Supreme Court Provides Clarification on the Highly Compensated Employee Exemption’s Salary Requirement

By Fiona W. Ong, Elizabeth Torphy-Donzella and Eric Hemmendinger - Shawe Rosental LLP

February 22, 2023

On February 22, 2023, the U.S. Supreme Court issued its opinion in Helix Energy Solutions Group, Inc. v. Hewitt, clarifying that, in order to qualify for the highly compensated employee (HCE) exemption from the Fair Labor Standard Act’s overtime mandate, the employee must be paid on a salary basis, and the payment of a daily rate does not constitute a salary.

The FLSA’s HCE Exemption. The FLSA provides exemptions to its minimum wage and overtime requirements for certain executive, professional and administrative employees (i.e. the “white-collar” exemptions), as well as for highly compensated employees meeting relaxed requirements. Specifically under the HCE exemption, the employee must regularly perform at least one exempt administrative, executive or professional duty, and must receive a total annual compensation of at least $107,432, including at least $684 per week paid on a salary basis.

At issue in this case was the definition of “salary basis.” As set forth in FLSA regulation 29 C.F.R. §541.602(a),

An 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.

FLSA regulation 29 C.F.R. §541.604(b) further provides that employees may be compensated on an hourly, daily or shift basis without violating this salary basis requirement if certain conditions are met. First, the employer must “guarantee” the payment of at least the required minimum salary of $684 a week “regardless of the number of hours, days or shifts worked.” And second, there must be a “reasonable relationship” between “the guaranteed amount and the amount actually earned.” The regulations provide that “The reasonable relationship test will be met if the weekly guarantee is roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.” As the Supreme Court notes, “Those conditions create a compensation system functioning much like a true salary—a steady stream of pay, which the employer cannot much vary and the employee may thus rely on week after week.”

Background of the Case. In the case, the employee was an oil rig worker. He typically worked 12 hours a day, 7 days a week (84 hours a week) for a 28-day “hitch,” and then had 28 days off before the next hitch. The employee was paid a daily rate, earning over $200,000 a year, with no overtime compensation. He sued for non-payment of overtime, and the employer argued that he was exempt from the FLSA’s overtime provisions under the HCE exemption. The federal district court agreed with the employer, but the U.S. Court of Appeals reversed, finding that the employee was not paid on a salary basis. The case was then appealed to the Supreme Court.

The Supreme Court’s Decision. The parties agreed that the employee did not meet an alternative path to the salary basis under FLSA §604(b), which requires daily or hourly rates “consistent with the salary basis concept.” But the employer argued that the employee was paid on a salary basis under §602(a) because he received a paycheck every two weeks that exceeded the minimum salary required by the FLSA for the exemption. The Supreme Court majority, however, rejected the employer’s construction, and found that the employee did not meet the HCE exemption from overtime.

The Supreme Court held that §602(a) excludes daily rate workers, as the salary basis requirement requires the full salary for any week in which an employee performs any work, regardless of the actual number of hours worked. By contrast, “[a] daily-rate worker’s weekly pay is always a function of how many days he has labored.”

As to the employer’s argument regarding the frequency and amount of payment, the Supreme Court stated that, “a ‘basis’ of payment typically refers to the unit or method for calculating pay, not the frequency of its distribution.  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.”  Thus, the Supreme Court distinguished the basis of payment (weekly v. daily) from “paycheck frequency.”

The Supreme Court confirmed that §604(b)’s alternative path to the salary basis applied not only to the normal white-collar exemptions, but also the HCE exemption. And the two provisions – §602(a) and §604(b) – work in tandem. §602(a) addresses weekly salary, while §604(b) addresses daily/hourly/shift rates that meet the salary basis. To read §602(a) to incorporate daily rates would mean that §604(b) has no purpose, contrary to the rules of statutory interpretation, which seek to give effect to all provisions of the law.

Employer Takeaways. Employers seeking to use the HCE exemption must ensure that the employees are being paid a salary or, if paid on an hourly/daily/shift basis, a weekly guarantee that provides a steady stream of income. A daily (or hourly or shift) rate will never constitute a weekly salary, regardless of how high that rate may be.

However, employers should also keep in mind that, while all states adopt the FLSA’s white-collar exemptions, not all have recognized the HCE exemption. Thus, this exemption may not necessarily apply under state wage-hour law.

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