtime because he met the salary basis test and was a “bona fide executive” under the highly compensated exemption.
The salary basis test 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, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” 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.
Justice Kagan, speaking for the majority of the Court, wrote that, under the plain meaning of the salary basis test, it does not apply to daily rate employees. The test exempts only employees paid by the week or longer – not an employee paid by the day. Further, a daily rate is inconsistent with a fixed salary, regardless of the amount of time worked or dollars paid. To satisfy the salary basis test, the Court determined that, whenever an employee works at all in a week, he must get his “full salary for that week,” i.e., a “predetermined amount.” A daily-rate worker’s weekly pay, like Hewitt’s, is always a function of how many days the employee has labored, and can only be calculated once the week is over.
Justice Gorsuch dissented on procedural grounds. Justices Kavanaugh and Alito also dissented, arguing that Hewitt met the salary basis test because he was a bona fide executive based on his salary level, duties, and that it was certain that he would make a minimum of $963 per week for any week that he worked.
In light of this decision, employers should review their pay practices to ensure that they are paying highly compensated professionals a predetermined salary, and not compensation based on the number of days the employee has worked.
This article is designed to provide one perspective regarding recent legal developments, and is not intended to serve as legal advice, nor does it establish an attorney-client relationship with any reader of the article where one does not exist. Always consult an attorney with specific legal issues.
