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On August 21, 2019, the U.S. Court of Appeals for the Fifth
Circuit issued an opinion in Faludi v. U.S. Shale Solutions,
L.L.C. that may prove to be an important decision for
companies that utilize day rate compensation.1 The
decision settled two important issues, concluding that: (1) a
guaranteed day rate that provides compensation exceeding $455 can
meet the Fair Labor Standard Act ("FLSA") salary
requirements for the white collar overtime exemptions, and (2) the
FLSA's reasonable relationship test does not apply to the
highly compensated exemption.
The underlying lawsuit seeking overtime compensation under the
FLSA was filed by an attorney (who had allowed his law license to
lapse without telling the company) who held a consulting position
at U.S. Shale from November 2014 through March 2016 pursuant to an
Independent Contractor and Master Consulting Services Agreement
("IC Agreement"). The IC Agreement provided for a rate of
$1,000 per day for each day he performed services, making his
annualized compensation approximately $260,000. The IC Agreement
also provided for the plaintiff's submission, and U.S.
Shale's payment of, invoices twice per month.
On cross motions for summary judgment, the district court
concluded the attorney was exempt from overtime because the daily
guarantee was sufficient to meet the salary basis requirements of
the FLSA's highly compensated exemption. Of note, because the
plaintiff had allowed his law license to lapse, the district judge
found that the attorney exemption under the FLSA did not apply.
While licensed attorneys are one of only a few occupations that are
not required to meet the salary basis requirements of the
FLSA's white collar overtime exemptions, the plaintiff's
law license was not active, which triggered the court's need to
consider the salary basis requirements of the FLSA's overtime
exemptions.
In a 2-1 ruling, the Fifth Circuit affirmed the district
court's ruling. The Fifth Circuit explained that because the
attorney's $1,000 day rate guaranteed him at least $455 per
week, and he regularly received that amount on a weekly or less
frequent basis, he was exempt from the FLSA's overtime
requirements. The court rejected the attorney's argument that
his compensation was not calculated "on a weekly, or
less frequent basis." Instead, the court found that the text
of the regulation only provides that the attorney must have
regularly received a predetermined amount and that his
agreement provided for these "weekly or less frequent"
payments. The court reasoned that the company guaranteed the
attorney would receive more than the $455 per week because "if
[the attorney] worked for even one hour in a given week he was
guaranteed $1,000, which exceeds the regulatory minimum of
$455."
The attorney also argued on appeal that the overtime exemption
failed because his total weekly compensation significantly exceeded
the alleged single-day guarantee by four or five times, and
therefore violated the FLSA's "reasonable relationship
test." The reasonable relationship test set forth in 29 C.F.R.
§ 541.604(b) states that the overall compensation must bear a
reasonable relationship to the guaranteed salary. The court held,
however, that the reasonable relationship test was irrelevant
because 29 C.F.R. § 541.604(b) does not apply to
employees who meet the requirements of the highly compensated
exemption set out in 29 C.F.R. §§ 541.600, 541.601, and
541.602. Therefore, because the attorney's compensation
exceeded the highly compensated threshold of $100,000, and there
was no dispute that he would otherwise meet the duties test of the
highly compensated exemption, the Fifth Circuit concluded that the
highly compensated exemption applied.
The case is an important decision for companies that utilize day
rates for positions that are highly compensated, particularly in
the energy exploration and production industry that operate in
regions covered by the Fifth Circuit (Texas, Louisiana and
Mississippi).
Footnotes
1 Littler Shareholder Kerry Notestine and Associate Kelcy
Palmer represented the defendant in this case.
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