US Supreme Court Rules Highly Compensated Employee Is Not Exempt From Overtime

On February 22, 2023, the US Supreme Court held in Helix Energy Solutions Group, Inc. v. Hewitt that an employee who was paid nearly $1,000 each day he worked was not exempt from the Fair Labor Standards Act (FLSA) and therefore owed overtime for the work he did.

IN DEPTH

This case turned on an interpretation of the FLSA regulations, which exempt from the overtime requirement certain bona fide executive, administrative and professional employees. Specifically, the regulations provide that, to qualify for these "white collar" exemptions, the employees "must be compensated on a salary basis." 29 C.F.R. § 541.600; see also 29 C.F.R. § 541.601(b)(1). Section 541.602(a), in turn, provides that "[a]n employee will be considered to be paid on a 'salary basis' . . . if the employee regularly receives each pay period on a weekly or less frequent basis, a predetermined amount constituting all or part of the employee's compensation, which is not subject to reduction because of variations in the quality or quantity of work performed" and subject to certain exceptions, is paid in full "for any week in which the employee performs any work without regard to the number of days or hours worked."

The question presented to the Court was "whether a high-earning employee is compensated on a 'salary basis' when his paycheck is based solely on a daily rate." Construing just Section 541.602(a), the Court held that, even though the employee made nearly $1,000 a day and received over $200,000 annually, the employee was not exempt from the FLSA's overtime requirements because the employee did not receive a flat, fixed predetermined amount that was not dependent on days worked. The Court rejected the employer's argument that a separate regulation—Section 541.601—that eliminates the need for an in-depth analysis of an employee's work duties to satisfy exempt status for employees making over $107,432 eliminated the need to satisfy the "salary basis" test. This regulation, however, is still useful for highly compensated employees because it does make it easier to show the employee performed white-collar work.

Notably, employees whose earnings are calculated on "an hourly, a daily or a shift basis" can still satisfy the "salary basis" test and be exempt if they are paid a minimum guaranteed weekly amount and "a reasonable relationship exists between the guaranteed amount and the amount actually earned." 29 C.F.R. § 541.604(b). Because the employer in Helix conceded that Section 541.604(b) could not be met, the Majority did not analyze its applicability, including opining on what minimum guarantee is enough in relation to the employee's total compensation. Justice Brett Kavanaugh's dissent nevertheless highlights a US Department of Labor (USDOL) opinion letter (FLSA 2018-25, 2018) providing that a reasonable relationship exists when "at least two-thirds of their total compensation comes in form of a weekly guarantee." In the context of a six-day work week, the day rate employee must therefore receive guaranteed pay equivalent to four days worked regardless of days actually worked.

The Court also declined to address an argument raised for the first time on appeal that USDOL's regulations requiring payment on a "salary basis" were inconsistent with the statutory exemption. Justice Kavanaugh endorsed this approach, writing that because the FLSA "focuses on whether the employee performs executive duties," "it is questionable whether the Department's regulations—which look not only at an employee's duties but also at how much an employee is paid and how an employee is paid—will survive if and when the regulations are challenged as inconsistent with the Act." Defense counsel should take note of this argument for future cases.

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Joseph Mulherin
McDermott Will & Emery
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