In September of 2021, the Fifth Circuit—the federal appeals court for district courts in Texas, Louisiana, and Mississippi—reversed a summary judgment order granted to Helix Energy Solutions Group related to the necessity of overtime payments for a highly compensated employee who was paid a daily rate. Despite the fact that the employee earned over $200,000 per year, the Fifth Circuit overturned the district court’s order granting judgment to Helix, his employer. The U.S. Supreme Court agreed to hear the case, and oral arguments took place in October. While no opinion has yet been rendered, the reported questioning by the justices has raised questions as to whether new challenges will be brought to the regulatory scheme governing overtime for highly compensated individuals.

Employee paid day rate – not salary – seeks overtime pay

The underlying action was brought by the plaintiff-employee seeking overtime pay for weeks in which he worked over 40 hours. The employee worked as a tool pusher, managing other employees while on a “hitch” offshore on an oil rig. Each such hitch lasted about one month. There was no dispute between the parties that during each hitch the employee worked more than 40 hours per week. The issue decided by the Fifth Circuit, and currently being examined by the U.S. Supreme Court, was whether the employee was paid on a salary basis.

As the Fifth Circuit pointed out, there is no exemption from the FLSA’s overtime requirements simply for being well paid. Instead, employees—even highly compensated employees—must satisfy specific regulatory tests. Some of the most common exemptions, including the “white collar exemptions” (administrative, executive, and professional) and the highly compensated exemption, require the employer to satisfy the “salary basis” test. This means that an employee must not only receive at least the amount of weekly compensation (currently $684), but also, must receive it in a manner that comports with the U.S. Department of Labor’s regulations. A salary is defined by the FLSA as compensation paid “on a weekly, or less frequent basis,” “without regard to the number of days or hours worked.”

Employer argues “de facto salary” qualifies for FLSA overtime exemption

The plaintiff-employee was paid a day rate of $963, which was well over the weekly salary amount required at the time ($455 per week). While the defendant-employer admitted that the employee was paid a day rate and not a traditional salary, it argued that, since the day rate exceeded the weekly salary amount requirement, it was, in effect, a qualifying salary. In other words, because a salary only needs to be paid if some work is completed and the employee received at least one day’s day rate amount of compensation if any work was completed in a week, the day rate should act as a de facto salary.

The Fifth Circuit disagreed. Relying heavily on the text of the regulations and opinions from other federal courts, the Fifth Circuit held that a salary must compensate an employee on a weekly, or less frequent, basis. Consequently, it overturned the district court’s judgment in favor of the employee and remanded the case back down for adjudication. However, the defendant-employer appealed the Fifth Circuit’s opinion, and in October, the U.S. Supreme Court heard oral argument on the issue.

Questioning by SCOTUS justices may spur future legal challenges

Reportedly, the justices’ questions indicated a potential split on whether a day rate could qualify as a salary. However, perhaps more intriguingly, several justices expressed some doubt that the regulatory text was consistent with the FLSA’s statutory language. In other words, some justices appeared to invite a challenge to the enforceability of the FLSA’s regulations. While that particular issue was not in front of the court in this case, it should be expected that such questions will spur challenges putting that exact issue squarely before the courts. Certainly, this is an area of law on which to keep an eye in the future.

While not dispositive in the case discussed above, it is important to note that there is an FLSA regulation that in some ways permits day rate employees to still qualify for exemptions that generally require a salary basis:

An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes 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 a reasonable relationship exists between the guaranteed amount and the amount actually earned.

— 29 C.F.R. 541.604(b) (emphasis added)

Under this regulation, a day-rate employee must still earn a salary and that salary must be reasonably related—i.e., close in amount—to the compensation actually earned during the workweek. If those two conditions are met, the employer can pay additional sums on a day-rate basis and not lose its exemption, assuming all other elements of the exemption, including the duties test, are met.

While the U.S. Supreme Court’s questions portend potential shifts in the regulatory landscape, for now, employers should be mindful of the current case law and regulations related to highly compensated day-rate employees.

• Hewitt v. Helix Energy Sols. Grp., Inc., 15 F.4th 289, 290 (5th Cir. 2021), cert. granted, 212 L. Ed. 2d 762, 142 S. Ct. 2674 (2022)