On February 22, 2023, the United States Supreme Court in Helix Energy Solutions Group, Inc. v. Hewitt held that a highly compensated executive employee paid a guaranteed daily rate is not paid on a ‘salary basis’ and therefore, is a nonexempt employee entitled to overtime pay under the Fair Labor Standards Act (FLSA). The decision should alert employers to review their classification of employees as exempt versus nonexempt to ensure compliance with applicable federal and state requirements.
The Fair Labor Standards Act
While the FLSA requires that most employees be paid overtime for work time in excess of 40 hours, it exempts several categories of positions from that requirement. The most common exemptions from overtime are referred to as the “white-collar exemptions,” which include executive, administrative, professional, outside sales, IT professionals, and highly compensated executive positions.
Under the FLSA, two criteria must be met for most positions to qualify for a white-collar exemption: 1) payment on a salary basis of not less than $684 per week ($35,568 annually); and 2) satisfaction of a “primary duty test” specific to each type of exemption listed above. However, to qualify for the highly compensated employee exemption, the employee must be paid on a salary basis of not less than $107,432 and perform at least one of the primary duties of the other exempt positions described above. Proper classification of employees is critical, as failure to do so may expose employers to lawsuits seeking back pay due to unpaid overtime plus penalties.
The U.S. Supreme Court’s Holding
In Helix Energy, the former employee (Hewitt) claimed he was entitled to unpaid overtime because he was paid a guaranteed daily rate, not on a weekly salary basis, despite the fact that he earned over $200,000 a year. The employer (Helix Energy Solutions) countered that the employee met the requirements of the “highly compensated employee” exemption because he performed managerial functions that satisfied the primary duties test, was guaranteed at least $963 for each day worked, and his annual earnings exceeded the required minimum salary of $107,432.
In the 6–3 decision, the United States Supreme Court rejected the employer’s arguments and found in favor of the Hewitt. In reaching this conclusion, the high court focused on whether the employee was paid on a “salary basis” under the applicable regulations issued by the U.S. Department of Labor (DOL). The Court concluded that an employee paid exclusively with a day rate cannot satisfy the salary basis test, even if that day rate exceeds the required weekly salary level. Therefore, Hewitt could not be deemed exempt from the FLSA’s overtime requirements. Writing for the court, Justice Elena Kagan stated, even a “high-earning employee” who is compensated on a “daily rate – so that he receives a certain amount if he works one day in a week, twice as much for two days, three times as much for three, and so on” is “not paid on a salary basis, and thus entitled to overtime pay.”
Takeaway
The Helix Energy decision highlights the importance of the salary basis requirement contained in the DOL regulations. The Supreme Court’s holding could open the door to more misclassification claims from highly compensated employees seeking overtime pay under the FLSA. If you have questions about the proper classification of your employees, please contact any member of Lindabury’s Labor & Employment group.