United States: Overtime Pay Compliance With The FLSA: Helix Energy Solutions Group, Inc. v. Hewitt And Highly Compensated Employees

It certainly is not news that the Fair Labor Standards Act ("FLSA") requires employers to pay employees overtime pay when they work more than 40 hours per week – absent any specifically enumerated exemptions.¹ Related thereto, employers are not required to pay overtime compensation to employees who work "in a bona fide executive, administrative, or professional capacity," as defined by the United States Department of Labor ("DOL"). Under the DOL's regulations, an employee must be paid on a "salary basis" to qualify for these exemptions.² Additional regulations expand on the salary-basis requirement, as applied to lower-income and higher-income employees.

On May 2, 2022, the Supreme Court granted certiorari on Helix Energy Solutions Group, Inc. v. Hewitt,³ a case about whether a tool-pusher on an oil-rig was wrongly denied overtime pay. At the heart of the case was the legal question of whether a high-earning employee is compensated on a "salary basis" when his paycheck is based on a daily rate rather than a weekly rate—meaning his compensation amount ranges weekly depending on how many days he works during a given week. On February 22, 2023, a 6-3 majority of the Supreme Court held that Hewett was not exempt from overtime pay because he was not paid on a salary basis.⁴

A Short FLSA Primer

Under DOL regulations, an employee may be considered a bona fide executive, and thus excluded from the FLSA's overtime pay requirement, if the employee meets three distinct tests: (1) the "salary basis" test, which requires that an employee receive a "predetermined amount" for each week the employee works "which is not subject to reduction because of variations in the quality or quantity of the work performed"; (2) the "salary level" test, which requires that the preset salary exceeds a specified amount; and (3) the "job duties" test, which focuses on the nature of the employee's job responsibilities.⁵ When all three criteria are met, the employee is considered a bona fide executive and excluded from the FLSA's overtime compensation requirement.

The Secretary of Labor has implemented the bona fide executive standard through two separate and slightly different rules, the first "general rule" applies to employees making less than $107,432 per year, and the second rule addresses "highly compensated employees" ("HCE"), who make at least $107,432 per year.⁶ Under the general rule, employees meet the executive exemption when they are (1) "compensated on a salary basis" (salary-basis test); (2) make "at least $684 per week - paid on a salary or fee basis" (salary-level test); and (3) perform three listed responsibilities–managing the enterprise, directing other employees, and exercising power to hire and fire (duties test). Under the HCE rule, the salary-basis test and salary-level test still apply, but the duties test becomes easier to satisfy as a qualifying employee only needs to "regularly perform[]" one (not all) of the three responsibilities listed in the general rule.

Two other regulations,⁷ § 541.602(a) and § 541.604(b), provide greater context to the salary-basis test at issue in Hewitt. Section 602(a) states that "[a]n 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 is not subject to reduction because of variations in the quality or quantity of the work performed." Section 604(b) states that an employer may base an employee's pay on an hourly, daily, or shift rate without "violating the salary basis requirement" or losing the [bona fide executive] exemption" so long as two conditions are met. First, the employer must "also" guarantee the employee at least $684 each week (the minimum salary level) "regardless of the number of hours, days or shifts worked." Second, the promised amount must bear a "reasonable relationship" to the "amount actually earned" in a typical week.

Factual and Procedural Background of Hewitt

From 2014 to 2017, Michael Hewitt worked for Helix on an offshore oil rig, where he oversaw various aspects of the rig's operations and supervised 12 to 14 workers. He typically worked 12 hours a day, seven days a week (84 hours) during a 28-day work period. Helix paid Hewitt on a daily-rate basis, with no overtime compensation. The daily rate ranged, over the course of his employment, from $963 to $1,341 per day. Hewitt's paycheck was issued every two weeks and amounted to his daily rate multiplied by the number of days he had worked in the pay period. Under this compensation scheme, Helix paid Hewitt over $200,000 annually.

In response to Hewitt's action against Helix under the FLSA to recover overtime pay, Helix asserted that Hewitt was exempt from the FLSA because he qualified for the bona fide executive exemption. The crux of the dispute turned on whether Hewitt was paid on a salary basis.⁸ The district court agreed with Helix that Hewitt was compensated on a salary basis and granted the company summary judgment. The Court of Appeals for the Fifth Circuit, sitting en banc, reversed the district court's decision, holding that Hewitt was not paid on a salary basis because daily-rate workers do not fall within Section 602(a) and Hewitt's compensation did not satisfy Section 604(b)'s conditions.⁹ The Supreme Court granted certiorari, and affirmed the Fifth Circuit's decision.

Supreme Court Decision in Hewitt

In the majority opinion written by Justice Kagan, the Supreme Court concluded that Hewitt was not paid on a salary basis because Section 602(a) "applies solely to employees paid by the week (or longer); it is not met when an employer pays an employee by the day, as Helix paid Hewitt." The Court noted that "daily-rate workers, of whatever income level, are paid on a salary basis only through the test set out in §604(b)," but that Helix acknowledged that Hewitt's compensation did not satisfy 604(b)'s requirements because Helix did not guarantee that Hewitt would receive an amount each week bearing a "reasonable relationship" to the weekly amount he usually earned. Thus, whether Hewitt was entitled to overtime pay under FLSA depended entirely on whether he was paid on a salary basis under Section 602(a).

The Court examined the text of 602(a) and concluded that nothing in its language addressed a daily-rate worker, "who by definition is paid for each day he works and no others." The Court found that Section 602(a)'s requirement that an employee receive a predetermined amount irrespective of days worked embodied the standard concept of the word salary which connotes the stability and security of a regular weekly, monthly, or annual pay structure. The Court rejected Helix's argument that Section 602(a) was satisfied because Hewitt received his paycheck every two weeks, and that check contained pay exceeding $455 for any week in which he had worked. The Court concluded that there was no support for the contention that the salary-basis test is satisfied based on how often paychecks are distributed. The Court reasoned that a basis of payment typically refers to the unit or method for calculating pay, not the frequency of its distribution. To illustrate this, Justice Kagan stated that a lawyer who asks to "receive her pay on an hourly basis... is proposing an hourly billable rate, not delivery of a paycheck every hour."

Next, the Court addressed the relevance of Section 604(b), which allows some employees to meet the salary basis test despite being paid a day-rate. The Court concluded that reading Section 602(a) to also cover daily and hourly employees would subvert Section 604(b)'s conditions for determining when an employee's pay is considered "salary." The Court rejected Helix's argument that Section 604(b) applied to HCEs such as Hewitt because Section 602(a) and 604(b) must be read in harmony outside the HCE context, and Section 602(a) cannot carry two different meanings depending on whether the employee to which it is being applied is a HCE.

Lastly, having concluded that the regulatory text was clear, the Court rejected Helix's policy arguments that the Court's decision would create windfalls for high-earning employees. The Court cited two Amicus Curiae¹⁰ briefs filed by Nurses' unions, noting that under Helix's reading of the regulations, nurses and other workers paid less than $100,000 a year would lose their entitlement to overtime compensation.

The dissent, written by Justice Kavanaugh and joined by Justice Alito, rejected the majority's conclusion that Hewitt was not a bona fide executive. The dissent reasoned that because Hewitt's day-rate ($963) was higher than the weekly minimum requirement of $455 per week specified in the regulations, he was always guaranteed a "predetermined amount" of at least $963 as part of his total compensation for any week that he worked. The dissent believed that the salary-basis definition allowed the "predetermined amount" to be "part" of the employee's compensation. Additionally, they agreed with Helix that Section 604(b) did not apply to HCEs, and was not otherwise relevant to the case.

What Employers Can Do Now

Employers can take the following measures to help mitigate potential legal risk related to overtime pay:

• Consider conducting an audit of your payroll records to determine whether certain employees may be entitled to overtime compensation in light of the Supreme Court's recent decision.
• Confer with legal counsel on other best practices to minimize legal risk, including any developments in state, local, and federal laws concerning the FLSA.

As always, check your local or state laws, as these may differ from the FLSA.

Footnotes

1. 29 U.S.C. § 207(a)(1).

2. 29 CFR § 541.100(a)(1).

3. 142 S.Ct. 2674.

4. No. 21-984, 2023 WL 2144441 (U.S. Feb. 23, 2023).

5. See 84 Fed. Reg. 51230 (2019); 29 CFR 541.100 (executives); 29 CFR 541.200 (administrative employees); 29 CFR 541.300 (professional employees).

6. 29 C.F.R. § 541.100, 541.601(a), (b)(1).

7. We refer to them simply as 602(a) and 604(b).

8. Hewitt conceded that his employment satisfied the exemption's other tests (the salary-level and duties test).

9. Hewitt v. Helix Energy Solutions Group, Inc., 15 F.4th 289 (5th Cir. 2021).

10. An amicus curiae is an individual or organization who is not a party to a legal case, but who is permitted to assist a court by offering information, expertise, or insight that has a bearing on the issues in the case.

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.