Wednesday, February 22, 2023: U.S. Supreme Court Held FLSA’s Overtime Exemption Does Not Apply to Highly Paid, Daily-Rate Worker
Employer Ignored “Salary-Basis” test
A highly-paid, daily-rate oil rig worker was not an “executive” employee exempt from the Fair Labor Standards Act’s (“FLSA”) overtime pay guarantee because he was not paid on a “salary basis,” the U.S. Supreme Court held in a 6-3 ruling. Daily-rate workers, of whatever income level, qualify as paid on a salary basis only if the conditions set out in the regulations at 29 C.F. R. §541.604(b) are met, the Court ruled. Justice Elena Kagan wrote the majority opinion in Hewitt v. Helix Energy Solutions Group, Inc. (Dkt. No. 21–984), which was joined by Chief Justice John Roberts and Associate Justices Clarence Thomas, Sonia Sotomayor, Amy Coney Barret, and Ketanji Brown Jackson. Under the U.S. Department of Labor’s Wage and Hour Division’s (“WHD”) regulations implementing the FLSA, highly-compensated employees (HCEs) may be exempt from overtime under the FLSA depending upon the type of duties the employee performs.
How We Got Here
The employee typically worked 84 hours a week on an off-shore oil rig. His employer paid him on a daily-rate basis, with no overtime compensation. Accordingly, his compensation consisted of his daily rate times the number of days he had worked in a given two-week pay period. The employer argued that because he earned over $200,000 annually, the employee was exempt from the FLSA because he qualified as “a bona fide executive” under the FLSA at 29 U. S. C. §213(a)(1). Under the applicable WHD regulations, an employee is considered a bona fide executive if the employee meets three distinct tests: (1) the “salary basis” test, which requires that an employee receive a predetermined and fixed salary that does not vary with the amount of time worked; (2) the “salary level” test, which requires that the preset salary exceeds a specified amount; and (3) the job “duties” test.
Two Exemption Rules Implement “Bona Fide Executive” Standard
The Secretary of Labor has implemented the bona fide executive standard through two separate and slightly different rules, Justice Kagan explained in the 20-page majority opinion (See 29 C.F.R. §541). First, the “general rule” – at 29 C.F. R. §541.602(a) – considers employees to be “executives” when they are “[c]ompensated on a salary basis” (salary-basis test); “at a rate of not less than $455 per week” (salary-level test); and carry out three listed responsibilities – managing the enterprise, directing other employees, and exercising power to hire and fire (duties test).
Second, a different rule – at 29 C.F. R. §541.604(b) – addresses HCEs who make at least $107,432 or more per year ($100,000 per year prior to January 1, 2020). The HCE rule relaxes only the duties test, while restating the other two (“salary-basis” and “salary-level”). Whether the employee in this case was an “executive” exempt from the FLSA’s overtime pay guarantee turned solely on whether he was paid on a salary basis, Kagan explained.
Lower Court Rulings Differed
The federal district court for the Southern District of Texas agreed with the employer that the employee was compensated on a salary basis. But, the full Court of Appeals for the Fifth Circuit reversed, deciding that he was not paid on a salary basis, and accordingly, could claim the FLSA’s protections.
Majority opinion
The critical question was whether the employee was paid on a salary basis under 29 C.F. R. §541.602(a), the majority opinion explained. While a worker may be paid on a salary basis under either §602(a) or §604(b), the employer acknowledged that the employee’s compensation did not satisfy §604(b)’s conditions. Thus, the court turned to the text of 602(a), which excludes daily-rate workers, the majority stated.
The role of §604(b) confirms the Court’s reading of §602(a), Justice Kagan further noted. The analysis under §604(b) (for a compensation scheme to meet the salary basis test) is all about daily, hourly, or shift rates. Reading §602(a) to also cover daily- and hourly-rate employees would subvert §604(b)’s strict conditions on when their pay counts as a “salary.” By contrast, when read as limited to weekly-rate employees, §602(a) works in tandem with §604(b), with §604(b) taking over where §602(a) leaves off. Thus, the two rules do operate independently.
The majority also found that the HCE Rule is not merely a “simple income level” test for the purposes of the FLSA bona fide executive exemption.
Two Dissents
Justice Brett Kavanaugh wrote a 5-page dissent, joined by Justice Samuel Alito. According to Kavanaugh, because the employee performed executive duties, earned at least $100,000 per year, and received a guaranteed weekly salary of at least $455 for any week that he worked, he was not legally entitled to overtime pay under the regulations. He also asserted that the WHD regulations may be inconsistent with the FLSA because the statute “focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid.”
Justice Neil Gorsuch issued a separate, 2-page dissent stating that the employer’s appeal should have been dismissed for procedural reasons.