Supreme Court Considers Whether “Highly Compensated” Employees Paid on a “Day Rate” Basis Are Overtime-Exempt Under FLSA
On October 12, 2022, the Supreme Court held oral argument to address the decision of the U.S. Court of Appeals for the Fifth Circuit in Hewitt v. Helix Energy Sols. Group, Inc., 15 F.4th 289 (5th Cir. 2021), cert. granted, No. 21-984 (U.S. May 2, 2022), and a corresponding split among the circuit courts of appeal regarding the application of Fair Labor Standards Act (FLSA) regulations for the “highly compensated employee” (HCE) exemption from overtime.
In Hewitt, the Fifth Circuit held that the employer’s day-rate pay structure did not satisfy the “salary basis” component of the “white collar” exemptions under the FLSA, even though the employee at issue unquestionably met the salary-level and duties requirements of the HCE variation of those exemptions. The Fifth Circuit further concluded that the employee did not meet a separate exemption requirement, namely, that there be a reasonable relationship between the employee’s total weekly pay and any weekly minimum salary he received.
In Hewitt, the plaintiff worked month-long hitches on an oil rig and was paid $963 for every day that he worked. He admittedly earned over $200,000 per year and supervised about a dozen other employees. On its face, this would satisfy the FLSA’s “highly compensated employee” (HCE) exemption from overtime, which requires a relaxed duties test and, at the time, annual compensation of at least $100,000 (now, $107,432).
However, the plaintiff argued that his “day rate” pay did not satisfy Department of Labor (DOL) regulations which, to satisfy the HCE exemption, require an employee’s pay to be calculated on a “salary basis,” generally defined as the regular receipt of a “predetermined” amount of pay “on a weekly, or less frequent basis,” the amount of which cannot be reduced due to “variations in the quality or quantity of work performed.” Further, the plaintiff relied on a DOL regulation indicating that an exempt employee’s guaranteed salary must bear a “reasonable relationship” to any additional pay received on a daily or hourly basis. He asserted that his “day rate” pay system was incompatible with these regulations.
In a sharply divided en banc proceeding, the Fifth Circuit concluded the plaintiff did not qualify for the HCE exemption because, even though his day rate pay was well above the $455 (now, $684) per week minimum salary required by the exemption, the pay structure failed to satisfy the regulatory requirement that an employee be paid a guaranteed weekly salary that complied with the “reasonable relationship” test found in Section 541.604(b) of the regulations.
In dicta, the Sixth and Eighth Circuit Courts of Appeal previously had reached the same conclusion regarding the exemption’s requirements. However, the First and Second Circuits previously had determined that the “reasonable relationship test” does not apply to highly compensated employees, at least for those paid a minimum guaranteed weekly salary. The Supreme Court granted certiorari to resolve these potentially conflicting interpretations of the regulations.
Supreme Court Oral Argument
During oral argument, questioning by the Justices appeared to demonstrate the convoluted nature of the salary basis regulations applicable to the executive, administrative, and professional (“EAP”) exemptions (also known as the “white collar” exemptions). This confusion becomes even more pronounced when dealing with the pay structures that have developed for highly compensated employees in the energy industry, such as the plaintiff in Hewitt.
During oral argument, several Justices pressed counsel appearing on behalf of the appellant-employer Helix Energy, on whether “salary” should be defined as a “stable” or “predictable” amount received each week. Appellant’s counsel asserted that the language of the regulations clearly specifies that the “salary basis” requirement simply establishes the minimum compensation that the employee must be paid each week; that the compensation does not vary based on the quantity or quality of work; and that an employee may receive more than that minimum and still be paid on a salary basis.
For example, he noted, Section 541.602 specifically provides that an employee is paid “on a salary basis” if the employee receives a predetermined amount that constitutes “all or part” of the employee’s compensation. The HCE exemption set forth in Section 541.601 specifically provides that the total compensation paid must only “include” $455, paid on a salary basis (the equivalent of about $24,000 annually), and thus the regulation appears to contemplate that the remainder of the $100,000 annual compensation requirement may be paid on a daily, hourly, or other basis. And importantly, appellant’s counsel argued, Section 541.601 is the most pertinent regulation because it specifically applies to the class of highly compensated employees such as the plaintiff. Consequently, appellant’s counsel argued, the separate “weekly, or less frequent” requirement of Section 541.602 and the “reasonable relationship” requirement of Section 541.604(b) should be inapplicable, irrespective of the day-rate structure of an employee’s pay.
Justices Kavanaugh and Gorsuch questioned whether the regulations are inconsistent with the statutory language of the FLSA, which does not address salary requirements at all, with Justice Kavanaugh even commenting that this would be a “strong argument.” However, both appellant’s counsel and the Justices acknowledged during the questioning that this argument was not squarely presented in the instant case.
Conversely, counsel for the plaintiff-appellee focused his oral argument on the common understanding of what it means to be a salaried employee and how the FLSA regulations purportedly capture that understanding. Because a “day rate” employee’s pay is calculated on a “daily basis,” and no set weekly amount of the compensation was guaranteed, such an employee can never meet the “salary basis” requirements of the regulations, he asserted.
It is unclear how the Court will resolve the dispute over regulatory interpretation, yet its decision is certain to affect the pay practices of many oil, gas, and utility companies, given the prevalence of day rates and hybrid salaried/hourly pay structures in the energy industry.
Further, the Justices’ inquiries regarding inconsistencies between the salary regulations and the statutory text of the EAP exemptions may spark a new wave of litigation challenging the validity of the salary requirements. Their inquiries may suggest a belief that the salary regulations are outside the scope of the DOL’s regulatory authority under the “major questions” doctrine, invoked by the Court earlier this year in overturning an Environmental Protection Act regulation. That doctrine provides that Congress cannot defer significant issues of national policy to an administrative agency unless there is a clear expression of such intent.
Since the Court’s recent application of the major questions doctrine, a lawsuit challenging the DOL’s recent Tipped Regulations Final Rule has cited it as a basis for overturning the regulations. Thus, it is not inconceivable that the doctrine ultimately may come into play with respect to any or all of the salary regulations applicable to the EAP exemptions. Furthermore, when a federal district court enjoined, and ultimately invalidated, the DOL’s 2016 overtime final rule establishing a significant increase in the salary threshold for the “white collar” exemptions, that court relied on the plain language of the statute and the Chevron doctrine to conclude that “Congress intended the EAP exemption to depend on an employee’s duties rather than an employee’s salary.” Nevada v. DOL, 218 F. Supp. 3d 520, 530 (E.D. Tex. 2016); Nevada v. DOL, 275 F. Supp. 3d 795 (E.D. Tex. 2017) (invalidating the 2016 overtime final rule). Although the DOL changed course by implementing new salary requirement regulations in 2020, only time will tell whether new challenges to the validity of the salary regulations, inspired by the Justices’ comments, will gain traction in the courts.