iIn a recent en banc decision (meaning the case was heard before all the judges rather than a panel of three), the US Court of Appeals for the Fifth Circuit held that a tool pusher earning more than $200,000 a year was entitled to overtime because the day rate he was paid did not qualify as a “salary” under the Fair Labor Standards Act (FLSA). This decision highlights the importance of ensuring that employees classified as exempt from overtime meet all the requirements — including payment on a salary basis, if applicable — for the exemption(s) claimed. Regular review of pay practices (with modifications as needed) can avoid a costly mistake.
A Brief Primer on the FLSA
The FLSA mandates overtime for any employee who works more than 40 hours in a seven-day workweek. There are several exemptions to the FLSA’s overtime requirements, the details of which are set forth in regulations issued by the US Department of Labor. The most common exemptions are the “white collar” exemptions — executive, administrative, and professional; an employee who is properly classified under one of these exemptions is not entitled to overtime, regardless of the number of hours worked.
Each of the white collar exemptions has two components, both of which must be satisfied for the exemption to apply. The employee must (1) perform all the job duties required by the specific exemption (the “duties test”) and (2) be paid on a salary basis at least $684 a week (the “salary basis test”). If the employee is “highly compensated,” i.e., earns at least $107,432 annually, the employee need perform only one of the required job duties to be exempt, provided that the salary basis test is still satisfied.
To be considered paid on a salary basis, an employee must regularly receive a predetermined amount of compensation on “a weekly, or less frequent, basis,” which amount “cannot be reduced because of variations in the quality or quantity of the employee’s work.” Subject to a few specific exceptions, if the employee performs any work in a workweek, the employee must be paid the full salary for that week.
Perhaps recognizing that some different compensation schemes should be allowed without jeopardizing an employee’s exempt status, the Department of Labor regulations specifically permit an exempt employee to be paid on an hourly, daily, or shift basis “without losing the exemption or violating the salary basis requirement” if (1) the employee is guaranteed a minimum salary of at least $684 a week and (2) a “reasonable relationship” exists between the guaranteed amount and the amount the employee actually earns. Thus, an employee who satisfies the duties test can be paid a day rate and still be exempt from overtime provided these two criteria are met.
The Fifth Circuit Applies the Law as Written, Much to the Employer’s Dismay
Michael Hewitt worked for Helix Energy as a tool pusher for several years and was responsible for supervising a crew of other Helix employees. He worked offshore on 30-day hitches, was paid a day rate of $963, and regularly worked more than 40 hours a week. Helix classified Hewitt as exempt from overtime as a “highly compensated” “executive” employee on the basis that his duties were primarily supervisory in nature and because he regularly earned more than $200,000 a year. However, despite his high earnings, soon after he was terminated, Hewitt filed suit against Helix alleging that he had been improperly classified as exempt and should have been paid overtime.
The district court granted summary judgment in favor of Helix, dismissing Hewitt’s claims. Hewitt appealed, and in its original decision, the Fifth Circuit reversed, holding that although Hewitt was highly compensated, he did not satisfy the salary basis test as he was not paid a guaranteed weekly salary. Helix then sought en banc review, and on September 9, 2021, in a straightforward 12-to-6 decision, the full Fifth Circuit again ruled in favor of Hewitt, holding that under the undisputed facts of the case, the day rate that Hewitt was paid did not satisfy the salary basis test.
Despite Helix’s argument that Hewitt’s high rate of compensation alone should be sufficient, the Fifth Circuit relied on the plain language of the applicable regulation that dictates when a day rate can nevertheless qualify as a “salary” for purposes of the FLSA exemptions. Because it was undisputed that Hewitt was not guaranteed a minimum weekly amount of at least $684 and Helix did not even argue that it satisfied the reasonable relationship test, the Fifth Circuit reversed the summary judgment and remanded the case to the district court for further proceedings. Put another way, even though Hewitt’s rate for a single day’s work exceeded the minimum salary required to satisfy the exemptions, this did not pass muster because his pay depended on the quantity of work performed.
In doing so, and in response not only to the dissent but also to the numerous amici briefs that had been filed by industry interests, the court stated, “Our job is to follow the text — not to bend the text to avoid perceived negative consequences for the business community. That is not because industry concerns are unimportant. It is because those concerns belong in the political branches, not the courts.” Hewitt v. Helix Energy Solutions Group, Inc., 19-20023 (5th Cir. 9/9/2021).
A Wake-Up Call for Employers
This case highlights yet again the challenges that employers often face in complying with highly technical regulatory schemes like the FLSA. It is not sufficient just to classify employees as exempt and pay them well, as the consequences (even if unintentional) can be costly. Similarly, an employer cannot simply pay an employee a salary and classify him or her as exempt if the employee is not performing exempt duties. Under the FLSA, a prevailing employee can recover not only the amount of overtime owed but an equal amount in liquidated damages along with attorney’s fees. In addition, FLSA claims are often pursued on a collective basis (meaning that other current and former employees are notified of the case and can join in), which means that potential exposure for FLSA violations can be significant — and such exposure is almost always uninsured.
Employers should regularly audit their pay practices for all job classifications, focusing on (1) the duties that employees actually perform (rather than just on written job descriptions) and (2) how employees are being compensated. A proactive approach, with the assistance of counsel as needed, can avoid expensive problems down the road.
