Labor & Employment Blog

Today, the United States Supreme Court affirmed the decision of the Fifth Circuit Court of Appeals in Hewitt v. Helix Energy Solutions Group, Inc., holding that an oil rig supervisor paid a day rate is entitled to overtime pay because a day rate is not a “salary” within the meaning of the federal wage law—the Fair Labor Standards Act (“FLSA”). The FLSA requires employers to pay employees overtime pay of at least 1.5 times the employee’s regular rate of pay for all hours worked over 40 hours in a workweek. However, certain employees are exempt from overtime. Companies frequently rely on the “highly compensated employee” exemption for supervisory workers. This exemption from the overtime pay requirement applies to employees who: (1) have a total annual compensation of at least $107,432, which must include at least $684 per week “paid on a salary or fee basis,” and (2) regularly and customarily perform at least one of the duties of an executive, administrative, or professional employee, as set forth in the FLSA.

The Hewitt case asked the Supreme Court to decide whether an employee compensated solely by a day rate is paid on a “salary basis” for purposes of the highly compensated employee exemption. A worker may be paid on a salary basis under either 29 CFR § 602(a) or § 604(b). An employee is paid on a salary basis under §602(a) only if the employee receive[s] the full salary for any week in which the employee performs any work without regard to the number of days or hours worked. Section 604(b) provides that an employee’s earnings may be computed on a daily, hourly or shift rate without violating the salary basis requirement so long as an employer also provides a guarantee of a minimum weekly payment approximating what the employee usually earns (the “reasonable relationship test”).

Under the FLSA regulations, a “reasonable relationship” exists if the weekly guarantee is “roughly equivalent” to the employee’s usual earnings at the assigned daily rate for the employee’s normal scheduled workweek. Although there is no precise measure, the U.S. Department of Labor has opined that a 1.5-to-1 ratio of actual earnings to guaranteed weekly salary is a “reasonable relationship,” but that a ratio of 1.8-to-1 would be impermissible. Helix conceded Hewitt was paid on a daily rate but argued that the “reasonable relationship” test does not apply to the highly compensated employee exemption.

The Supreme Court disagreed but, in doing so, clarified an often misunderstood application of the salary basis test. Employees had argued, many times successfully, that even if the employer paid an employee a salary that met the requirements of § 602(a), the employer was also required to satisfy the reasonable relationship test under § 604(b). Thus, these employees argued, employers who paid employees “extras” above their guaranteed salary could lose the exemption if the total compensation did not bear a reasonable relationship to the guaranteed salary. The Supreme Court squarely rejected this argument, holding that for highly compensated employees, a pay practice meeting §602(a) and the highly compensated employee rule’s other requirements does not also have to meet the reasonable relationship test of §604(b). As the Supreme Court explained, § 602(a) and § 604(b) “are independent routes for satisfying” the highly compensated employee exemption’s salary basis requirement.