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Employment and Labor

Employers Beware: Highly Compensated Employees Could Be Entitled To Overtime

Employers Beware: Highly Compensated Employees Could Be Entitled To Overtime

The Fair Labor Standards Act (FLSA) guarantees that covered employees receive overtime pay when they work more than 40 hours a workweek. An employee is exempt from the overtime requirement if he or she works “in a bona fide executive, administrative, or professional capacity” and is paid on a “salary basis.” Last week, the United States Supreme Court determined that a high earning employee was not compensated on a salary basis when his paycheck was based solely on a daily rate. Therefore, the High Court held that this employee is entitled to overtime pay.

FLSA Background

The FLSA was enacted to eliminate substandard wages and oppressive working hours by guaranteeing a minimum wage and requiring time-and-a-half pay for work over 40 hours a week (e.g. overtime) – even for workers whose regular pay exceeds minimum wage.

However, the FLSA also provides for certain exemptions to the overtime pay requirement if the employee is employed in a bona fide executive, administrative, or professional capacity, known as the “bona fide executive exemption.” In order to meet this exemption, there are three tests an employee must meet.

  1. The salary basis test, which focuses on whether the employee receives a predetermined and fixed salary, one that does not vary with the precise amount of time he or she works.
  2. The salary level test, which asks whether that preset salary exceeds a specified amount.
  3. The duties test, which focuses on the nature of the employee’s job responsibilities.

When all three tests are met, the employee is considered a bona fide executive and thus exempt from FLSA’s overtime requirement.

When considering whether employees are exempt bona fide executives, two separate rules apply depending on the employee’s income: (1) one applies to lower income employees (making less than $100,00 annually, including salary, commissions, bonuses, etc.) and (2) one applies to higher income employees (making at least $100,000 annually, including all forms of pay).

Employees making less than $100,000 are considered executives when they are compensated on a salary basis (salary basis test) at a rate of $684[1] or more a week (salary level test) and carry out three listed responsibilities – managing the enterprise, directing other employees, and exercising the power to hire and fire (duties test).

Employees making $100,000 or more are considered executives when they are compensated on a salary basis (salary basis test) at a rate of $684 or more a week (salary level test) and regularly perform just one of the three responsibilities – managing the enterprise, directing other employees, or exercising the power to hire and fire (duties test). The salary basis and salary level tests remain the same as the lower income employee test but the duties test becomes easier to satisfy.

Regarding the salary-basis test, regardless of how much the employee is compensated, there are two additional rules to consider if the employee is regularly paid on a weekly, daily, hourly, or shift basis.

First, an employee who regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount that is not subject to reduction based on the variations in the quality or quantity of the work performedwill be considered to be paid on a salary basis. This rule ensures that the employee will get her compensation through a preset weekly (or less frequent) salary not subject to reduction because of the number of days or hours she worked. This rule is referred to as § 602(a).

Second, an employee who’s compensation is computed on an hourly, daily, or shift basis will be considered to be paid on a salary basis provided that the employer guarantees the employee at least $684 a minimum each week regardless of the number of hours, days, or shifts worked and the promised amount bears a reasonable relationship to the amount actually earned in a typical week. This rule is referred to as § 604(b).

Generally, a salary is fixed compensation regularly paid weekly, monthly, or annually. In contrast, a worker paid by the day or hour, docked for time he or she takes off and uncompensated for time he or she is not needed, is understood generally as a daily or hourly wage earner, not a salaried employee.

With the foregoing rules in mind, the Supreme Court decided that a highly compensated employee paid on a daily rate basis was entitled to overtime.

Hewitt v. Helix Energy Solutions Group

From 2014 to 2017, Michael Hewitt worked for Helix Energy Solutions Group as a tool pusher on an offshore oil rig. Hewitt reported to a captain, oversaw various aspects of the rig’s operations, and supervised 12 to 14 employees. Usually, he worked 12 hours a day, seven days a week (84 hours a week) for 28 days and then had 28 days off before reporting back.

Helix paid Hewitt over $200,000 annually. Hewitt was paid on daily rate basisand his paycheck was issued every two weeks. Over the course of his employment, this daily rate ranged from $963 to $1,341 per day. His paycheck amounted to his daily rate times the number of days he worked in the pay period. So, at a daily rate of $963, if Hewitt worked only one day, his paycheck would be $963; if he worked 14 days, his paycheck would be $13,482.

Hewitt sued Helix under the FLSA to recover overtime pay. Helix argued that Hewitt was exempt because he was a bona fide executive. The district court agreed and Hewitt appealed. The Fifth Circuit Court of Appeals concluded that although Hewitt was highly paid, he was not exempt. The Supreme Court agreed to take the case and on Wednesday, February 22, 2023, agreed with the appellate court and concluded that Hewitt was not exempt from overtime.

SCOTUS’ Analysis

The critical issue was whether Hewitt was paid on a salary basis. The parties agreed that Hewitt, as a high income employee, counts as an executive when: (1) he is paid on a salary basis; (2) the salary paid is at or above $455 a week; and (3) he performs at least one listed duty. Hewitt conceded he met the salary level and duties tests and contested only that he was paid on a salary basis. Helix conceded that Hewitt did not receive an amount each week bearing a reasonable relationship to the weekly amount he usually earned. Therefore, the issue for the Court to decide was whether Hewitt was paid on a “salary basis” as described in § 602(a). If yes, Hewitt was exempt; if no, he was covered under the FLSA and could recover overtime.

The Court concluded that the answer was no. Section 602(a) applies solely to employees paid by the week. It is not met when an employer pays an employee by the day as Helix paid Hewitt. Daily rate workers, regardless of income level, are paid on a salary basis only through the test set out in § 604(b).

Weekly-Rate Workers v. Daily-Rate, Hourly-Rate, and Shift Workers

The Court held that §§ 602(a) and 604(b) apply regardless of whether an employee is a low income or highly compensated employee. However, § 602(a) only applies to workers paid on a weekly-rate and § 604(b) only applies to workers paid on a daily rate, hourly rate, or shift basis. In other words, § 602(a) specifically excludes daily rate workers. Under § 602(a), whenever the employee works at all in a week, he or she must get his or her full salary for that week; his or her pay cannot be reduced because he or she did not work the full week. In contrast, a daily rate worker is paid for each day he or she works and no others. A daily rate worker’s pay is always a function of how many days the employee has worked, and  is calculated only by counting the days once the week is over – not by ignoring the number of days worked and paying the employee a predetermined amount – and therefore is not salaried.

Helix tried to argue that § 602(a) applies because it states that an employee can be salaried if it receives “each pay period on a weekly or less frequent basis.” The Court rejected this argument and concluded that the plain text of § 602(a) excludes daily rate workers like Hewitt. The Court opined that such language means “weekly [or biweekly, or monthly] basis,” not a daily or hourly one. The “basis” in that phrase is the unit of time used to calculate pay and that unit must be a week or less frequent measure; it cannot be a day, or more frequent measure. An employee paid on an hourly basis is paid by the hour, an employee paid on a daily basis is paid by the day, and an employee paid on a weekly basis is paid by the week – regardless of when or how often the employee receives a paycheck. Accordingly, § 602(a) requires that a salaried worker’s paycheck reflects how many weeks – not days or hours –worked and that the worker is paid a weekly – not daily or hourly – rate. Therefore, a daily rate worker, even if her daily rate is high like Hewitt, does not qualify as a salaried employee under § 602(a). In contrast, § 604(b) states that an employee can be salaried where her earnings are computed on an hourly, a daily, or a shift basis if the employer guarantees a weekly payment approximating what the employee usually earns.

Employer’s Public Policy Arguments Rejected

Helix attempted to make various public policy arguments to justify departure from the rules. Each of these arguments were rejected by the Court. Helix argued that a finding that § 602(a)’s salary basis test never captures daily-rate workers will give (1) windfalls to high earners, (2) disrupt and increase costs of industry operations, and (3) impose significant retroactive liability.

First, the Court noted that “even the most formidable policy arguments cannot overcome a clear textual directive.” However, even if it were to accept Helix’s position, there would be troubling outcomes because it would deny overtime pay to daily rate employees making far less than Hewitt. Further, Helix’s windfall complaint for high earners is in direct contrast to FLSA’s requirement that the FLSA applies to all workers regardless of whether they are well paid. The Court found Helix’s operation and cost base objections equally unpersuasive because Helix could come into compliance with the salary base requirement for Hewitt and other similar employees by: (1) adding to Hewitt’s per day rate a weekly guarantee that satisfies § 604(b)’s conditions or (2) convert Hewitt’s compensation to a straight weekly salary.

Succinctly stated, Helix cannot avoid paying their employees a true salary and also avoid paying their employees, evenly highly compensated ones, overtime. Simply put, because Hewitt is not paid on a salary basis, he is entitled to overtime compensation. As the High Court noted, “nothing about today’s decision should come as a surprise.”

Significance for Employers

Given the Supreme Court’s recent opinion, if employers have not done so already, they should conduct a review of how their employees are paid to ensure that they are not operating under the false assumption that some employees are exempt from overtime simply because they are highly compensated.

[1] This increased from $455 in 2020.