Can the Justices Add Clarity to the Salary Basis Test for White Collar Overtime Exemptions?

May 27, 2022
overtime pay

The U.S. Supreme Court has accepted the Petition for Certiorari of Helix Energy Solutions Group, Inc. to review an issue splitting the federal Courts of Appeals under the Fair Labor Standards Act (FLSA). The Justices have been asked to construe a regulation under the FLSA that involves an exemption from the requirement to pay overtime compensation to certain employees who are highly paid and perform non-manual labor, namely what is the meaning of “salary basis,” a requirement underlying the exemption, when the compensation was based on a daily rate as opposed to a weekly one. Helix Energy is arguing that the regulation establishing the exemption for highly compensated employees is a stand-alone regulation, or a ‘carve out’ of the exemptions under the FLSA, and not to be bridled by other regulations delineating the terms of exemptions for white collar employees in general. The crux of the issue is whether it is sufficient that the salary be predetermined by the employer and paid consistent with the notion of a salary, or must it be actually guaranteed to the employee in the employment agreement itself, even if it was paid as a salary in practice.

“White Collar” Exemptions

Since 1938, the federal Fair Labor Standards Act was enacted to ensure that employees be paid fairly and protected from oppressive working hours. The Act mandated that employers pay employees who toil more than 40 hours in a work week at one and one-half times their regular rate of pay. Although a myriad of exemptions from this overtime compensation requirement exists, the most prevalent – albeit at times abstruse – are what are known as the “white collar exemptions” for positions that do not involve manual labor. Those include the “executive,” “administrative” and “professional” exemptions. 29 USC §213(A)(1).

These exemptions can be applied only if they meet three defined tests:

  • The employee performs certain duties as identified in the regulations promulgated under the FLSA
  • The employee is paid on a salary basis
  • The salary must meet or exceed the statutory amount.

For purposes of construing the second test, the regulations define “salary basis” to mean that 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.” 29 C.F.R. § 541.602(a). However, those employees that are highly compensated (currently meaning receiving compensation of at least $107,432 annually) will be “deemed exempt under section 13(a)(1) of the Act if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee.” 29 C.F.R. §541.601. (“HCE exemption”.)

The Case of Helix Energy Solutions Group, Inc. v. Hewitt

In Helix Energy Solutions Group, Inc. v. Hewitt, (2021), the Fifth Circuit found that the employer had failed to pay a highly compensated supervisor overtime for failing to meet the salary basis test as the compensation was not guaranteed. The employee was a highly skilled supervisor earning more than $200,000 annually managing employees on Helix’s offshore well-intervention vessels. He was paid every two weeks based on a predetermined daily rate from $963 to $1,341 per day over the course of his employment. He was paid for every week he performed work, regardless of how many hours he actually worked, which was consistent with the general notion of being paid on salary. Nevertheless, he filed a lawsuit for the failure to pay him at the overtime rate for hours worked beyond 40 in a work week.

Helix argued that Hewitt met all the requirements for a highly compensated employee under §541.601: (i) he performed executive duties, (ii) earned at least $100,000 a year, and (iii) received at least the minimum salary income in every week he performed work, regardless of whether he worked less than or more than 40 hours a week. Hewitt conceded that he met all those requirements but claimed that because his compensation was calculated based on a daily minimum, Helix also had to meet the requirements of 29 C.F.R. §541.604(b) which provides:

An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if 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.

Helix Energy argues that the language in the HCE exemption that the employee once having met the salary amount requirement was “deemed exempt” obviated the need to scrutinize the details of the employment arrangement other than as required in §541.602.

The District Court found that Hewitt was “twice exempt” as he met the exemption both as an executive employee and the more streamlined test for highly compensated employees. He was paid on a “salary basis” because he was paid a predetermined amount not subject to reduction in excess of $455 in any week that he performed work, regardless of how many hours he worked. On appeal, an en banc Fifth Circuit held he was not exempt because the salary was not “guaranteed” relying on the language in 29 C.F.R. §541.604(b) which it held applicable to the HCE exemption. The Fifth Circuit determined that because Hewitt’s compensation was based on an hourly rate “per day” as opposed to “weekly,” that §541.604(b) therefore modified the language of the HCE exemption. Although Hewitt may have received compensation consistent with the notion of a salary, he was being paid only by the indulgence of the employer and not necessarily guaranteed to receive that amount in the future.

The Case of Hughes v. Gulf Interstate Field Services, Inc.

The Sixth Circuit held similarly in Hughes v. Gulf Interstate Field Services, Inc., (2017). Hughes involved welding inspectors on a pipeline project who each received offer letters stating they would receive a salary of $337 per day worked. The project was based on a six-day work week of ten hours per day, but nothing was in the offer letter stating the number of days to be worked each week. Hughes argued that the employees had been told verbally they would be paid for six days even if they worked only five. The employees earned in excess of the statutory minimum for highly compensated employees and in fact were paid for six days of work per week regardless of whether they worked all six days or were sick. The District Court held that there was no dispute that the employees were paid the requisite amount and that the “actual payment practice” controlled the question not whether there was a guaranty. The Sixth Circuit disagreed, finding that whether a weekly salary was guaranteed mattered under §541.604(b). “Here, while Gulf Interstate has established that Hughes and McDonald were paid during the time that each was employed on the Ohio pipeline project in a way that was consistent with a weekly guarantee, it has not proven unreasonable the conclusion that these payments were matters of grace rather than right.”  The Court latched onto the language in that regulation referencing the “employment agreement” stating, “we must look for a guarantee – and to assess whether there was a guarantee, we must by negative implication from our own precedents look beyond payment received to the formal terms of the employment arrangement.” The matter was remanded to determine whether there had been any actual guarantee based on the disputed facts.

The U.S. Supreme Court to Decide When Highly Paid Workers Deserve Overtime Pay

On appeal to the U.S. Supreme Court, Helix argues that §541.601 is self-limited and not subject to further analysis under §541.604(b). Helix’s position is in line with those of the First and Second Circuits as well as industry standard and practice relative to highly paid “white collar” employees. As Helix points out in its petition, §541.604 has brought a sense of certainty to employers that they need not undergo the more stringent analysis for such an exemption if they compensate the employees at a sufficiently high level.

This question of what “salary basis” requires for highly compensated employees is now before the U.S. Supreme Court which is expected to determine whether the guarantee requirement of §541.604(b) further limits §541.601. Their decision may or may not clarify the further issue of what is required to meet the requirement of a guarantee.

The FLSA is fraught with nuances that can pose significant liability for employers if not interpreted and implemented correctly. If you need assistance in navigating the FLSA and its numerous regulations, please contact Maribeth Meluch (MM@kjk.com; 614.427.5747) or another member of our Labor & Employment Practice Group to assist you.