Supreme Court rules in favor of well-paid oil and gas company supervisor in overtime compensation dispute.
Consider for a moment whether a company supervisor who makes over $200,000 annually is a “salaried employee” or not, and whether he is, despite being well paid, entitled to overtime pay under the Fair Labor Standards Act (“FLSA”)? The U.S. Supreme Court recently answered these questions in a much anticipated decision.
The U.S. Supreme Court confirmed that employees must be paid on a “salary basis” to maintain exempt status. If the “salary basis” test is not met, employees, even if highly compensated, may be entitled to overtime compensation. See Helix Energy Solutions Group, Inc. v. Hewitt, 598 U.S. (2023) (Kagan, J.).
Whether an employee is “salaried” is ordinarily linked, as a matter of common parlance, to the stability and security of a regular weekly, monthly, or annual pay structure. Take away that kind of paycheck security and the idea of a salary also dissolves. This goes to the core of the issues discussed in the Supreme Court’s most recent Helix decision.
Background of the case: Michael Hewitt worked for Helix Energy Solutions Group supervising 12 to 14 workers and managing various aspects of the oil-rig’s operations. He usually worked 12 hours per day, seven days per week, for 28 straight days. He was then off for the following 28 days. Notably, Hewitt typically worked about 84 hours per week but was compensated on a daily-rate basis (which ranged from $963 to $1,341 per day) with no overtime compensation. Hewitt made over $200,000 annually.
Hewitt filed suit against Helix to recover thousands in overtime pay under the FLSA. The central issue was whether a high-earning employee is compensated on a “salary basis” when his paycheck is based solely on a daily rate. The U.S. Supreme Court ruled 6-3 that the Hewitt was not compensated on a salary basis under the federal regulations and can therefore seek overtime pay under the FLSA.
Court’s Rationale: Whether Hewitt is entitled to overtime pay depends on if he is considered a “bona fide executive”. There are two rules that guide this analysis.
The general rule pertains to employees making less than $100,000 in total annual compensation, including commissions and bonuses. See 29 CFR §§541.100, 541.601(a), (b)(1). Under this rule, the bona fide executive exception is triggered when the employee is (1) compensated on a salary basis (salary-basis test), (2) compensated at a rate of not less than $455 per week (salary-level test), and (3) their duties include managing the enterprise, directing other employees, and exercising power to hire and fire (duties-level test).
The highly compensated employee (“HCE”) rule, focuses on employees making at least $100,000 annually. The HCE rule is very similar to the general rule—restating the salary-basis and salary-level test—except that it amends the duties test. Under the HCE rule, the duties test considers whether the employee performs just one of the three responsibilities listed in the general rule. The parties did not dispute that Hewitt satisfied the salary-level and duties tests. Therefore, the Court only considered the salary-basis test to determine if Hewitt is considered a bona fide executive.
To further refine the salary-basis test, the Court looked to two other regulations—§541.602(a) and §504.604(b).
The main salary-basis provision, §602(a), says that “an employee will be considered to be paid on a salary basis if 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. Subject to certain exceptions, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.” The parties disputed the meaning of “weekly, or less frequent basis.”
The Supreme Court ultimately held that the word “basis”—as used in the regulation—refers to unit or method of calculations, not paycheck frequency. Therefore, since Hewitt’s pay was calculated on a daily-rate basis, Hewitt was not exempt from overtime pay under §602(a). Notably, a daily-rate worker’s weekly pay is always a function of how many days worked. Thus, the daily-rate worker’s compensation changes based on the number of days worked in the workweek. Consequently, a daily-rate worker does not qualify under §602(a) as a salaried employee because compensation is subject to variation, which is specifically prohibited by §602(a).
Section 604(b), on the other hand, focuses on employees whose compensation is computed on an hourly, daily, or shift basis. Under §604(b) an employer can pay an employee on a daily, hourly, or shift basis without violating the minimum wage mandate or losing the bona fide executive exemption so long as two conditions are met: (1) the employer must guarantee the employee at least $455 each week regardless of the number of hours, days, or shifts worked, and (2) that promised amount must be roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal scheduled workweek. The Supreme Court opined that these conditions create a compensation system functioning much like a true salary—a steady stream of pay, which the employer cannot much vary and the employee may thus rely on week after week.
As to §604(b), the Court ruled that although Hewitt could make at least $455 per week, it is not guaranteed. Consider Hewitt’s schedule: Hewitt typically worked 28 days straight and was then off work the following 28 days. During the weeks in which Hewitt did not work, he was not paid. And the very nature of a “daily-rate based pay” connotes that Hewitt’s pay was wholly dependent on the number of days worked and could be reduced accordingly. Therefore, the Court concluded Hewitt cannot possibly be considered a salary-basis employee under §604(b).
In sum, the Court held that Hewitt, though well paid, was not compensated on a salary basis and was therefore entitled to overtime pay for each hour he worked in excess of 40 hours per week.
The dispute will return to the U.S. District Court for the Southern District of Texas for further proceedings consistent with the opinion.
Practical takeaways from the Helix decision: It is worth noting that a high rate of pay does not automatically exclude an employee from overtime pay benefits. The Court makes clear here, and has made clear in previous opinions, that “workers are not deprived of the benefits of the FLSA simply because they are well paid.” See Jewell Ridge Coal Corp. v. Local No. 6167, United Mine Workers of America, 325 U.S. 161 (1945). Federal regulations require more to trigger the exception to the FLSA overtime pay mandate.
Additionally, the decision potentially opens the floodgates of high-earning employee requests for overtime pay. If your company has a similar compensation scheme as Helix, it may be prudent to revisit the compensation structure in order to keep the benefits of the bona fide executive exception to the overtime pay mandate.
Read our previous article on the Supreme Court consideration of Helix v. Hewitt