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

By Christopher T. Vrountas, Esquire and Allison C. Ayer, Esquire, Vrountas, Ayer & Chandler, P.C.

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 employeemustbepaidonasalariedbasis,nomattertheincomeleveloftheemployee. In essence the Court ruled that even highly paid employees, whose annual income exceeds$100,000ormore,areentitledtoovertimepayifthey 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 payforhoursworkedover40,iftheyarenotpaidapre-determinedamount,onaweekly orlessfrequentbasis,withoutregardtothenumberofdaysorhoursworked

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 professionalemployees.Inordertoqualifyfortheseexemptions,theemployeemustpe 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 quantityoftheworkperformed. ThisfinalrequirementwasatissueinHelixEnergySolutionsGroup,Inc.v.Hewitt.

Here’swhathappened:

MichaelHewittworkedforHelixEnergySolutionsGrouponanoffshoreoilrig Hereported tothecaptainoftherig,oversawaspectsoftherig’soperationsandsupervised12to14 workers.Heworked28-daysatatime,followedby28daysoff.Duringthe28-daystretch ofwork,hetypically,butnotinvariably,worked84hoursperweek(12hoursaday,7days a week). The employer paid Hewitt every two weeks, and paid him an amount equal to hisdailyratetimesthenumberofdayshehadworkedinthepayperiod.IfHewittworked onlyonedayduringthe2weekperiod,his paycheck would total $963. But if he worked all 14 days, his paycheck would come to $13,482.Usingthismethodofcompensation,theemployerendeduppayingHewittover $200,000 annually. Importantly, the employer did not pay this employee overtime compensationforhoursworkedover40.IttookthepositionthatHewittwasexemptfrom 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-levelanddutiestestofthebonafideexecutiveexemption Buthearguedthathis job position did not meet the requirement that he also be paid on a salaried basis The SupremeCourtagreed.

LookingtothelanguageoftherelevantFLSAregulation,theCourtsaidthatan“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.’Thatamount,accordingtotheCourt,mustbe‘withoutregardtothenumberof 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 requirementforovertimeexemptionscouldnotbemetforanemployeelikeHewittpaid onadaily-ratebasis“whobydefinitionispaidforeachdayheworksandnoothers”As the Court noted, “[a] daily-rate worker’s weekly pay is always a function of how many dayshehaslabored Itcanbecalculatedonlybycountingthosedaysoncetheweekis over not,as[thelaw]requires[tobeexemptfromovertime],byignoring that number and paying a predetermined amount” Finding that the salary-basis applied equally to the separate “highly compensated employee”, the Court found that eventheseemployees,whohadamorerelaxeddutiesstandardtobeexempt,hadtobe paidonsalarybasis,notatadailyrate.

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 thattheemployeegethispaychecknomoreoftenthanonceaweek.Itstheorywasthat 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) foranyweekhehadworkedatall,theemployeewaspaidonasalariedbasis,andmet theexemptionrequirementsforovertime.

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’sreceiptofthewages,thatmustbeaweekorlessfrequentmeasure 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 “Mostsimplyput,anemployeepaidonanhourlybasisispaidbythehour,anemployee paidonadailybasisispaidbytheday,andanemployeepaidonaweeklybasisispaid by the week irrespective of when or how often his employer actually doles out the money”

Continues...

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,or2)byconvertingHewitt’scompensationtoastraightweeklysalaryfortime hespendsontherig.Theemployerrejectedbothoptionsbecausetheywouldrequireit 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,eventhoughdoingsomaywellincreasecosts.”

So,whatdoesthismeanforemployersgoingforward?Basically,thetotalcompensation anemployeeearnsoverallinayear,doesnot,inandofitself,exemptanemployeefrom 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 receivingfarexceedsthesalarylevelofthe 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 entitledtoovertimepayforallhoursworkedover

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.

Giventhispotentialexposure,employersshouldworkwithcounseltomakesureanyand allemployeeswhoarenotgettingpaidovertime,arebeingpaidonasalariedbasis,as defined by the Helix court. In particular, employers should pay close attention to employeespaidatadailyrate,andmakesurethattheyarepayingthemovertimeforall hoursworkedover40eachweek.Iftheyarenot,theyshouldconsiderconvertingthemto salaried-basedemployees,ASAP,orelsebereadytostartpayingovertime.

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