As we reported earlier this week, on February 22, 2023, the Supreme Court issued its decision in Helix Energy Solutions Group, Inc. v. Hewitt, finding that a daily-rate worker who earned over $200,000 annually was not exempt from the Fair Labor Standards Act’s (FLSA or Act) overtime requirements. The Court reasoned that, although the employee’s compensation exceeded the amount required under 29 C.F.R. § 541.601’s highly compensated employee (HCE) exemption, and he customarily and regularly performed at least one exempt duty (there, the “executive” duty of supervising a crew of workers), his employer did not pay him on a “salary basis” because he did not “receive a fixed amount for a week no matter how many days he … worked.”
Practically, Helix’s holding is unlikely to have broad consequences. Most employers pay employees who earn enough to qualify as an HCE (currently, $107,432 annually) and perform at least one exempt administrative, executive, or professional duty a predetermined salary. But employers who have classified non-salaried high earners as exempt HCEs will acutely feel its effects.
So what can those employers do to comply with the FLSA? Helix leaves them with three options:
- They could classify their employees as exempt HCEs by paying them on a salary basis that meets or exceeds the HCE exemption’s minimum threshold (again, $107,432 per year). Under the Department of Labor’s (Department) regulations, “salary basis” means that employees receive “a predetermined amount constituting all of or part of [their] compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed.” 29 C.F.R. § 541.602(a). But paying employees a fixed salary comes with a cost: salaried employees generally must receive their full salary for any week during which they perform any work. Although there are exceptions to this general rule, they are limited. And an employer who makes improper deductions may forfeit its ability to satisfy the salary-basis requirement.
- Alternatively, employers may pay exempt HCEs an hourly, daily or shift rate, provided their compensation meets two requirements. Id. § 541.604(b). First, employers must guarantee payment of “at least the minimum weekly required amount paid on a salary basis” (currently, $684 per week), regardless of the amount of time the employee works. Id. Second, that guaranteed payment must bear a “reasonable relationship” to the amount the employee actually earns—that is, the guaranteed amount must be “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.” Id.
- Finally, employers may convert highly compensated non-salaried employees to nonexempt employees. Of course, that would entail costs, most notably, compliance with the FLSA’s overtime requirement. But employers may mitigate those costs to some extent by analyzing employees’ schedules and working with counsel to determine appropriate nonexempt compensation arrangements (e.g., hourly, fluctuating work week, or day rate).
Because not every state that has an overtime requirement recognizes the HCE exemption, it is also important to confirm compliance with state law.
While Helix’s holding may have limited applicability, Justice Kavanaugh’s dissenting opinion may bring about a drastic alteration to the wage-and-hour landscape if lower courts act on it. The majority did not address Helix’s argument that the Department’s regulation implementing the salary-basis test was inconsistent with the Act, finding that Helix waived the argument by not raising it in the lower courts. Justice Kavanaugh, however, all but adopted it.
Beginning with the observation that the FLSA’s executive exemption “focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid,” Justice Kavanaugh questioned “whether the Department’s 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 Act.” Justice Kavanaugh further remarked that the regulations’ focus on “how an employee is paid” was “dubious” and that he was “hard-pressed to understand why [that] would matter.”
Given Justice Kavanaugh’s commentary, it’s likely only a matter of time before we see a challenge to the salary-basis component of the Department’s regulations. We will report on any developments.
- Member of the Firm