Supreme Court Holds that Employers Could Not Rely on the Highly Compensated Employee Overtime Exemption For an Employee Paid According to a Daily Rate.

The Decision’s Impact on Employers 
Last week, in Helix Energy Sols. Grp., Inc. v. Hewitt, the United States Supreme Court held that a purported Highly Compensated Executive (“HCE”)[1] remained overtime-eligible under the Fair Labor Standards Act (“FLSA”) because he was not paid on a salary basis, as required by the regulations. Instead, Helix paid him based on a daily rate using a formulation that did not satisfy the salary basis test under review or the alternative test. This ruling may subject employers using similar compensation approaches to liability for unpaid overtime premiums, liquidated damages, and attorney’s fees. It is a stark reminder of the need to perform a careful, in-depth analysis before applying the white-collar overtime exceptions.

Hewitt’s Factual Background
In Hewitt, an oil rig supervisor who earned more than $200,000 annually sued his former employer, Helix Energy Solutions Group, seeking overtime pay under the FLSA. Under the FLSA’s general rule, an employer must pay overtime for time worked over 40 hours during a single work week. There are several exemptions from the overtime pay requirement, including one for HCEs. Hewitt typically worked 84 hours a week. Although he did not receive overtime pay, he earned at least $963 daily. Using this approach, Hewitt could earn between $963 and $13,482 per two-week pay period, depending on the number of days worked. Pointing to the daily pay rate amount, Helix argued that it did not have to pay overtime since the daily rate was far more than the $455 minimum weekly salary level needed to claim the exemption.[1]  
 
The Court Held that Helix’s Payment Approach Did Not Satisfy the Primary Salary Basis Test
Writing for the majority, Justice Kagan analyzed Helix’s argument it satisfied the salary basis test by paying a daily rate above the minimum required weekly salary basis test in 29 C.F.R. § 541.602(a). To qualify for the HCE exemption, the employer must establish that it pays the employee on a salary basis. Under this salary basis test, the employer must show:

• “The employee regularly receives compensation 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.”[2]
  
  

The Court rejected Helix’s argument in part because the $963 was not a predetermined weekly salary. Interpreting the regulatory language, the Court found that the standard meaning of a “salary” requires a weekly or less frequent steady and predictable stream of pay. Because Helix paid Hewitt a daily rate, it could not properly classify Hewitt as an HCE under the salary basis test in § 602(a). This test “applies solely to employees paid by the week (or longer); it is not met when an employer pays an employee by the day, as Helix paid Hewitt.”

Thus, even though Helix paid Hewitt more than $200,000 annually, he was entitled to overtime pay. Any other result, according to the majority, would allow employers to avoid paying a true salary and avoid paying overtime, which is the exact result the salary basis test was designed to avoid.

The Alternate Salary Basis Test                 
The Court also discussed an alternative salary basis test available when the employer compensates an employee using a daily rate. “Daily-rate workers, of whatever income level, are paid on a salary basis solely through the test set out in 29 C.F.R. § 604 (b). This is the appropriate test when compensation is “computed on an hourly, a daily or a shift basis,” rather than a weekly or less frequent one. To satisfy this alternative test, the employer must show:

• “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.”
  
  

Although Helix conceded it did not satisfy this test, Helix further argued that it did not apply to HCEs. The Court rejected this argument, finding it lacked textual support.
 
 
More Changes May Be On the Horizon
In his dissent, Justice Kavanaugh, joined by Justice Alito, viewed the majority’s conclusions as based on the “head-scratching assertion that Hewitt was somehow not guaranteed to receive $455 for any week that he worked even though (as all agree) he was in fact guaranteed to receive $963 for any day that he worked.”
Perhaps more important, Justice Kavanaugh discussed whether the Department of Labor had exceeded its authority in issuing the salary basis test regulations. Under the language of the FLSA, he noted, the availability of the exemption hinges on the employee’s job duties, and there is no mention of how (e.g., under a daily rate or on a salary basis) the employee is paid. Thus, he questioned whether the regulations “will survive if and when the regulations are challenged as inconsistent with the Act.”
 
Steps to Take Now 

• Evaluate your organization’s compensation structure to ensure that all employees classified as HCEs are compensated on a salary basis using one of the two methods described in the regulations. We highly recommend that employers work closely with their internal or external counsel when making these determinations.
• Consider the implications of an expansive reading of Hewitt. Although Hewitt involved the HCE exemption, the salary basis test also applies to the executive, administrative, and professional exemptions.[3] Thus, courts may apply Hewitt to these exemptions.
• Examine whether your organization should modify its commission and bonus structures as part of its strategy to meet compensation objectives in a way that complies with the Court’s decision.

 
If you have any questions or would like additional information, please reach out to the L&B attorney with whom you normally work.


[1] In Hewitt, the Court applied the 2015 version of the Secretary of Labor's regulations, which were in effect during the period in dispute. The threshold annual salary amount for HCEs under the prior version of the regulations was $100,000. The threshold was increased to $107,432 in 2020. 29 C.F.R. § 541.601(a)(1); 84 Fed. Reg. 51307 (Sept. 27, 2019).

[2] Again, the Court relies on the amount in the 2015 regulation in force while Hewitt worked for Helix. In 2020, the minimum weekly salary was raised to $684. 29 C.F.R. § 541.600(a) (2020); 29 C.F.R. § 541.601(b)(1); 84 Fed. Reg. 51306 (Sept. 27, 2019).

[3] 29 C.F.R. § 541.602(a).
 
[4] 29 C.F.R. § 541.100(a)(1); 29 C.F.R. § 541.200(a)(1); 29 C.F.R. § 541.300(a)(1); 29 C.F.R. § 541.600(a).