On Wednesday, the U.S. Supreme Court issued its long-awaited decision in Helix Energy Solutions, Group, Inc. v. Hewitt, deciding that a supervisor who was paid a daily rate and earned more than $200,000 a year was not exempt from the overtime provisions of the federal Fair Labor Standards Act.

Justice Elena Kagan delivered the opinion of the Court, in which Chief Justice John Roberts, and Justices Amy Coney Barrett, Ketanji Jackson, Sonia Sotomayor, and Clarence Thomas joined. Justices Neil Gorsuch and Brett Kavanaugh each filed dissenting opinions, and Justice Samuel Alito joined in Justice Kavanaugh’s dissent.

Plaintiff Michael Hewitt worked as a supervisor for Helix Energy Solutions on an offshore oil and gas rig, working 28 days in a row (12 hours per day), followed by 28 days off. Mr. Hewitt was compensated at a daily rate that ranged between $963 and $1,341, and for any week that Mr. Hewitt worked, he was paid at least $455 a week.

The parties agreed that Mr. Hewitt’s position met the “duties test” for the executive exemption under the FLSA’s 541 regulations (29 CFR Part 541), but what was at issue before the Supreme Court was whether Mr. Hewitt met the “salary basis” requirement for the “Highly Compensated Exemption.”

The question here is whether a high-earning employee is compensated on a “salary basis” when his paycheck is based solely on a daily rate—so that he receives a certain amount if he works one day in a week, twice as much for two days, three times as much for three, and so on. We hold that such an employee is not paid on a salary basis, and thus is entitled to overtime pay.

Salary basis regulations

Two regulations—Section 541.602(a) and Section 541.604(b)—describe the salary basis test. Section 541.602(a) provides as follows:

[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 amount is not subject to reduction because of variations in the quality or quantity of the work performed. Subject to [certain exceptions], an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.

Section 541.604(b) provides that a daily rate worker can qualify as paid on a salary basis provided two conditions are met: (1) the employer guarantees the employee a certain minimum salary level each week ($455 a week at the time of the litigation), and (2) the guaranteed minimum salary bears a “reasonable relationship” to the “amount actually earned” in a typical week.

Helix acknowledged, and the majority opinion noted, that Mr. Hewitt did not receive a guaranteed weekly amount that roughly approximated what he usually earned. Thus the majority opinion concentrated on whether Mr. Hewitt’s compensation satisfied the requirements of Section 541.602(a):

[The parties] agree, as they must, that under the regulations, a high-income employee like Hewitt counts as an executive when (but only when) he is paid on a salary basis; the salary paid is at or above the requisite level ($455 per week); and he performs at least one listed duty.

To reach its conclusion that that Helix did not pay Mr. Hewitt on a salary basis as defined in Section 541.602(a), the Court looked at the text and the structure of the regulations and noted the following:

  • The text of the regulation excludes daily-rate workers.
  • The regulatory language “reflects the standard meaning of a ‘salary,’ which connotes a steady and predictable stream of pay, week after week after week.”
  • “The broader regulatory structure—in particular, the role of Section 604(b) confirms our reading of Section 602(a).”
  • “Section 604(b) thus speaks directly to when daily and hourly rates are ‘consistent with the salary basis content . . . And by doing so, the provision reinforces the exclusion of those [daily] rates from Section 602’s dominion.”
  • The Highly Compensated Exemption does not save Helix because the HCE “refers to the salary-basis (and salary level) requirement in the same way that the general rule does.” In other words, “The Highly Compensated Exemption’s rule does not operate independently of Section 604(b).”

Helix had made the policy argument that “‘windfalls’ to high earners, disrupt[ion] and ‘increase[d] costs’ . . . and . . . ‘significant retroactive liability’” would result if the Court found that daily-rate workers never fell within the salary basis test in Section 602(a). The Court rejected that argument:

[A]s this Court has explained, “even the most formidable policy arguments cannot overcome a clear” textual directive. And anyway, Helix’s appeal to consequences appears something less than formidable in the context of the FLSA’s regulatory scheme. Indeed, it is Helix’s own position that, if injected into that plan, would produce troubling outcomes—because it would deny overtime pay even to daily-rate employees making far less money than Hewitt.

Are the salary basis regulations invalid?

At oral argument before the Supreme Court, Helix had suggested that the salary basis component of the regulations was invalid because it was not justified by the language of the FLSA. As Justice Kagan paraphrased Helix’s argument, the salary basis component (of the 29 CFR Part 541 regs) was “an impermissible extrapolation from the statutory exemption for workers employed in a bona fide executive exemption.” However, because Helix did not make that argument in the lower courts, the Supreme Court “followed its usual practice” and declined to address its merits.

Justice Gorsuch, who dissented on the ground that certiorari was improvidently granted,  agreed that Helix “failed to raise” the argument and declined to express a view of its merits. However, both he and Justice Kavanaugh indicated that they might be willing to give such an argument a sympathetic hearing in an appropriate case. According to Justice Gorsuch, “[T]he fact that Helix Energy forfeited such a foundational argument seems to me all the more reason to leave any question about Section 541.602 to another day.” Justice Kavanaugh, who dissented on the ground that the language of the regulations supported a finding that Mr. Hewitt qualified as a bona fide executive, was even stronger: “[I]t is questionable whether [the 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 [FLSA].”

Implications for employers

According to the Amicus Brief filed by the Independent Petroleum Association of America and Offshore Operators Committee,

The economic model of the oil industry centers around the daily costs of operations. Even the drilling rigs and platforms are hired out on a day-rental basis. This model has been in effect for many years and is driven by its economic efficiency.

The Supreme Court decision is likely to bring about many lawsuits and significant changes to the oil and gas industry. As a reminder to employers, when it comes to wage and hour compliance, regularly review the fundamentals, never assume someone won’t make a claim for money, and realize that just because “everybody does it this way” doesn’t mean it will pass legal muster. Many companies have employees who are misclassified, have timekeeping practices that need work, and use pay practices that can be challenged. Employers should start with the basics and go from there.

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