March 21, 2023

SCOTUS Holds Highly Compensated Daily-Rate Employees May Be Entitled to Overtime

5 min

On February 22, 2023, the Supreme Court clarified the requirements for highly compensated employees to be considered executives exempt from overtime pay under the Fair Labor Standards Act (FLSA). In Helix Energy Solutions Group v. Hewitt, the Supreme Court ruled 6-3 that a highly compensated former employee was entitled to overtime pay despite earning more than $200,000 per year, because he was paid on the basis of a day rate.

Under the FLSA, employers must pay non-exempt employees at least minimum wage for all hours worked and, for all hours worked over 40 in a workweek, overtime pay at not less than one and a half times the regular rate of pay. Employees may be properly classified as exempt if they work in a "bona fide executive, administrative, or professional capacity." To be exempt, employees must be (1) paid on a salary basis (salary basis test); (2) be paid no less than a minimum threshold (salary level test); and (3) perform certain duties required by the specific exemption claimed—executive, administrative, or professional (duties test). For example, to satisfy the duties test for an executive, the employee's primary duty must be managing the enterprise or managing a customarily recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and the employee must have the authority to hire or fire other employees, or the employee's suggestions and recommendations as to the hiring, firing, advancement, promotion, or any other change of status of other employees must be given particular weight. For highly compensated employees—those making $107,432 or more—the duties test is satisfied if they customarily and regularly perform at least one of the above duties.

Case Analysis

Respondent Michael Hewitt was a former oil-rig employee who worked in 28-day "hitches," meaning he'd work 28 consecutive 12-hour days, followed by 28 days off. Helix paid Hewitt on a daily-rate basis every two weeks for the days worked in the pay period. Hewitt's rate ranged from $963 to $1,341 per day over the course of his employment, leading to earnings of over $200,000 annually. Hewitt brought suit under the FLSA, alleging that he was entitled to overtime pay as a non-exempt employee. In a 6-3 opinion authored by Justice Kagan and joined by Chief Justice Roberts and Justices Thomas, Sotomayor, Barrett, and Jackson, the Court sided with Hewitt.

The Court found that Hewitt satisfied both the salary level and job duties test for executives but centered its analysis on whether Helix's pay methods satisfied the salary basis test. Under applicable regulations, an employee is considered to be paid on a "salary basis" if he or she "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." 29 C.F.R. § 541.602(a). The Court ultimately concluded that daily-rate employees such as Hewitt are excluded from this regulation because it requires that an employee's compensation be predetermined for a unit of at least one week. The Court further acknowledged, and Helix did not dispute, that Hewitt could not pass an alternative salary basis test that "the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days, or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned." 29 C.F.R. § 541.604(b). In short, to pass the salary basis test an employee must receive a predetermined amount for each week that is not subject to reduction based on the number of days, hours, or shifts actually worked. If an employee is paid based on a daily rate, they must be guaranteed at least the minimum weekly required amount and there must be a reasonable relationship between that guaranteed amount and the amount earned. Because Hewitt's weekly pay fluctuated based on the number of days he worked in a given week, the Court held that Hewitt could not pass the salary basis test under either regulation, was not exempt, and thus was entitled to overtime pay.

Employer Takeaways

This case demonstrates that employers may not be safe from the harshness of overtime requirements simply because an employee is highly compensated. Helix had argued that, functionally, the salary basis test was satisfied because, in any week Hewitt worked, his minimum amount was far above the required threshold. However, the Supreme Court has affirmed that courts will rely on the plain text of the FLSA and will ignore the inequities associated with paying overtime to highly compensated day workers. In particular, this case may have far-reaching implications for employers in the energy and oil industries, who typically provide high day rates to employees on offshore jobs.

Employers who classify employees as exempt under any of the white collar exemptions would be wise to ensure that they are strictly complying with the above tests, even if an employee is typically paid at a rate that is far above the limit of what is socially accepted as a salary. For a more in-depth discussion of some common issues that arise with employee classification, we recommend reviewing our previous alert.

If your organization has any questions about compliance with the FLSA or any state wage and hour laws, please contact Venable's Labor and Employment Group.