Under the Fair Labor Standards Act (“FLSA”), the workforce is divided into two groups: (1) hourly, non-exempt employees, who are entitled to overtime compensation for any time worked in excess of forty hours per week; and (2) salaried, exempt employees who are not entitled to overtime compensation. In order to classify someone as a salaried exempt employee, that person must be paid on a “salary basis,” in addition to other criteria. The primary purpose of this classification system is to make sure that covered employees receive overtime pay when they work more than 40 hours a week. It is intended, arguably, to provide fair and just compensation to those employees who typically do not work in highly compensated positions.
Some employers, especially those in the energy sector, have implemented a day rate system whereby employees are guaranteed a fixed amount of pay for each day worked (rather than each week worked). In many cases, the day rate system results in employees receiving substantial compensation that far exceeds the weekly salary threshold required under the FLSA.[1]
That’s what happened in Helix Energy Solutions Group, Inc. v. Hewitt, 598 U.S. __, 2023, a decision that came out today. Mr. Hewitt worked on an oil rig and was paid a day rate that ranged from $963 to $1,341, which resulted in Helix paying him more than $200,000 per year. Obviously, Mr. Hewitt received more than the minimum weekly salary threshold, but the question that the Supreme Court addressed is whether paying an employee on a day rate can satisfy the weekly salary basis requirement under the FLSA. Helix argued that Mr. Hewitt’s compensation satisfied the goals of the FLSA because his compensation was never less than the weekly threshold set by the U.S. Department of Labor. Writing for a 6-3 majority, Justice Kagan rejected this argument: “A daily-rate worker’s weekly pay is always a function of how many days he has labored.” In other words, Mr. Hewitt’s weekly compensation was not predetermined on a weekly basis; his weekly compensation was subject to how many days he worked. Justice Kagan noted that Mr. Hewitt would not have been entitled to overtime had Helix simply chosen to guarantee Mr. Hewitt a weekly salary that satisfied the salary threshold, regardless of how many days he worked.
Helix argued that providing overtime to Mr. Hewitt would result in “windfalls” for high earners, and would be cost prohibitive because it would result in paying employees for time that they did not work. Unsurprisingly, the Court rejected these arguments: “Helix wishes neither to pay employee a true salary nor to pay them overtime. And the whole point of the salary-basis requirement is to take that third option off the table, even though doing so may well increase costs.”
There are several important takeaways from this decision. First, employers should carefully consider the legal consequences before implementing a pay structure that deviates from hourly or salary compensation. Second, the overtime provisions of the FLSA will apply regardless of how much the employee is paid if an employee is improperly treated as non-exempt. Third, perhaps we need to plan for retirement by encouraging our kids to become oil rig workers.
[1] The current minimum salary threshold is $684 per week, which equals $35,568 per year. Notably, the DOL sets the salary threshold on a weekly basis; not a yearly basis. The DOL is expected to announce an increase in the minimum salary threshold in 2023.