SCOTUS Holds Highly Compensated Employees Must Be Paid on a Salary Basis

On February 22, 2023, the United States Supreme Court held that certain highly compensated employees are entitled to overtime under the Fair Labor Standards Act (“FLSA”) if they are not paid on a salary basis.

In Helix Energy Solutions Group, Inc. et al. v. Hewitt, 598 U.S. __ (2023), an oil rig supervisor earning over $200,000.00 per year sued for overtime as he was not paid a weekly rate, but rather a daily rate. Helix argued that Hewitt was a highly compensated exempt executive employee.

By way of background, under the Fair Labor Standards Act (FLSA), employers are required to pay their employees a minimum wage and overtime pay for hours worked in excess of 40 hours per week unless the employee is exempt from these requirements.

Under the FLSA, an employee is considered a bona fide executive excluded from the FLSA’s protections if the employee meets three tests: (1) the salary basis test, which requires that the employee receive a predetermined and fixed salary that does not vary with the amount of time worked; (2) the “salary level” test, which requires the preset salary to exceed a specified amount; and (3) the job “duties” test, which considers whether the employee has responsibility for managing the enterprise, directing other employees, and hiring and firing other employees.

In the underlying litigation, the dispute centered around whether Hewitt met the requirements under the Department of Labor regulations for being paid on a salary basis. The plaintiff filed a lawsuit in federal district court in Texas, alleging he was misclassified as exempt and was therefore entitled to overtime. The district court disagreed with the plaintiff, holding that because he received at least $936 in any week that he performed work for his employer—i.e., more than the $455 per week required to meet the minimum requirement for the salary basis test—he was properly classified as exempt.

The plaintiff then appealed this ruling to the Fifth Circuit. The Fifth Circuit agreed with the plaintiff, reasoning that the salary basis test requires an employee to be paid the same amount of salary on a weekly basis or less frequently, irrespective of the days worked in the particular workweek. Because the plaintiff’s pay varied by the number of days he worked in a workweek, the Fifth Circuit concluded it did not meet the regulatory definition of a “salary” for purposes of the white-collar exemptions under the FLSA. The employer appealed the Fifth Circuit’s ruling to the United States Supreme Court. It was undisputed that Hewitt satisfied (2) and (3); at issue was whether he was paid on a salary basis.

In Justice Kagan’s majority opinion, the Supreme Court held:

• (1) To qualify as an exempt highly compensated employee or an exempt executive employee, the salary basis requirement must be met;
• (2) A traditional “salary basis” compensation structure as defined in 29 C.F.R. § 541.602(a) is met only when the worker is guaranteed the minimum required amount ($684.00) on a weekly basis; and
• (3) Daily-rate employees can satisfy this salary basis test, but only if the requirements of § 541.604(b) are met. Specifically, the employee’s wages include a guaranteed minimum amount they receive “regardless of the number of…days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.”

Implications for Employers

The Helix Energy Solutions Group, Inc. v. Hewitt decision provides important guidance for employers who have Highly Compensated Employees who are paid on a daily basis. To qualify for the Highly Compensated Employee exemption, these employees must now be paid at least $684 per week on a salary or fee basis, regardless of their daily pay rate.

Employers who do not comply with this requirement may face liability for unpaid overtime wages and other damages. On the other hand, Highly Compensated Employees who are paid on a daily basis and do not receive at least the minimum weekly salary amount on a salary or fee basis may be entitled to overtime pay.

In conclusion, the Helix Energy Solutions Group, Inc. v. Hewitt decision clarifies the “salary basis” test for Highly Compensated Employees paid on a daily basis and emphasizes the importance of complying with FLSA requirements. Employers who have questions about how to classify their employees should consult with the employment law team at Warren Law Group to ensure compliance with the FLSA and other applicable wage and hour laws.