USSC Says Even High Wage Earners Are Entitled to Overtime if Paid on a Daily Rate Basis

April 27, 2023

On February 22, 2023, in a 6-3 decision, the United States Supreme Court held that in order to be exempt from overtime under the Fair Labor Standards Act (FLSA), an employee must be paid on a salaried basis, no matter the income level of the employee.  In essence the Court ruled that even highly paid employees, whose annual income exceeds $100,000 or more, are entitled to overtime pay if they are paid at a daily rate or on any basis other than salaried.  In other words, even employees who earn six-figures must be paid one and a half times their regular rate of pay for hours worked over 40, if they are not paid a pre-determined amount, on a weekly or less frequent basis, without regard to the number of days or hours worked.

As background, the FLSA generally requires employers to pay employees a premium overtime rate (i.e., 1.5 times regular rate of pay) for all hours over 40 worked in a week.  The FLSA exempts from this requirement bona fide executive, administrative, and professional employees. In order to qualify for these exemptions, the employee must pe paid at a certain level (currently $455/week), their job position must involve certain specific duties set out in FLSA regulations, and they must be paid on a “salary basis,” explained as receiving each pay period on a weekly, or less frequent basis, a predetermined amount not subject to reduction because of variations in the quality or quantity of the work performed.  This final requirement was at issue in Helix Energy Solutions Group, Inc. v. Hewitt.

Here’s what happened:

Michael Hewitt worked for Helix Energy Solutions Group on an offshore oil rig. He reported to the captain of the rig, oversaw aspects of the rig’s operations and supervised 12 to 14 workers. He worked 28-days at a time, followed by 28 days off.  During the 28-day stretch of work, he typically, but not invariably, worked 84 hours per week (12 hours a day, 7 days a week).  The employer paid Hewitt every two weeks, and paid him an amount equal to his daily rate times the number of days he had worked in the pay period.  If Hewitt worked only one day during the 2-week period, his paycheck would total $963.  But if he worked all 14 days, his paycheck would come to $13,482.  Using this method of compensation, the employer ended up paying Hewitt over $200,000 annually.  Importantly, the employer did not pay this employee overtime compensation for hours worked over 40.  It took the position that Hewitt was exempt from the FLSA’s overtime requirements because he qualified as a bona fide executive.  Hewitt sued his employer arguing that he did not meet the exemption requirements and was entitled to overtime compensation.  He conceded that his employment met both the salary-level and duties test of the bona fide executive exemption.  But he argued that his job position did not meet the requirement that he also be paid on a salaried basis.  The Supreme Court agreed.

Looking to the language of the relevant FLSA regulation, the Court said that an “employee is paid on a salary basis if but only if he ‘receive[s] the full salary for any week in which [he] performs any work without regard to the number of days or hours worked.’”  As the Court explained, this means that “[w]henever an employee works at all in a week, he must get his ‘full salary for [that] week’” referred to in the FLSA as a ‘predetermined amount.’  That amount, according to the Court, must be ‘without regard to the number of days or hours worked’— or in other words is ‘not subject to reduction because’ the employee worked less than the full week.”  Under this definition, the salary-basis requirement for overtime exemptions could not be met for an employee like Hewitt paid on a daily-rate basis “who by definition is paid for each day he works and no others.” As the Court noted, “[a] daily-rate worker’s weekly pay is always a function of how many days he has labored. It can be calculated only by counting those days once the week is over—not, as [the law] requires [to be exempt from overtime], by ignoring that number and paying a predetermined amount.”  Finding that the salary-basis applied equally to the separate “highly compensated employee”, the Court found that even these employees, who had a more relaxed duties standard to be exempt, had to be paid on salary basis, not at a daily rate.

For its part, the employer argued that the salary-basis requirement was met so long as the employee receives in each pay period on a weekly or less frequent basis a preset and non-reducible sum.  In other words, the salaried-basis requirement mandates only that the employee get his paycheck no more often than once a week.  Its theory was that because Hewitt’s paycheck came every two weeks, and because that check always contained pay exceeding $455 (the salary level required to be exempt from overtime) for any week he had worked at all, the employee was paid on a salaried basis, and met the exemption requirements for overtime.

The Court outright rejected this argument.  It reasoned that the use of the term “salary basis” means “the unit of time used to calculate pay,” not the frequency of its distribution.  In that way, it is the unit of time used to calculate the pay, not the employee’s receipt of the wages, that must be a week or less frequent measure in order to meet the salary basis requirement.  In that way, Hewitt’s pay, calculated on a daily basis, even though paid weekly, did not meet the standard.  As the Court stated

“Most simply put, an employee paid on an hourly basis is paid by the hour, an employee paid on a daily basis is paid by the day, and an employee paid on a weekly basis is paid by the week—irrespective of when or how often his employer actually doles out the money.”

Interestingly, the Court gave two specific ways the employer could have changed Hewitt’s pay structure to come into compliance with the salary-basis requirement:  1) by adding to Hewitt’s per-day rate a weekly guarantee that satisfies the ‘salary-basis’ conditions, or 2) by converting Hewitt’s compensation to a straight weekly salary for time he spends on the rig.  The employer rejected both options because they would require it to pay for days Hewitt has not worked.  But this requirement – to be paid even for days not worked, was the very point of the salary-basis requirement of the overtime exemption, and proved to them that the employer had violated the law.  As the Court stated “Helix wishes neither to pay employees a true salary nor to pay them overtime. And the whole point of the salary-basis requirement is to take that third option off the table, even though doing so may well increase costs.”

So, what does this mean for employers going forward?  Basically, the total compensation an employee earns overall in a year, does not, in and of itself, exempt an employee from overtime.  Employees must be paid strictly on a salary basis in order for an employer to avoid overtime premium pay.  This means that even if the pay the employee ends up receiving far exceeds the salary level of the overtime exemption (currently $455/week), if it is calculated on a basis more frequent than one-week, or otherwise accounts for how much the employee worked (i.e., adjusts up or down verses being paid a pre-set amount), the employee is not exempt, and is entitled to overtime pay for all hours worked over 40.  At pay levels this high, unpaid overtime claims could result in significant overtime pay, never mind possible multiple damages and attorneys’ fees for non-compliance.  Given this potential exposure, employers should work with counsel to make sure any and all employees who are not getting paid overtime, are being paid on a salaried basis, as defined by the Helix court.  In particular, employers should pay close attention to employees paid at a daily rate, and make sure that they are paying them overtime for all hours worked over 40 each week.  If they are not, they should consider converting them to salaried-based employees, ASAP, or else be ready to start paying overtime.