On February 22, 2023, the United States Supreme Court issued a 6-3 decision holding that an employee who is paid a day rate (without any weekly guarantee) must be paid overtime under the Fair Labor Standards Act (“FLSA”) because day rates are inconsistent with the Department of Labor (“DOL”) regulations governing many exemptions from the overtime requirements. This decision compels employers – particularly those in the energy and maritime industries that commonly rely on day rates – to re-examine their payment practices.
Under the FLSA, employers are required to pay time and a half to employees who work more than 40 hours in a work week. There are various exemptions to the overtime requirements, including exemptions for bona fide executive, administrative, and professional employees, as well as for highly compensated employees making at least $107,432 per year who perform executive, administrative, or professional duties. None of these exemptions apply, however, unless the employee is paid on a “salary basis.” The regulatory definition of “salary basis” requires that the employee receive a predetermined amount of pay for each pay period on a weekly or less frequent basis, and the employee must receive his full salary for any week in which any work is performed without regard to the number of days or hours worked. See 29 C.F.R. § 541.602(a).
The FLSA regulations provide that day rates satisfy the salary basis test for executive, administrative, and professional employees, as well as for highly compensated employees, only if (1) the employee is guaranteed at least the minimum weekly required amount regardless of how much he works in the week and (2) the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned daily rate for the employee’s normal scheduled workweek. Unless an employer provides its day rate employees such a guarantee, its risk of overtime liability is significant, especially if the employee works 12-hour shifts seven days a week.
The application of the salary basis test was the central question before SCOTUS in Helix Energy Sols. Grp., Inc. v. Hewitt, No. 21-984, 2023 WL 2144441, at *3 (S. Ct. Feb. 22, 2023). Hewitt was a tool pusher on a rig who supervised 12-14 other employees and earned more than $200,000 a year. Despite the fact that he was paid a guaranteed daily rate of $963 – well above the FLSA’s requisite weekly rate of $455 (now raised to $684) – Hewitt sought overtime wages and liquidated damages, which can be recovered going back as much as three years. The district court held that Hewitt qualified for the FLSA’s executive exemption and ruled for the employer, but the U.S. Fifth Circuit Court of Appeals, sitting en banc, reversed and held that Hewitt was not exempt from the FLSA overtime rules, despite being a highly compensated supervisor, because his day rate pay structure did not satisfy the salary basis test. The Supreme Court agreed with the Fifth Circuit that a day rate worker does not qualify as a salaried employee under 29 CFR § 541.602(a) regardless of the amount of his day rate. Writing for the majority, Justice Kagan explained that the regulatory language of the FLSA demonstrates that a “salary” refers to “a steady and predictable stream of pay, week after week after week,” which necessarily excludes employees paid with a daily rate. 2023 WL 2144441, at *8.
In a dissenting opinion joined by Justice Alito, Justice Kavanaugh argued that “[b]ecause Hewitt 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, [. . .] Hewitt was not legally entitled to overtime pay under the regulations.” 2023 WL 2144441, at *13. He also raised the possibility that the Department of Labor’s regulations are inconsistent with the FLSA because the law, unlike the agency regulations, defines exemptions based on duties rather than the method of pay. This dissent encourages employers to file suits challenging the regulations.
Whether the DOL regulations are eventually ruled unenforceable remains to be seen. But Liskow’s employment law team can assist you in reviewing your pay practices to ensure compliance with the FLSA and this new SCOTUS decision. Employers can avoid the risks associated with day rates by converting those day rates to hourly rates and paying overtime for hours worked over 40 in a workweek, and this can be accomplished without having to pay the employee more for the same amount of work. We can show you how to make this change with a relatively simple algebraic equation.
In addition, while the FLSA has an exemption from overtime for seamen, you should be aware that the definition of “seaman” for FLSA purposes is different than it is for Jones Act purposes, and the Fifth Circuit chipped away at the exemption as to crane operators on a lift boat in Adams v. All Coast, L.L.C., 15 F.4th 365 (5th Cir. 2021).
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