Supreme Court Upholds Salary Requirement for Overtime Exemption

​Highly compensated employees can be eligible for overtime pay if they are paid on a daily basis, the U.S. Supreme Court ruled on Feb. 22 in a case that clarifies overtime exemptions under the Fair Labor Standards Act (FLSA).

In Helix Energy Solutions Group v. Hewitt, the Supreme Court ruled 6-3 that a former employee who made more than $200,000 a year was eligible for overtime pay because he was paid on a daily basis.

The case hinged on whether being paid at least a minimum amount per day can count as a salary. The court ruled that the defendant company didn't pay a salary as defined under the FLSA, and therefore a highly compensated employee was not exempt.

"This decision reiterates that the FLSA and other wage and hour laws can have very rigid requirements," said Patrick Dalin, an attorney with Fisher Phillips in Philadelphia. "The employee in this case was very well-paid, but the court nevertheless denied the employer the overtime exemption based on a very technical reading of the regulations. Employers should ensure that they pay all employees covered by the executive, administrative and professional exemptions within the strict guidelines of the salary basis and salary level regulations."

While employers should make sure to pay employees according to the FLSA, attorneys say most employers will not have to change their practices due to the court's ruling.

The court "issued a narrow opinion on a narrow issue," said Ryan Mick, an attorney with Dorsey & Whitney in Minneapolis. "Relatively few employers outside the energy industry utilize the day rate pay structure at issue in the case. Concerns that the justices might upend traditional FLSA rules by disregarding the FLSA regulations addressing the salary basis requirement turned out to be unfounded, at least for now."

Background

Helix Energy Solutions Group, an offshore oil and gas company based in Houston, claimed its former employee, Michael Hewitt, was exempt from overtime pay because he was a highly paid executive, earning more than $200,000 per year. It said he didn't qualify for overtime pay because he received at least $455 each week, meeting the minimum standard for salaried workers at the time.

However, Hewitt claimed he should get retroactive overtime pay because Helix calculated his pay using a daily rate, and the Supreme Court agreed.

From 2015 to 2017, Hewitt worked 28-day "hitches," living on an offshore oil rig for 28 days at a time and being on-duty for 12 hours each day. His pay ranged from $963 to $1,341 per day. Hewitt earned $248,053 in 2015 and $218,863 in 2016, according to court records.

The salary basis requirement is met solely when employees are paid by the week or longer, the high court found. "It is not met when an employer pays an employee by the day, as Helix paid Hewitt," the court said. The basis of payment "typically refers to the unit or method for calculating pay, not the frequency of its distribution."

Hypothetically, the company could meet the salary basis requirement by adding a weekly guarantee to the worker's per-day rate or by converting the worker's pay to a straight weekly salary for time he spends on the rig, the court explained.

"Employers sometimes think that if an employee earns a lot of money, that that is sufficient to treat the person as exempt and not pay overtime. But this case makes very clear that the guaranteed weekly amount is always a critical requirement for satisfying the salary basis test," said Brett Coburn, an attorney with Alston & Bird in Atlanta. "Putting this guarantee in writing can often have little or no impact on the amounts that employers pay to these highly compensated employees because they typically earn well above that minimum guarantee anyway, but it can make a world of difference in avoiding claims by these highly compensated employees that they should also have received overtime."

What's Required for FLSA Exemptions

Employees are now exempt from overtime under the FLSA if they earn at least $684 per week and perform executive, administrative, professional or outside sales work. The predetermined salary level cannot vary based on the quality or quantity of work. Employers may use nondiscretionary bonuses, incentive payments and commissions to satisfy up to 10 percent of the standard salary level.

The word "salary" "connotes a steady and predictable stream of pay," the court stated, noting, "The whole point of the salary-basis test is to preclude employers from paying workers neither a true salary nor overtime."

In general, to be considered an executive, the employee must manage the business, direct the work of at least two full-time employees, and have the authority to hire or fire other employees. For highly compensated employees, only one of those three criteria has to be met. In the Supreme Court case, Hewitt met this job duties test for executives.

To be considered an administrative employee, the person must perform office or nonmanual work directly related to management or general business operations. They must be permitted to exercise discretion and independent judgment with respect to matters of significance.

To qualify as a professional employee, a person must do work that requires advanced knowledge, is predominantly intellectual in character, and includes exercising discretion and judgment. Their advanced knowledge must be in a field of science or learning, customarily acquired by a prolonged course of specialized intellectual instruction. Creative professionals must primarily do work that requires invention, imagination, originality or talent in a recognized field of artistic or creative endeavor.

The Supreme Court ruling shows the importance of applying the exemption criteria properly, experts say, as misclassifying someone as exempt can be costly in the long run.

"Employers should be careful not to paint outside the lines of the strict requirements of the wage and hour laws and regulations," Dalin said. "Even where an employer and its employees agree to a creative compensation arrangement, the employer can be subject to substantial back pay and liquidated damages liability if the arrangement does not comport with the law's strict requirements."

The ruling also puts employers in a weaker position, Dalin said.

"From a policy and fairness perspective, the [court] decision is somewhat disconcerting because the employee at issue was paid very well," he said. "The consequences of such a technical reading of the regulations will be greater liability for some employers even where they pay their employees generously."