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U.S. Supreme Court Considers Salary Basis Applied to Daily Rate Worker Under FLSA Executive Exemption

October 17, 2022

The High Court Justices heard arguments on whether, under the Fair Labor Standards Act (FLSA), a supervisor making more than $200,000 per year, but paid by the day, is entitled to overtime pay. The answer depends on whether the “standalone” regulatory exemption set forth in 29 C.F.R. §541.601 remains subject to the detailed requirements of 29 C.F.R. §541.604 when determining whether highly compensated supervisors are exempt from the FLSA’s overtime-pay requirements. The employer turned to the Supreme Court after the a federal appellate court determined that the employee was entitled to overtime. Much of the contention revolves around whether the employee was paid on a “salary basis” and exactly what that term means. Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis.

At oral arguments, whether the amount of the employee’s annual salary and the concession that he performed executive duties was enough to render him an “executive” exempt from FLSA overtime-pay requirements was central to much of the discussion. But the fact that he was paid by the day, remained a sticking point in the analysis as both sides parsed through the meaning of specific language in Sections 541.601 and 604. There were also suggestions that workers would get a windfall if the employee won, and that the employer could avoid these problems by structuring pay differently or petitioning for an exemption from the salary basis allowing daily rate pay.

Not exempt from overtime compensation.Below, in Hewitt v. Helix Energy Solutions Group, Inc.(No. 21-984), the en banc Fifth Circuit reversed a grant of summary judgment in favor of the oil and gas industry employer, which had argued that the employee, who was paid on a daily rate, was exempt from overtime compensation as a highly compensated executive employee. A daily-rate worker can be exempt from overtime pay but only “if” two conditions are met: the minimum weekly guarantee and the reasonable relationship conditions. Here, the employer did not offer a minimum weekly required amount paid “regardless of the number of hours, days or shifts worked,” the appeals court found. The employer also did not comply with the reasonable-relationship test. As a result, the employer failed to show that the employee was paid on a salary basis, according to the Fifth Circuit.

“Highly compensated” exemption.The employer contends that the employee is a highly skilled supervisor who earned over $200,000 annually while managing operations and supervising employees on the company’s offshore well-intervention vessels. “He emphatically is not, and does not claim to be, the type of blue-collar laborer whom the FLSA’s overtime provisions were designed to protect,” according to the employer. The FLSA exempts from overtime-pay requirements anyone “employed in a bona fide executive, administrative, or professional capacity,” which the Secretary of Labor has interpreted to include employees who earn at least $100,000 per year, considered “highly compensated employees,” whose total compensation includes at least $455 per week paid on a “salary basis,” and who perform any of several enumerated supervisory executive duties. Such employees are deemed exempt from the FLSA Act’s overtime requirements.

In this case, the employee “falls squarely within” the highly compensated employee exemption because he concedes that he performed executive duties, he earned at least $100,000 per year, and received at least $455 in every week in which he performed any work without regard to how many hours he actually worked, the employer argues.

All about the salary-basis test.This case is about the salary-basis test, according to the employee. The requirement that executives be paid “on a salary basis” reaches back 80 years. The Secretary of Labor has reaffirmed that executives are “nearly universally paid on a salary basis” and that a salary is a “hallmark of exempt status” and an important indicator of the status, prestige, and autonomy that such positions entail. As set forth in the regulations, and consistent with the common understanding of a salary, payment by the hour, day, or shift is not payment “on a salary basis,” the employee contends.

As the Fifth Circuit held, the employer failed to pay the employee on “on a salary basis,” instead paying him by the day for “hitches” he worked as a tool pusher on an offshore oil rig where he alternated 12-hour shifts with another tool pusher for 28 consecutive days per hitch, the employee argues. “As a day-rate employee, his compensation did not meet the general rule because he was paid ‘with’—not ‘without’—‘regard to’ the amount of days he worked and because he did not receive an amount that was ‘predetermined’ for any week.” Because there is no dispute that the employer did not satisfy the requirements in 29 C.F.R.§ 541.604(b) for employers who wish to pay their employees by the hour, day, or shift, the employee was not exempt, and the employer owed him overtime pay, according to the employee’s brief.

“Highly compensated” wage earner?Arguing before the High Court for the employer, Paul D. Clement of Kirkland & Ellis, faced an early question from Justice Thomas, that framed an important part of the debate, arguably the threshold question, whether the employee is compensated on a salary basis. “[W]hy don't we just consider your highly paid [employee] here to simply be a wage earner but a highly paid wage earner?”

Clement said that Section 601 does not require a worker to be a salaried worker or to be generally or mostly paid on a salary basis. “It's very specific. It says the total annual compensation has to include at least $455 a week on a fee or salary basis,” the attorney said. So, then you are required to look at Section 602 and figure out how much you get on a salary basis. Section 602 does not tell you whether you’re mostly a salaried worker or a salaried worker in the abstract but is very specific. “And the test is really, what is the amount that you receive in any week in which you work at least one minute?” Clement said. Here, that was $963 or more, and that $963 was a guarantee, meaning that if the employee worked even a minute in a week, he would get $963. Clement called that “a predetermined amount” satisfying “the only requirement vis-a-vis a salary basis in Section 601, which is that your total annual compensation include at least $455 on a fee or salary basis.”

What about predictability and regularity of payment?Justice Jackson questioned why Clement was arguing that the amount is the only relevant marker of Section 601’s applicability. She read that regulation to say that the person’s total annual compensation must include at least $455 per week paid on a salary or fee basis, and then there is a separate regulation, Section 602, which Clement conceded to apply. The attorney had stated that that 601 incorporated 602’s salary basis test.

Clement acknowledged that Justice Jackson was right. “And so salary basis, I think, then becomes the question,” the Justice continued. What it means to be on a salary basis under Section 602 is not just some sort of minimum level of compensation—the $455 doesn’t even appear in that section, Justice Jackson noted. “In fact, when it talks about what it means to be paid on a salary basis, it appears to be looking at the predictability and the regularity of the payment, not the amount.”

Clement countered that Section 601 tells you that you’re not looking for whether the employee gets most of his compensation on a salaried basis or the lion's share of his or her compensation on a salaried basis. Instead, it’s asking single question—does the total annual compensation include at least $455 on a salaried basis? “The regulation doesn’t ask for stability above that,” he argued.

Changing the pay structure, “massive windfalls.”Justice Alito, acknowledging that the pay structure of employees who work out on oil rigs is different, inquired whether the employer could just change the pay structure to avoid the problem in this case as the government contends.

After taking apart the government’s alternative option to change the pay structure, Clement said, “nothing we can do prospectively to change things is going to avoid massive, massive windfalls.”

Employer can’t meet Section 601 and 602 requirements.Edwin Sullivan of Oberti Sullivan LLP, arguing for the employee, said that for more than 40 years, the FLSA has made two things clear: (1) a bona fide executive must be paid on a salaried basis; and (2) a pure daily rate employee is not paid on a salaried basis. The highly compensated employee regulation requires payment on a salaried basis, and there are only two ways to get there under the regulatory scheme. The first is rule 602, the general rule, and the second is a special rule for workers who are paid on an hourly, daily or shift basis.

Here, the employer can’t get there under the general rule because there has to be an amount earned—a predetermined amount that is fixed on a basis in time, and it is under the regulation, a weekly or less frequent basis, Sullivan told the Justices. The employee was paid on a daily basis. Daily basis is more frequent than weekly basis. Rule 602 goes on to say that the full salary has to be paid without regard to the days worked, the attorney noted. Here, the employee was paid with regard to the days worked.

The special rule under Section 604(b) is for hourly, daily, or shift employees, but the employer concedes they it cannot satisfy that section, Sullivan argued. “They disclaim that they should even be of use to this section, which was made to help employers,” Sullivan said. “That concession is telling because it’s meant to avoid sham salaries.”

“Visual problem.”Justice Thomas characterized what he saw as problematic for the employee: “The difficulty is just, for the average person, looking at it, when someone makes over $200,000 a year, they normally think of that as an indication that it’s a salary.” He called the problem “visual.”

Industry exemption.Justice Jackson pointed to other existing exemptions, for example, people in the movie industry, who make very high hourly rates compared to people who would otherwise be an EAP (executive, administrative, professional). She queried why that carveout would be necessary if the employer’s argument here is right?

Anthony Yang, Assistant to the Solicitor General, Department of Justice, arguing as amicus curiae in support of the employee, answered by explaining that the movie industry petitioned for a rulemaking, saying that in their industry, there is no good way to actually pay a salary. “They got an exemption for salary basis allowing daily rate pay,” Yang said, agreeing that this would be unnecessary if the employer here was right about Section 602(a).

For another day.The issue of whether the regulations were consistent with the statute was raised but not before the Court here. Perhaps putting some handwriting on the wall, Justice Kavanaugh said: “[Y]ou obviously have a strong argument that the regs are inconsistent with the statute but say it’s not—that precise question is not before us.”

Asking whether this question is being litigated, Clement stated he wasn’t sure. Said Justice Kavanaugh in response: “Why is—why is that not being litigated somewhere, I guess? Because my understanding is that there’s a lot of litigation going on about this topic. And it seems a pretty easy argument to say, oh, by the way, or maybe, oh, let’s start with the fact that the regs are inconsistent with the statute and the regs are, therefore, just invalid across the board to the extent they refer to salary.”