Background

On February 22, 2023, the Supreme Court of the United States held that a “da[y] rate [oil rig] worker” was not exempt from the Fair Labor Standards Act’s (“FLSA”) overtime guarantees despite his status as a “highly compensated employee”. The Court reasoned that the employee’s compensation failed to satisfy the “salary basis test” and, therefore, entitled him to overtime pay.

Decision

In Helix Energy Solutions Group, Inc. v. Hewitt, the Supreme Court of the United States reviewed the holding of the Fifth Circuit Court of Appeals which heard the case en banc. That decision overturned the findings of the United States District Court for the Southern District of Texas which found Hewitt was not eligible for overtime pay because he was an executive paid on a salary basis. In reversing that opinion, the Fifth Circuit held that Hewitt was not paid   on a “ salary basis” because his compensation structure failed to satisfy the requirements of 29 C.F.R. § 541.604(b). The Fifth Circuit reasoned that while § 514.604(b) allows for the calculation of an exempt employee’s earnings “on an hourly, a daily or shift basis, without losing the exemption or violating the salary basis requirement”, such a calculation must include both: (1) “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 (2) “a reasonable relationship between the guaranteed amount and the amount actually earned”. Requiring both elements is already the accepted approach of the Sixth Circuit, Eighth Circuit, and the Labor Department irrespective of the employee’s highly compensated status. The Fifth Circuit opined that “Helix could have easily complied. . . by offering a minimum weekly guarantee of $4,000 based on Hewitt’s daily rate of $963”.

On review, the Supreme Court of the United States affirmed the holding of the Fifth Circuit and offered two ways for employers to retain the exemption without violating the salary basis requirement: (1) adding a weekly guarantee to Hewitt’s day rate that satisfies  the salary basis requirement of the FLSA; or (2) converting Hewitt’s compensation into a straight weekly salary for time he spends on the rig.

What are the practical implications for employers going forward?

Employers paying day rates should reevaluate their compensation structures by either: (1) adding weekly guarantees which satisfy the salary basis requirement of the FLSA; or (2) converting day rate workers to a weekly compensation salary structure. Employers who continue to utilize day rates without adding these defined protections risk wage and hour lawsuits for unpaid overtime.