In a 6-3 decision issued earlier this week, the U.S. Supreme Court upheld the U.S. Department of Labor’s long-standing requirement that an employee be paid on a “salary basis” in order to be exempt from overtime under the FLSA’s white collar overtime exemption for highly compensated employees. Since January 1, 2020, the exemption for highly compensated employees applies in cases where an employee makes at least $107,432 per year, including at least $684 per week on a salary or fee basis, and the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee as identified in DOL regulations.
In order to be exempt under the highly compensated employee exemption – and several other white collar overtime exemptions – DOL regulations require that an employee be paid on a “salary basis”, meaning that the employee must regularly receive “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.” In other words, in order to treat an employee as exempt from overtime, an employer cannot reduce that employee’s pay in weeks where the employee performs less work, or in weeks where the employee performs work poorly.
DOL regulations also allow an employer to calculate an exempt employee’s earnings on an hourly, daily or shift basis, without violating the salary basis requirement, if the arrangement “also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned”. The reasonable relationship requirement will be met if an employee’s weekly salary guarantee is roughly equivalent to the employee’s usual earnings at the applicable hourly, daily or shift rate for the employee’s normal scheduled workweek. For example, “an exempt employee guaranteed compensation of at least $725 for any week in which the employee performs any work, and who normally works four or five shifts each week, may be paid $210 per shift without violating the $684-per-week salary basis requirement.”
In Helix Energy Sols. Grp., Inc. v. Hewitt, No. 21-984, 2023 U.S. LEXIS 944, at *3 (Feb. 22, 2023), the Court ruled on the case filed by Hewitt, a toolpusher on an offshore oil rig who was paid on a daily-rate basis for a shift schedule that required him to work 12 hours per day, 7 days per week for 28 straight days, after which he would have 28 days off before reporting back to the rig. Hewitt was compensated on a daily-rate basis with no overtime compensation. If he only worked one day in a two week pay period, his paycheck would total $963; if he worked all fourteen days in a pay period, his paycheck would total $13,482. On an annual basis, Hewitt made over $200,000.
At trial, Hewitt conceded that his pay met the salary level and duties requirements of the exemption for highly compensated employees. The only issue at trial was whether Hewitt was paid on a salary basis. The District Court ruled in favor of the employer, but the Court of Appeals for the Fifth Circuit reversed, holding that Hewitt was not paid on a salary basis. On appeal, the Supreme Court affirmed the Fifth Circuit. The payment structure used by Hewitt’s employer – a daily rate which varied by as much as $12,000 depending on the number of days worked – did not constitute a salary basis and did not guarantee Hewitt a minimum weekly amount that bore a reasonable relationship to the amount actually earned. Because Hewitt’s compensation did not meet the requirements identified in the DOL regulations, he was entitled to overtime pay despite his high level of compensation.
The Supreme Court’s ruling highlights that regardless of an employee’s compensation level, employers should be careful to ensure that an employee’s duties, amount of compensation, and manner of compensation meet all DOL regulatory requirements before determining that an employee is exempt from overtime compensation under the FLSA. Employers should remember that state law may impose additional requirements for an employee to reach exempt status, in addition to those required under federal law.
If you have any questions about how this case, or whether your employees qualify as exempt from overtime pay, please call our office. Thank you.
This Client Alert provides a general overview of new legal developments. It is not intended to provide legal advice. If you have questions or would like more information about how these developments may affect your business, please contact us at (570) 341-8800.
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