Supreme Court Upholds Ruling That FLSA Overtime Exemption Does Not Cover Highly Paid Rig Worker
- A majority of the U.S. Supreme Court affirmed the U.S. Court of Appeals for the Fifth Circuit's holding that a highly paid employee was not exempt from the overtime requirements of the Fair Labor Standards Act (FLSA) because he was paid a day rate and not a guaranteed salary.
- Per the Supreme Court, merely meeting the required level of compensation (i.e., daily rates that exceed $455/week) is not sufficient under the FLSA regulations; instead, employees must be paid on a "salary basis" under the FLSA regulations (i.e., the employee must either receive 1) a predetermined and fixed salary each week, which does not vary based on the number of days worked, or 2) a guaranteed weekly compensation that approximates what the employee usually earns, even if the weekly compensation is computed on an daily basis) to be exempt.
In a 6-3 ruling, the U.S. Supreme Court upheld the U.S. Court of Appeals for the Fifth Circuit's Sept. 9, 2021, en banc ruling that a highly paid employee was not an exempt executive under the Fair Labor Standards Act (FLSA) because he was not paid on a salary basis. (See Holland & Knight's previous alerts, "En Banc Fifth Circuit Holds Highly Paid Rig Worker Not Covered by FLSA Overtime Exemption," Sept. 15, 2021, and "Fifth Circuit Holds Day Rates Do Not Satisfy the Salary Basis Test," April 29, 2020.)
The opinion of the Court, delivered by Justice Elena Kagan and joined by Chief Justice John Roberts and Justices Clarence Thomas, Sonia Sotomayor, Amy Coney Barrett and Ketanji Brown Jackson, focused on the question of "whether a high-earning employee is compensated on a 'salary basis' when his paycheck is based solely on a daily rate." 598 U.S. 1 (2023).
Under 29 C.F.R. § 541.604(b), an exempt employee's earnings may be computed on a daily 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 … days … worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned." In its ruling, the Court determined that employees who are paid a daily rate – whatever the income level – must satisfy the salary-basis test set out in § 541.604(b): 1) that the employee is paid at least $455 each week1 and 2) that the guaranteed amount computed on a daily basis "must bear a 'reasonable relationship' to the 'amount actually earned.'" Id. at 5. (citing § 541.604(b)).
Case Background and Decision
Here, respondent Michael Hewitt worked on an offshore oil rig for petitioner Helix Energy Solutions Group at a daily rate of $963, typically for 12 to 14 hours a day, seven days a week, during a 28-day "hitch," followed by 28 days off. Id. Hewitt was paid every other week for the days worked in a pay period and earned an income of more than $200,000 annually. Helix did not dispute that such a payment scheme did not satisfy the requirements of § 541.604(b) because it did not guarantee that payment received each week would bear a reasonable relationship to the weekly amount Hewitt usually earned.
Turning to 29 C.F.R. § 541.602(a), which is the general salary-basis test that requires an employee to receive a predetermined and fixed salary that does not vary with the amount of time worked, the Court determined that Helix did not pay Hewitt on a salary basis as set forth in the regulation because Hewitt was paid by the day – not a fixed amount on a weekly or less-frequent basis based on the number of weeks (not days or hours) he worked. The Court noted that the text of § 541.602(a) explicitly excludes day-rate workers and further stated that § 541.602(a) comports with the common and standard understanding of term "salary" because it requires that an employee receives a fixed amount per week, no matter how many days he worked. In rejecting Helix's contention that Hewitt was a salaried worker under § 541.602(a) because he was paid every two weeks and received at least $455 for the weeks that he indeed worked, the Court concluded that workers paid a daily rate do not qualify as salaried workers under § 541.602(a), no matter how high the daily rate.
The Court further held that the exemption for highly compensated employees – which streamlines the rules set forth for the bona fide executive exemption standard for high-income employees – does not supplant the salary-basis requirements in Sections 541.602(a) and 541.604(b), but incorporates them. In so holding, the Court emphasized that high-wage employees are not "deprived of the benefits of the [FLSA] simply because they are well paid."
In dissent, Justice Brett Kavanaugh, joined by Justice Samuel Alito, contended that Hewitt was an exempt employee not entitled to overtime under the FLSA because he performed executive duties, earned at least $100,0002 a year and received a guaranteed salary of at least $455 for any week worked. Kavanaugh also noted that the FLSA overtime regulations themselves may be inconsistent with the FLSA. In a separate dissent, Justice Neil Gorsuch contended that the case should be dismissed as improvidently granted since the case did not implicate how § 541.601 relates to § 541.604 – which Helix contended in its petition for a writ of certiorari.
Implications and Conclusion
This decision will continue to have broad implications for employers in the oil and gas and energy industries, as well as other industries that have historically paid on a day-rate basis. According to the majority opinion, policy considerations – such as whether the Court's holding would provide windfalls to highly paid day-rate workers and result in increased costs of industry operations – were irrelevant to its textual-based FLSA analysis. In addition, the Court noted that Helix had at least two options to comply with the FLSA's salary-basis requirement for Hewitt and other workers who have been historically paid a daily rate in accordance with industry practices: 1) "[i]t could add to Hewitt's per-day rate a weekly guarantee that satisfies § 604(b)'s conditions" [i.e., it could pay a guaranteed weekly amount regardless of the number of days worked, even if the amount is computed on a daily basis, as long as a reasonable relationship exists between the guaranteed weekly amount and the amount actually earned] or 2) "it could convert Hewitt's compensation to a straight weekly salary for time he spends on the rig."
Any employer paying on a day-rate basis should carefully examine with counsel its practices in light of the Court's opinion and guidance to determine whether the practices present any risk for unpaid overtime and whether there are any available steps to mitigate that risk. For more information or to examine the impact this decision may have on your pay practices, contact the authors or another member of Holland & Knight's Labor, Employment and Benefits Group.
1 This threshold was $455 per week for the relevant time at issue in the case and has since been increased to $684 each week.
2 The current FLSA regulations define highly compensated employees as those who perform certain responsibilities and who are paid total annual compensation of at least $107,432. At the relevant time, the minimum total annual compensation for highly compensated employees was $100,000.
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