Squire Patton Boggs Summer Associate Wade Erwin discusses the issues in and implications of an FLSA case set to heard by the U.S. Supreme Court in October.
In the upcoming 2022-2023 term, the United States Supreme Court is set to decide in Helix Energy Solutions Group, Inc., et al. v. Hewitt (No. 21-984) whether a daily rate supervisor who earned in excess of $200,000 annually is entitled to overtime compensation under the federal Fair Labor Standards Act. Employers that pay their employees daily rates – particularly those in the oil and gas industry – should be on the lookout, and preparing, for the Court’s decision, as it threatens to alter the employment compensation landscape substantially and may force some employers to reshape their compensation schemes entirely. Oral argument in this case is presently scheduled for October 12, 2022.
In Helix, the Court will determine whether supervisors who typically would be exempt from the overtime compensation provisions of the Fair Labor Standards Act (“FLSA”) are entitled to time-and-a half pay for hours worked over 40 hours in a workweek because they receive a daily rate rather than a fixed annual salary. As readers of this blog are aware, the FLSA requires employers to pay employees at a rate of one-and-one-half times their regular rate of pay for any hours they work in excess of 40 hours in a workweek. Although the FLSA applies to broad categories of employees, regulations implemented by the U.S. Department of Labor exempt certain employees from these overtime pay requirements. These exceptions apply to employees who are paid on a salary basis in an amount more than $684/week and who satisfy criteria concerning the performance of executive, administrative, professional, computer, and/or outside sales duties. They also apply to “highly compensated” employees – those who earn at least $107,432/year and are paid on a salary basis – if the employee customarily and regularly performs at least one of the duties associated with exempt employees.
In Helix, Michael Hewitt worked for Helix as a tool pusher, managing other employees while working offshore on an oil rig. In that role, Hewitt managed approximately a dozen other employees, for which he was paid a sizable $963 daily rate for every day he worked. Although Mr. Hewitt typically worked more than 40 hours per week, his daily rate remained unaffected by the number of hours he worked or the quality of the work he performed. Mr. Hewitt spent two years working for Helix, earning over $200,000 annually from 2015 to 2017. After Helix terminated Mr. Hewitt’s employment for performance-related reasons, he filed suit against the company in a Texas federal court. In that suit, Mr. Hewitt alleged that Helix misclassified him as an exempt employee under the FLSA and that he was therefore entitled to overtime compensation for the hours he worked in excess of 40 hours in a workweek. In response, Helix argued that Mr. Hewitt’s supervisory role and high annual income brought him under the FLSA’s “highly compensated” and “executive” employee exceptions. The trial court agreed with Helix, ruling that Mr. Hewitt was exempt from the FLSA’s overtime compensation requirements. The matter was then appealed to the United States Court of Appeals for the Fifth Circuit.
The issue before the Fifth Circuit centered on the salary prong of the “highly compensated” and “executive” FLSA exemptions. Because he was a supervisor who earned over $200,000 a year, and he always made the statutory minimum of $455 each week he worked (which was the salary threshold during the years at issue; it is now $684/week), both sides agreed that Mr. Hewitt satisfied the first two exemption requirements. The parties, however, fiercely disputed whether Mr. Hewitt’s daily rate qualified as payment on a salary basis.
In a 12-6 en banc decision, the Fifth Circuit held that Mr. Hewitt was not exempt, and therefore that he was entitled to be paid overtime compensation despite his sizable income. Emphasizing “‘employees are not to be deprived of the benefits of the [FLSA] simply because they are well paid,’” the majority found that the plain text of the FLSA placed Mr. Hewitt outside the “executive” and “highly compensated” exceptions. Because he worked for a daily rate and did not receive compensation on weekly or less frequent basis – what would be ordinarily considered a “salary” – the appellate court reasoned that Mr. Hewitt needed to satisfy the salary basis test to fall within the overtime exemptions. However, under the salary basis test, Mr. Hewitt had to receive a guaranteed weekly payment that was calculated without regard to the number of hours, days, or shifts he worked. Additionally, to be exempt from the FLSA’s overtime requirements, the test required that a reasonable relationship exist between the guaranteed rate and the amount that Mr. Hewitt actually earned. According to the Fifth Circuit, the reasonable relationship standard ensures that the minimum weekly guarantee is not a sham. By setting a ceiling on how much the employee can expect to work in exchange for his regular paycheck, the test prevents the employer from claiming that it pays a stable weekly amount without regard to hours worked, while in reality regularly overworking employees in excess of the time the weekly guarantee contemplates.
Helix argued that Mr. Hewitt’s daily rate was a minimum weekly guarantee, but the Fifth Circuit rejected this argument. Instead, it held that the Helix’s compensation plan failed both prongs of the salary basis test. As an initial matter, the court reasoned that the daily rate did not qualify as a guaranteed weekly payment because Mr. Hewitt’s pay was, by definition, calculated with regard to the number of days he worked. The Fifth Circuit further held that Helix did not satisfy the reasonable relationship test because Helix paid Mr. Hewitt an “order of magnitude greater” than the minimum weekly guarantee (that is, the $963 daily rate). Because Helix’s payments to Mr. Hewitt did not meet the salary basis test, the appeals court held that he was not exempt under the FLSA, and therefore eligible for overtime compensation.
The Fifth Circuit’s holding deepened a circuit split on this issue. While the Fifth, Sixth and Eighth Circuits apply the reasonable relationship test, the First and Second Circuits adhere to a different interpretation that exempts daily-rate workers under the salary basis test. In order to resolve this circuit split, the U.S. Supreme Court agreed on May 2, 2022 to hear Helix, and is set to decide whether highly compensated supervisors who are compensated on a daily basis that exceeds the FLSA’s highly compensated threshold and who are paid more than the weekly salary basis amount are exempt from overtime compensation under the FLSA. The Court’s decision will carry immense implications for certain employers, particularly those in the oil and gas industry, where the compensation scheme at issue is prevalent. As briefs submitted in the case highlight, requiring overtime compensation for highly paid daily workers threatens to increase labor costs in oil and gas exploration and production industry by a minimum of 26.2 percent. Further, if the U.S. Supreme Court affirms the Fifth Circuit’s decision, interest groups have voiced concern that a single employee making $200,000 annually could be entitled to an additional $52,000 in back wages. Helix’s impact also could spread across industries, affecting the construction industry, creative services companies, and any other employers who pay their employees daily rates. The Court’s decision in Helix could bring a new class of employees within the purview of the FLSA’s overtime requirements, and depending on the outcome, employers could face increased liability for failure to pay overtime compensation. The case could force companies with highly compensated daily rate employees to either make overtime payments or pivot towards a guaranteed minimum salary scheme. We will continue to track the Helix case and will provide updates on federal overtime law as new information becomes available. In the meantime, employers who pay their employees on a guaranteed daily amount basis should review their current pay practices and consult with counsel to consider whether to revise their approach prospectively in the event of an adverse ruling from the Court.