U.S. Supreme Court Clarifies Salary Basis Requirement for Executive Exemption – Maybe?

On February 23, 2023, the Supreme Court of the United States ruled in Helix Energy Solutions Group, Inc. v. Hewitt, that even highly compensated individuals are subject to the overtime requirements of the FLSA unless they are paid on a salary basis. Below are details of this ruling and the impact it may have on employers.

The Fair Labor Standards Act (“FLSA”) provides that employees must be paid 1.5 times their regular rate of pay for all hours worked over 40 in a given week. 29 U.S.C. § 207. While this rule is fairly straightforward, it is also subject to various, complicated exemptions. 29 U.S.C. § 213. One such exemption is the “executive” exemption, which provides that an employer need not pay overtime wages to a “bona fide” executive. Id. § 213(a)(1).

The Department of Labor has implemented rules interpreting the exemptions of the FLSA’s overtime requirement. 29 C.F.R. § 541.100 et seq. Under these rules, an employee is an “executive” exempt from the overtime requirements of the FLSA only if the employee is paid on a “salary basis” (among other things). 29 C.F.R. §§ 541.100, 541.601(a) and (b)(1).

In Helix Energy Solutions Group, Inc. v. Hewitt, a well-compensated oil rig worker sought clarification of the salary basis requirement. 143 S. Ct. 677 (2023). Mr. Hewitt worked on an oil rig for 28-day periods for up to 84 hours per week, followed by 28 days off. Mr. Hewitt was paid a “daily rate” for each day he worked on the oil rig. His paychecks were issued once every two weeks for the days he had worked the preceding two weeks. Under this compensation scheme, Mr. Hewitt was paid around $200,000 per year, though his pay ranged broadly from pay period to pay period. His employer determined that he was exempt from overtime as a highly compensated executive. Mr. Hewitt argued that he was not subject to the FLSA’s executive exemption because he was paid under the daily rate scheme, and that he was therefore entitled to significant unpaid overtime.

The Court began its opinion by pointing out that the definition of “salary basis” provided by federal regulations is straightforward: an employee is paid on a salary basis where he receives a “predetermined and fixed salary—one that does not vary with the precise amount of time he works.” 143 S. Ct. at 682-83 (quoting 84 Fed. Reg. 51230).

While there is an exception to this rule that allows employers to capitalize on the executive exemption while paying employees on an hourly, daily, or shift rate, the exception is limited. Id. at 684. It only applies when the employee receives at least $455 per week, no matter how many hours, days, or shifts worked, and where the amount is “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily, or shift rate for the employee’s normal work schedule.” Id. (citing 29 C.F.R. § 541.602(b)). The ultimate requirement is that there be a “steady stream” of pay like a salary. Id.

The parties agreed that Mr. Hewitt’s employer could not benefit from the daily rate exception to the salary basis test because his pay fluctuated too greatly. Id. If he worked no days or a single day in a pay period, his pay was radically different than instances where he worked all 14 days of a pay period. Id.

Mr. Hewitt’s employer argued, however, that he should still be subject to the executive exemption. The employer’s argument relied largely on public policy concerns: where, as here, the employee is highly compensated, the need for a predictable income stream is lessened. Id. at 690. Also, finding such individuals to be non-exempt purely because they are paid a daily rate provides such employees with unexpected windfalls (and imposes significant retroactive liability on employers). Id. The Court rejected these concerns and ruled that Mr. Hewitt could not be subject to the executive exemption under the standard salary basis test because his pay “can be calculated only by counting [the days he worked] once the week is over—not … by ignoring that number and paying a predetermined amount.” Id. at 691-92.

While this ruling provides some clarity for employers for now, it may be only temporary. During oral argument, Mr. Hewitt’s employer suggested that the salary basis requirement should be eliminated altogether as inconsistent with the statutory language of the FLSA. The majority opinion did not address this suggestion, but Justices Kavanaugh and Alito agreed with the employer’s argument in dissent. Id. at 695. They reasoned that the FLSA ties the executive exemption to the employee’s duties, not his method or rate of compensation. Id. They believe it is therefore “questionable whether the department’s regulations … will survive if and when the regulations are challenged as inconsistent with the act.” Id.

The opportunity for further litigation challenging the validity of the salary basis test for the executive exemption (and potentially for other exemptions as well) is ripe. In the meantime, employers should proceed with caution before determining that employees paid by means other than a fixed salary are exempt from the requirements of the FLSA.