Employers often assume that a highly compensated supervisory employee will not be entitled to overtime pay when the employee works more than 40 hours in a work week. That assumption proved to be incorrect in a recent U.S. Supreme Court decision.
The Case of Helix Energy Solutions Group, Inc. v. Hewitt
Last May, we reported that the U.S. Supreme Court had 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), 29 CFR §541.601, regarding the overtime exemption for highly compensated employees and the meaning of the requirement that the salary basis be “guaranteed.” Helix Energy argued that the regulation establishing the exemption for highly compensated employees is a stand-alone regulation, or a ‘carve out’ of the overtime exemptions under the FLSA, and was independent of the other regulations delineating the terms of exemptions for white collar employees in general, and specifically in this case the basic requirement that an exempt employee must be paid on a “salary basis.” The crux of the issue as presented in the Petition was whether a highly compensated employee must pass the “salary basis” test and, if so, is it sufficient that the salary be predetermined by the employer and paid consistently with the notion of a salary, or must it be expressly “guaranteed” to the employee in the employment agreement.
Thus, the two issues presented on appeal were: (i) whether §541.601 was to be viewed independently or also under the auspices of the general salary requirements of §541.604(b) and, if the latter, (ii) whether the salary to Hewitt had been sufficiently guaranteed as required by that latter regulation. Despite the issues as presented in the Petition, the Supreme Court took a different route to determine whether Hewitt was exempt under the highly compensated employee exemption and rephrased the question to whether Hewitt had been paid on a salary basis in the first instance. The Court held that he was not.
The Salary Basis Test
Hewitt 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. Notably, even if he worked one day per week, he was paid at least the $455 per minimum per week as required by the HCE exemption regulation as it was in effect at the time.
The Court started with the premise that the HCE exemption is not a stand-alone exemption but must be viewed in correlation with the regulations governing the salary requirements generally for the white-collar exemptions and, in particular, the “executive exemption” which was in issue in this case. That exemption can be applied only if three defined tests are met:
- The employee performs certain executive or management duties.
- The employee is paid on a salary basis.
- The salary must meet or exceed the statutory amount which, at the time, was $455 per week.
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.”
The Court ruled that the HCE exemption only lightened the “duties test” – it did not dispense with the requirement that the employee be paid a salary on a guaranteed basis. However, the Court never resolved the dispute over whether Hewitt was guaranteed a salary as it found the perquisite – that Hewitt be paid on a salary basis – was never met.
Daily vs. Weekly Rates
Helix, as well as the dissent, argued that because Hewitt did in fact earn over $455 a week, they had met the salary basis test of §541.601(b)(and §541.600(a)). The majority of the Court disagreed and held that his compensation also had to be viewed under §541.602. First, the Court ruled that because his compensation was calculated based on a daily rate, not a weekly rate, Hewitt was not paid on a “weekly basis” and therefore did not fall under §541.602(a) which may have otherwise saved the day for Helix. Rather, Helix’s compensation was to be reviewed in the light of §541.604(b), which specifically references those employees whose earnings are computed on an hourly, daily or a shift basis. The Court reasoned that regardless of whether Hewitt earned over $455 a week, his compensation was still computed based on a daily rate. He was therefore not exempt, because he was not paid for a full week of work regardless of how many hours he worked as required by §541.604(b). Hewitt would only be paid for the number of days that he worked and, according to the Court, that did not meet the salary basis test of §541.602(a), and he was entitled to overtime pay.
How Will This Ruling Impact Employers?
Looking ahead, there is still no clarification from the Court on the meaning of “guaranteed” under the salary basis test. For employers that compute pay on a daily rate, they need to review their overtime exemptions under the Court’s clarified interpretation to assure they are in compliance with the FLSA white collar exemptions for all of their employees, not just those that fall under the exemption for being highly compensated.
Lastly, Justice Kavanaugh raised a provocative question – whether the regulations, focused as they are on compensation, are inconsistent with the FLSA and can be challenged on that ground. As he posits, the FLSA focuses on the duties the employee performs and not what the employee earns or how he is paid. Stay tuned.
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 one of our partners in our Labor & Employment Practice Group to assist you.