On Sept. 9, 2021, the en banc U.S. Court of Appeals for the Fifth Circuit, affirmed a decision that will impact payment practices in the oil industry, as well as many other industries, in Texas, Louisiana, Mississippi, and beyond. The U.S. Court of Appeals sitting en banc (which means it was a session where the case was heard before all the judges of a court rather than by one judge or a panel of judges), reconsidered a 2020 opinion in Hewitt v. Helix Energy Solutions Group, Inc. In its majority opinion, 12 of the 18 judges held that a daily rate can qualify as a salary if, and only if, the employer pays a minimum of $684 per week regardless of the amount that the employee works and a “reasonable relationship” exists between the minimum salary and the total amount paid.
Although that conclusion may not seem very interesting, as it applies to Hewitt, it means that a former offshore oil rig employee, who was paid a fixed daily rate of about $1,000 per day, and total annual compensation of more than $200,000 per year, did not qualify for the highly compensated exemption to the FLSA’s overtime pay requirements. Said another way, even though Mr. Hewitt was undoubtedly highly compensated, earning over $200,000 per year (an amount earned by less than 6% of Americans per year), he was entitled to overtime compensation because he was not paid a salary basis of at least $684 per week. Sounds strange, doesn’t it?
The Fair Labor Standards Act (“FLSA”) requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at not less than time and one-half the regular rate of pay for all hours worked over 40 in a workweek. There are several exemptions from this requirement. One such exemptions is the special rule for “highly compensated” employees who are paid total annual compensation of $107,432 or more, which includes at least 684.00 per week on a “salary basis”.
In Hewitt, Helix Energy Solutions Group paid Michael Hewitt, a daily rate of at least $963 per day — which resulted in income of over $200,000 per year — to work on its offshore drilling rig. Mr. Hewitt claimed that he was entitled to overtime compensation under the FLSA, but Helix Energy believed that Mr. Hewitt was exempt from the FLSA’s overtime requirements under the exemption for highly compensated employees. Mr. Hewitt contested his classification status and sued Helix Energy for unpaid overtime wages under the FLSA.
In reviewing Hewitt, it was undisputed that Mr. Hewitt satisfied the duties and income thresholds for the highly compensated employee exemption; however, there was a dispute about whether Mr. Hewitt’s day rate constituted a “salary basis,” which is necessary to meet to exemption. The Department of Labor has explained that being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined salary cannot be reduced because of variations in the quality or quantity of the employee’s work.
In its decision, the majority of the court ruled to be entitled to the highly compensated employee exemption, the employer must show that the employee was paid on a salary basis, which may be satisfied by paying a daily or hourly rate only if there is a fixed minimum weekly guarantee that bears a reasonable relationship to the employee’s actual compensation, no matter how high his or her compensation. However, Mr. Hewitt was only paid for days that he worked, so Helix Energy could not show that it paid Mr. Hewitt on a salary basis. As a result, Helix Energy did not meet its burden to show entitlement to the highly compensated employee exemption.
This is an important case. Any employer paying a day rate to an exempt employee should carefully review its payment practices to evaluate the risk for unpaid overtime.