The U.S. Court of Appeals for the Fifth Circuit recently handed down a decision that sent shockwaves through the energy industry and a clear message to employers that — to the surprise of many — paying an employee a six figure wage does not necessarily exempt them from earning overtime.
The court’s opinion in Hewitt v. Helix Energy Solutions Group, Inc. hinged on its interpretation of what it means to be paid on a “salary basis” under the Fair Labor Standards Act (FLSA). Generally, to qualify for the executive, administrative, professional, and/or highly compensated employee exemptions from the FLSA’s overtime requirements, the employee must satisfy three conditions: (1) performance of the particular type(s) of duties necessary to qualify them as an executive, administrative, or professional employee; (2) receipt of certain minimum income thresholds; and (3) compensation on a “salary basis.” Although the specific duties and income thresholds vary from exemption to exemption, the regulations apply the same salary-basis requirements to all four exemptions.
In Hewitt, the employee in question worked as a tool pusher on an offshore oil rig where he managed other employees and was compensated at “well over $200,000 each year.” However, like many energy workers, the employee’s compensation was computed on a daily basis rather than a weekly, monthly, or annual basis. The court observed that while employees whose compensation is calculated as a function of a daily rate may still be regarded as being paid on a “salary basis” for overtime exemption purposes, there are special conditions that must be met. Specifically, 29 C.F.R. § 541.604(b) requires that: (1) the employee be guaranteed at least the minimum weekly required amount to be paid on a salary basis ($455 at the time, $684 under current regulations) regardless of the number of hours, days, or shifts worked (the “minimum weekly guarantee” condition), and (2) a reasonable relationship must exist between the guaranteed amount and the amount actually earned (the “reasonable relationship” condition).
Citing precedent from the First and Second U.S. Courts of Appeals, the employer reasoned that since the employee in question was paid a minimum of his daily rate (i.e. $963) for any week where he performed any — even a single second — of work he was “guaranteed” the requisite minimal compensation regardless of the number of hours, days, or shifts worked. The court rejected this, finding that guaranteed payment of a daily rate could not satisfy the weekly guarantee condition because “a daily rate, by definition, is paid with regard to — and not ‘regardless of’ — ‘the number of … days … worked,’” and because the employee was paid “orders of magnitude” greater than the theoretical minimum weekly amount guaranteed, which violated the reasonable relationship condition.
Pointing to an example provided in the regulations, the court observed that, “Helix could have easily complied … by offering a minimum weekly guarantee of $4,000 based on Hewitt's daily rate of $963.  It has not done so. Under the plain text of § 541.604(b), that is all that matters.”
In reaching this ruling the Fifth Circuit joins the Sixth and Eighth Circuits, as well as the U.S. Department of Labor, in applying a textualist approach, rejecting the practical arguments advanced by employers and industry advocates in support of recognizing that highly compensated employees should be considered as exempt, notwithstanding § 541.604(b). Regardless of the interpretive approach, the court’s ruling makes clear that employers who compute worker pay as a daily rate must strictly comply with all aspects of § 541.604(b) in order to avail themselves of the FLSA’s overtime exemptions.
A copy of the court’s opinion can be accessed here.