Supreme Court: Employees Paid on Daily Basis May Not Satisfy FLSA’s Bona Fide Executive Salary Basis Test

On February 22, 2023, the United States Supreme Court held that Michael Hewitt, an oil rig worker who earned more than $200,000 annually, was not a bona fide executive exempt from the overtime pay protections of the Fair Labor Standards Act (FLSA). In Helix Energy Solutions Group, Inc. v. Hewitt, the critical question on appeal from the Fifth Circuit was whether Hewitt satisfied the FLSA’s bona fide executive “salary basis” test where his paycheck was based entirely on a daily rate.

The FLSA’s Salary Basis Test

Under applicable regulations, an employee is considered a bona fide executive excluded from the FLSA’s protections if the employee meets three distinct tests:

1. The “salary basis” test, which requires that an employee receive a predetermined and fixed salary that does not vary with the amount of time worked.
2. The “salary level” test, which requires that preset salary to exceed a specified amount.
3. The job “duties” test.

The U.S. Secretary of Labor has implemented the bona fide executive standard through two separate and slightly different rules, one “general rule” applying to employees making less than $100,000 in annual compensation, and a different rule addressing “highly compensated employees” (HCEs) who make at least $100,000 per year. 29 CFR §§541.100, 541.601(a), (b)(1). The general rule considers employees to be executives when they are “[c]ompensated on a salary basis” (salary basis test); “at a rate of not less than $455 per week” (salary level test); and carry out three listed responsibilities— managing the enterprise, directing other employees, and exercising power to hire and fire (duties). The HCE rule relaxes only the duties test, while restating the other two.

The Helix Energy decision focuses on whether Hewitt was paid on a salary basis. The salary basis test is defined in Title 29 of the Code of Federal Regulations. Section 541.602(a) provides that an employee is paid on a salary basis only if he earns a “predetermined amount,” (i.e., that he “receive[s] the full salary for any week in which [he] performs any work without regard to the number of days or hours worked.”) Critically, the employee must be paid this predetermined amount “without regard to the number of days or hours worked.” Additionally, under the “special rule” outlined in Section 541.604(b), an employee’s compensation scheme may satisfy the salary basis test even if the earnings are computed on an hourly or daily basis if the employer also guarantees a reasonable minimum weekly income.

Factual Background of Helix Energy

Michael Hewitt worked for Helix Energy between 2014 to 2017 as an oil rig “tool-pusher.” In this role, Hewitt worked alternating rotations of 28-day stints on the oil rig and 28 days off. While on the oil rig, Hewitt typically worked 12-hour days, seven days a week. Helix paid him on a daily-rate basis, ranging from $963 to $1341 daily. Under this compensation arrangement, his biweekly paycheck was the sum of his days worked multiplied by his daily rate. Although he worked upwards of 84 hours per week when he was on the oil rig, Hewitt received no overtime.

Subsequently, Hewitt sued Helix Energy under the FLSA to recover unpaid overtime wages. At the district court, the Southern District of Texas granted summary judgment in Helix’s favor. The Fifth Circuit, sitting en banc, reversed and remanded after it found that Helix did not pay Hewitt on a salary basis.

The Court’s Opinion

Justice Kagan, writing for the majority, affirmed the Fifth Circuit’s holding. According to Justice Kagan, the critical question for the Court was

“whether a high-earning employee is compensated on a ‘salary basis’ when his paycheck is based solely on a daily rate – so that he receives a certain amount if he works one day in a week, twice as much for two days, three times as much for three, and so on.”

Looking to the ordinary meaning of the FLSA’s regulations, the Court expressly answered “no.”

To support its conclusion, the Court noted that Section 602(a)’s plain text explicitly states that an employee is paid on a salary basis if he “receive[s] the full salary for any week in which [he] performs any work without regard to the number of days or hours worked.” Accordingly, the majority held that the FLSA salary basis test excluded daily-rate workers like Hewitt whose pay was calculated only by counting the days he worked during a given week.

The majority further supported its holding by looking to the role that 604(b)’s “special rule” plays in the FLSA’s regulatory structure. Section 604(b) permits employee earnings to be based on a daily or hourly basis so long as the employer also provides a guaranteed minimum weekly wage. Thus, through 604(b), the FLSA addresses directly when daily rates are “consistent with the salary basis concept.” Therefore, the Court’s reading of 604(b) confirmed its conclusion that Hewitt’s compensation scheme did not satisfy the salary basis test under Section 602(a).

Finally, the Court reasoned that Helix Energy could become compliant with the salary basis requirements in two ways. The first way would be to guarantee Hewitt and similarly compensated employees a weekly guaranteed amount that satisfied Section 604(b). The second way would be to convert Hewitt’s compensation scheme to a flat weekly salary. If Helix Energy opted not to pursue either of these options, Hewitt and other similarly compensated employees would not be exempt from the FLSA’s “white collar” exemption and would be eligible for overtime pay.

Considerations for Employers

Day-rate compensation schemes are especially prevalent in the oil and gas and construction sectors. Employers who pay workers on a daily basis should take notice that even highly paid employees, like Hewitt who earned over $200,000 annually, with executive type duties may qualify for overtime pay. The high Court’s ruling is also consistent with Department of Labor enforcement efforts targeting the oil and gas industry’s misclassifications of workers for FLSA purposes. Accordingly, employers should take a hard look at existing day-rate compensation schemes to determine whether employees may be entitled to overtime compensation.

Buchanan’s labor and employment team routinely monitors and reports on changes in the legal landscape that impacts employers. With more than 60 practice-specific attorneys, Buchanan is ready to help you evaluate this emerging issue and implement any necessary updates to your hiring and recruitment practices.