Overtime Exemption Fails Due To Daily-Rate Pay

The U.S. Supreme Court recently issued an interesting decision on overtime exemptions under the Fair Labor Standards Act (FLSA), holding that an employee making $200,000.00 per year was not exempt and was instead entitled to overtime. The Court’s decision is particularly important to employers relying on overtime exemptions for employees paid by the day, hour, or shift. 

In Helix Energy Solutions Group, Inc. v. Hewitt, the employee worked on an offshore oil rig, overseeing operations and supervising other employees. He was paid on a daily-rate basis and was not paid for overtime. He typically worked 84 hours a week while on the vessel and earned over $200,000.00 a year. His employer argued that he was exempt from overtime under the FLSA’s highly compensated employee exemption.

The FLSA’s overtime exemptions require the employer to meet a salary basis test, a salary level test, and a duties test. The issue in Helix Energy was whether the employer could meet the salary basis test for an employee paid on a daily-rate basis. The salary basis test requires the employee to receive a predetermined and fixed salary each pay period that “is not subject to reduction because of variations in the quality or quantity of the work performed.”   

Giving great deference to the regulations interpreting the FLSA, the Supreme Court decided that the employee was not exempt from overtime.  It explained that daily-rate workers can meet the salary basis test only if they satisfy the requirements of 29 C.F.R. § 541.604(b). This regulation states that an employer may base an employee’s pay on an hourly, daily, or shift rate without “violating the salary basis requirement” if the employee receives 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.” “The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.” Under the Court’s analysis, the employer could not satisfy this requirement and therefore could not satisfy the salary basis test for this employee, despite his high income.

Three Justices disagreed with this decision, and Justice Kavanaugh questioned whether the FLSA regulation relied upon by the Court is actually consistent with the FLSA (which does not require a salary basis test). Nevertheless, this decision is a good reminder of the importance of meeting the salary basis test, even for highly compensated employees. Moreover, employers who consider employees exempt from overtime but use a daily, hourly or shift rate of pay may need to adjust their pay practices.

If you have questions about this case or would like assistance with evaluating your overtime exemptions, please contact a KZA attorney. 

KZA Employer Report articles are for general information only; they are not intended and should not be construed to be legal advice. Reading or replying to such articles does not establish an attorney-client relationship. In addition, because the subject matters and applicable laws discussed in Employer Report articles are often in a state of change and not always applicable to every type of business entity or organization, readers should consult with counsel before making decisions based on the same.