Constangy.com News & Analysis
Can you make $200K a year and still get overtime? We’ll know soon.
10.20.22
The U.S. Supreme Court will soon decide whether a supervisor who was paid a daily, rather than a weekly, rate and earned more than $200,000 a year is exempt from the overtime provisions of the federal Fair Labor Standards Act.
If the Court decides that he is not exempt, he may be entitled to overtime despite his high compensation.
The Court heard oral argument last week in Helix Energy Solutions Group, Inc. v. Hewitt. This Bulletin will provide some background information and report on the oral argument. We will follow up with another Bulletin after the Court issues its decision.
The FLSA and the “salary basis” requirement
The FLSA requires employers to pay employees at a rate of one-and-one-half times their regular rate of pay for all hours worked in excess of 40 in a workweek. There are, however, dozens of exemptions to this requirement for various categories of employees. The most common exemptions are the so-called “white-collar exemptions” that apply to certain executive, administrative, professional, and outside sales employees who meet various salary and duties criteria. Employers do not have to pay overtime to FLSA-exempt employees.
In 2004, the U.S. Department of Labor added separate rules to the white-collar exemptions for “highly compensated employees.” Currently, “highly compensated employees” are exempt from overtime pay if -
they earn at least $107,432 per year in total compensation;
their total compensation includes at least $684 per week paid on a “salary basis” as set forth in the regulations; and
they customarily and regularly perform any one or more of the exempt duties or responsibilities of an executive, administrative, or professional employee, as defined by the FLSA. In other words, highly compensated employees will need to satisfy only one of the “duties” criteria that apply to the white-collar exemptions.
At issue in the Helix case is the “salary basis” requirement for highly compensated employees. The regulations provide 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.”
The regulations also say that “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.” A separate section of the regulations provides that employees’ earnings may be computed on a daily (or hourly or shift) basis without violating the salary basis requirement, as long as the arrangement includes a guarantee of at least the required weekly minimum and “a reasonable relationship exists between the guaranteed amount and the amount actually earned.”
Helix v. Hewitt
Michael Hewitt worked as a “toolpusher” for Helix on an offshore oil and gas rig, working 28 days in a row (12 hours per day), followed by 28 days off. The parties agreed that the toolpusher position was supervisory and largely administrative, meaning that it met the “duties” requirement for exemption.
However, Mr. Hewitt was paid based on a daily rate of at least $963, with no overtime premium. After Helix terminated his employment, he filed a putative collective action in federal court in Texas, seeking unpaid overtime. Mr. Hewitt contended that he was not FLSA-exempt because, in his reading of a 70-year-old regulation, the “predetermined amount” had to cover his base salary for at least one week’s work. Helix argued that there was no such requirement, and that Mr. Hewitt’s daily rate of pay was his predetermined compensation, which exceeded the minimum weekly amount.
The court agreed with Helix, but the U.S. Court of Appeals for the Fifth Circuit – in a divided opinion by all of the judges – sided with Mr. Hewitt. First, the appeals court noted the restriction that “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.” (Emphasis added.) According to the majority, that meant that Mr. Hewitt’s daily rate could not be a “salary” because it took into account the number of days that he worked. Second, because Mr. Hewitt’s weekly pay was regularly seven times his daily rate, the majority found that there was no “reasonable relationship” between the guaranteed weekly minimum and the amount that Mr. Hewitt actually earned.
The Fifth Circuit’s holding deepened a circuit split on this issue. The U.S. Courts of Appeals for the Sixth and Eighth circuits apply the reasonable-relationship test the same way the Fifth Circuit majority did. The First and Second circuits, on the other hand, have held that, if the employee meets the highly compensated employee requirements, the employer does not have to satisfy the reasonable relationship requirement.
Helix petitioned for certiorari, which was granted last May.
The Supreme Court arguments
Helix argued that the requirements for the highly compensated employee exemption are distinct from the requirements for the executive, administrative, and professional exemptions. The highly compensated employee exemption, the company said, should essentially be treated as a standalone exemption. More specifically, Helix argued that the regulation that addresses earnings “computed” on a daily basis and the corresponding reasonable relationship test should not apply to highly compensated employees.
Helix also noted that the FLSA says only that employees “in a bona fide executive, administrative, or professional capacity” are exempt and does not make mention of any salary requirement. Justice Elena Kagan seemed to agree, noting that the statute “doesn’t really care about how people are paid.” (However, she said that she believed Helix had forfeited that argument because it was belatedly raised in the lower courts.) Justice Brett Kavanaugh similarly noted that there is a “strong argument that the regs are inconsistent with the statute[, but that] question is not before us.”
Mr. Hewitt, with the support of the U.S. Department of Labor, maintained that the language of the regulation was meant to regulate the method of calculation of an employee’s pay. According to Mr. Hewitt, he was not paid on a salary basis because (1) his pay was calculated on a daily basis; (2) the amount he received per week was not a “guaranteed predetermined weekly amount” because he received less if he worked fewer days; and (3) his “weekly guaranteed” amount was not reasonably related to the amount that he actually earned each week.
Justice Clarence Thomas was skeptical about Mr. Hewitt’s first point, saying, “for the average person looking at it, when someone makes over $200,000 a year, they normally think of that as an indication that it’s a salary.”
No predictions
The “liberal” justices (Justices Kagan, Ketanji Brown Jackson, and Sonia Sotomayor) seemed to agree with Mr. Hewitt. For example, Justice Jackson said the purpose of the regulations was to ensure that workers receive regular and predictable payments, regardless of how much they may earn. The Court’s “conservative” justices (Chief Justice John Roberts, and Justices Samuel Alito, Amy Coney Barrett, Neil Gorsuch, Kavanaugh, and Thomas), on the other hand, indicated agreement with Helix. However, it was not clear that the Court would split along liberal-conservative lines in its decision.
Employers that pay their exempt employees a daily rate should be on the lookout for the Court’s decision. And, again, we will follow up with another Bulletin once the decision is issued.
Final thoughts
It is interesting that a very highly compensated executive employee is using a 70-year-old regulation (the “salary basis” regulation) to claim what appears to be an unintended windfall overtime award. In that regard, Justices Gorsuch and Kavanaugh signaled that they think the regulation may be an invalid exercise of administrative agency power and all but invited litigants to challenge the regulation based on the “major questions doctrine.” That legal theory was recently used by the Court to invalidate a major Environmental Protection Agency regulation that attempted to require power plants to move away from the use of coal, and Justice Gorsuch raised the same legal theory in his concurrence in National Federation of Independent Business v. U.S. Department of Labor. In that case, the Court invalidated the Emergency Temporary Standard issued by the Occupational Safety and Health Administration, which would have required employers with 100 or more employees to require most employees to be vaccinated against COVID-19.
The FLSA, which was enacted in 1938, is not always a good “fit” with our modern economy. The pending challenges to the “salary basis” requirement, as well as the proposed regulations on independent contractors issued last week, illustrate this. As a result, we face a flood of wage and hour litigation with no apparent end in sight.
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