Supreme Court Concludes Paying on a Daily Rate Cannot Meet the Salary Basis Test for Exempt Status
The United States Supreme Court recently decided a case particularly important to employers who pay employees a daily rate. In Helix Energy Solutions Group, Inc. v. Hewitt, the Court concluded that paying an employee a daily rate does not meet the salary basis requirement used to determine whether an employee is exempt from overtime under the federal Fair Labor Standards Act (FLSA). In order for employees to be exempt from overtime, they must meet both a duties test and be paid by a salary (commonly known as the salary basis test). Given the Court's decision, employees paid on a daily rate cannot be exempt, with very limited exceptions (doctors and lawyers).
Employers paying employees using a daily rate (common in the oil industry) should review their compensation practices in light of the Helix decision to determine if their pay structure meets the clarified salary basis test. If not, the employer may be liable for overtime, even if the employee's duties would otherwise qualify them as an exempt executive, administrative, or professional employee.
Michael Hewitt worked for Helix Energy Solutions as an offshore oil rig foreman, working a 4-week-on/4-week-off rotation. During his 28-day "hitches," Hewitt worked 12-hour days, 7-days per week, and Helix paid him a daily rate ranging from $963 to $1,341. Hewitt was not paid for the days he was off-shift and did not work. Through this compensation structure, Hewitt's annual income exceeded $200,000, and Helix classified him as a highly compensated employee, exempting him from overtime pay.
Hewitt brought suit in federal court alleging he was entitled to overtime under the FLSA because his daily rate did not comply with the salary basis test. Helix Energy argued that Hewitt's daily rate was on a salary basis because it exceeded the minimum weekly guarantee required under the regulation. The narrow issue before the United States Supreme Court was whether Hewitt's daily compensation satisfied the salary basis test.
The Supreme Court focused on the regulation that states an employee is paid on a salary basis if the employee receives a predetermined amount each week that cannot be changed based on the employee's quality or quantity of work. The Supreme Court stressed that the language embodies the meaning of a salary because, in its common application, a salary refers to a steady and predictable stream of pay, which was contrary to a daily rate. Under the FLSA regulation that permits payment on an hourly, daily, or shift basis, the employer must guarantee at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days, or shifts worked, and there must be a reasonable relationship between the guaranteed amount and the amount actually earned. The reasonable relationship test will only be met if the weekly guarantee is roughly equivalent to the employee's usual earnings for the employee's normal scheduled workweek. In this case, it was undisputed Helix Energy had not promised Hewitt any minimum amount of compensation. The Supreme Court's ruling was clear: a daily rate is not a salary. As a result, Hewitt's compensation did not meet the requirements to be exempt from overtime under an exemption that required he meet the salary basis test, even though his daily rate earned him over $200,000 annually.
This decision reminds employers that the duties test alone will, in most cases, not qualify an employee as exempt from overtime. Any employer relying upon a daily rate compensation structure should confirm (1) the pay structure for employees meets the requirements of the salary basis test; or (2) the employees' work hours do not trigger overtime requirements. Employers with questions about their pay practices should contact a Davis Wright Tremaine employment attorney for assistance.