United States: Fifth Circuit Approves Day Rates For Some Highly Compensated Employees

The Fifth Circuit Court of Appeals issued an opinion last week holding for the first time that a "day rate" in excess of $455 paid to a highly compensated employee meets the requirements of the "salary basis" test under the Fair Labor Standards Act (FLSA).

Specifically, in Faludi v. U.S. Shale Solutions, No. 17-20808, 2019 WL 3940878 (5th Cir. Aug. 21, 2019), the plaintiff, a consultant, brought suit alleging that his former client and employer1 owed him overtime under the FLSA because the plaintiff had not been paid on a salary basis. Instead, the plaintiff received $1,000 per day for any day on which he performed any amount of work in Houston and $1,350 per day for any day in which he performed any amount of work outside of Houston. However, under the plaintiff's arrangement with the defendant-employer, if he worked more than 40 hours in a week, he did not receive any overtime premiums. In the district court, the defendant-employer argued, and the district court found, that the plaintiff's claims failed as a matter of law because he fell within the FLSA's "highly compensated employee" exemption.

On appeal, the plaintiff argued that he did not qualify for the "highly compensated employee" exemption because the day rate payment system used by his employer did not satisfy the "salary basis" test. In support of his claim, the plaintiff argued: (1) the day rate system did not calculate pay "on a weekly, or less frequent basis" in violation of 29 C.F.R. § 541.602(a); (2) the plaintiff voluntarily reduced some of his day rate payments on invoices he submitted to the defendant-employer for days that he performed less than a full day's work; and (3) the day rate system did not satisfy the "reasonable relationship" test articulated in 29 C.F.R. § 541.604(b).

The Fifth Circuit rejected all three arguments, holding that:

  1. To satisfy 29 C.F.R. § 541.602(a), wages need not be calculated on a "weekly, or less frequent basis" so long as they are regularly paid to the employee on a "weekly, or less frequent basis."
  2. An employee's voluntary reduction of his or her own pay based on the amount of work performed absent any evidence of employer influence of coercion does not render the employee's salary "subject to reduction" as prohibited by 29 C.F.R. § 541.602(a).
  3. The "reasonable relationship" test articulated in 29 C.F.R. § 541.604(b) does not apply to the "highly compensated employee" exemption.

As a result, the court affirmed the district court's grant of summary judgment.

The Faludi decision marks a major shift in the wage-and-hour landscape in the Fifth Circuit. Most notably, the energy sector has a long history of utilizing day rates to pay highly skilled – and highly compensated – consultants and contractors. In recent years, this practice has spawned dozens of collective actions, all with extremely high exposure, challenging day-rate-based exemptions as failing the "salary basis" test. The Faludi decision should empower employers to better defend against such actions. However, an employer seeking to implement day rates should still proceed with caution. First, the Fifth Circuit's holding is limited to "highly compensated employees." Any employee paid a day rate who earns less than $100,000 per year – an amount that may soon rise to $147,000 based on pending rulemaking – will not qualify for exemption under Faludi because the "reasonable relationship" test likely will still apply. Second, the "salary basis" test remains only one prong of the exemption analysis. Much of the litigation concerning highly paid consultants and contractors has also raised claims that the duties of such consultants and contractors do not meet the duties test for the "highly compensated employee" exemption. Thus, employers should exercise care in assessing the duties of any contractors, consultants, or employees to whom they elect to pay a day rate, to ensure all elements of the exemption requirements are satisfied.

Footnotes

1 The district court held that a genuine issue of material fact existed as to whether the plaintiff was an independent contractor or employee. As a result, on appeal, the Fifth Circuit assumed arguendo that the plaintiff was an employee.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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