The U.S. Supreme Court recently ruled that an employer's guaranteed daily rate pay plan for an employee earning more than $200,000 per year did not meet the "salary basis" requirement of the federal Fair Labor Standard Act's ("FLSA") executive exemption test, and therefore, the employee was entitled to overtime pay for all hours he worked over 40 in a given 7-day workweek. This decision highlights the importance for employers of correctly classifying employees under the FLSA's exemptions from overtime pay. Helix Energy Solutions Group, Inc. v. Hewitt, __ U.S. __ (Feb. 22, 2023)("Helix"). Simply paying an employee a substantial amount of money each year may not satisfy the technical requirements of the FLSA.
The FLSA's "White Collar" Exemptions
The FLSA applies to most employers. The law divides employees into two categories: "non-exempt" and "exempt." As a general rule, the FLSA requires employers to pay non-exempt employees overtime pay at no less than one-and-one-half times their regular rate of pay for all hours worked over 40 in a given workweek. The FLSA exempts certain employees from overtime pay provided that certain criteria are met. Individuals who satisfy the requirements of the executive, administrative, or professional employee exemptions, often referred to as the "white collar exemptions," may be properly classified as exempt from receiving overtime.
To qualify for these "white collar exemptions," U.S. Department of Labor (DOL) regulations require an employer to satisfy a three-part test: (1) the employee must be paid on a "salary basis"; (2) the employee's minimum salary must be at least $684 per week; and (3) the employee must perform the required duties associated with the exemption. The regulations relax the requirements of the "required duties" test for a "highly compensated employee" ("HCE") earning at least $107,432 per year but the HCE exemption still requires satisfaction of the salary basis and minimum salary parts of the test.
In the Helix case, the Court focused on the first test, that is, what it means to pay an employee on a "salary-basis." Pursuant to the DOL regulations, in order to meet the salary-basis test, an employee must regularly receive a predetermined amount of compensation each pay period on a weekly, or less frequent, basis that is not reduced because of variations in the quality or quantity of the employee's work. 29 C.F.R. § 541.602(a).
Facts of the Case
The employee in the Supreme Court decision worked on an oil rig. The employer paid him bi-weekly based on his daily rate times the number of days he worked in the pay period. The employee frequently worked weeks with hours far in excess of 40, but he was not paid overtime. Under his day-rate compensation scheme, the employee reportedly earned over $200,000 annually. In light of this high rate of pay, the employer classified the employee as exempt from overtime pay assuming he would qualify as a "highly compensated employee" and reasoning that if the overall day-rate compensation were spread out evenly over 52 weeks it would far exceed the applicable minimum salary requirement currently set at $684 per week (previously set at $455 per week).
The employee ultimately sued his employer under the FLSA and asserted a claim for overtime pay. The employer denied any liability and replied that it had lawfully classified the employee as an executive exempt employee. The trial court ruled in favor of the employer and dismissed the claim. The employee appealed, and the Fifth Circuit Court of Appeals reversed the finding of the lower court and ruled in favor of the employee. The employer then appealed to the U.S. Supreme Court.
U.S. Supreme Court's Decision
In siding with the employee, the U.S. Supreme Court underscored that the DOL regulation at Section 602(a) "embodies the standard meaning of the word 'salary,'" and "demand[s] that an employee receive a fixed amount for a week no matter how many days he has worked[.]" The Court further reasoned that "nothing in that description fits a daily-rate worker, who by definition is paid for each day he works and no others." In the case under review, the employee's compensation was a function of how many days he worked and could only be determined once the employee's work days had been completed. In other words, the employee was not paid a predetermined weekly salary as §541.602(a) requires irrespective of the number of days worked.
Key Takeaways for Employers
Paying An Employee A High Compensation May Not Be Sufficient To Avoid The FLSA's Overtime Pay Requirements.
Despite the fact that the employee earned more than $200,000 per year, he was not paid by the employer in the Helix case on a "salary basis" as required by the FLSA. Employers who pay their employees on a guaranteed daily rate – however high the rate – must take care to include a weekly guarantee as required by the FLSA regulation's salary basis test in §541.602(a).
Employers Must Apply The FLSA's Exemption Criteria Properly To Avoid A Costly Misclassification Claim.
Employers should ensure strict compliance with the requirements of the FLSA and other wage and hour laws and regulations. Even if the employee and employer agree on a certain pay arrangement, the employer may not contractually circumvent the requirements of the FLSA and remains subject to the FLSA and its requirements at all times. In Helix, the Supreme Court interpreted the law and regulations strictly. Wage and hour laws have substantial damages provisions, including back wage assessments, liquidated damages, civil penalties and attorneys' fees and in some circumstances, even criminal penalties.
Employees Must Satisfy All Three Tests (Salary Basis, Minimum Salary, And Required Duties) To Qualify As Overtime Exempt.
This problem in Helix occurred due to the salary-basis part of the test. Even more frequently employers fail the three-part test because a position does not satisfy the "required duties" test. For example, an employer may wrongly assume that an office manager satisfies the "administrative" exempt test because the employee is paid in excess of $684 per week on a salary basis. However, the required duties for the "administrative exempt" test are quite demanding and not as easy to satisfy as many employers assume. See DOL Fact Sheet #17C addressing Administrative Employees.
Conduct A Wage And Hour Audit
It is a best practice to conduct a wage and hour audit on a regular basis. At the very least, review the exempt and non-exempt classifications for each position and confirm the company is able to identify what, if any, FLSA exemption applies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.