Supreme Court Holds That Highly-Compensated Employees Solely Paid a Day Rate Must Meet Reasonable Relationship Test

Seyfarth Synopsis: The Supreme Court held that highly-compensated employees paid solely on a day rate must meet the so-called “reasonable relationship test” to satisfy the salary basis requirement.

In Helix Energy Solutions Group, Inc. v. Hewitt, the Supreme Court considered whether a day-rate employee earning at least $963 per day and over $200,000 annually was paid on a “salary basis” under the highly-compensated employee (“HCE”) exemption to the overtime requirements of the Fair Labor Standards Act (“FLSA”).  In a 6-3 opinion, the Court held that he was not.

The HCE rule in effect at the time of the plaintiff’s employment required employees to receive at least $455 per week on a salary basis and at least $100,000 in total annual compensation.  (Currently, those figures are $684 and $107,432, respectively.)  Two regulations were at issue: 29 C.F.R. §§ 541.602(a) and 541.604(b). 

Section 541.602(a) states that “[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.” 

Section 541.604(b) provides an alternative path to satisfying the salary basis test.  This section states that an employee’s earnings may be computed on an hourly, daily, or shift basis, without violating the salary basis requirement, if the employee receives a guarantee of $455 per week (now $684) and there is a “reasonable relationship” between “the guaranteed amount and the amount actually earned.”  The Department of Labor (“DOL”) has construed the “reasonable relationship” requirement to mean that the guaranteed portion constitutes at least two-thirds of total compensation.  

Notably, the HCE does not expressly incorporate Section 541.604(b).  And as we discussed here, courts have held that this omission was intentional: the DOL meant to exclude from the reasonable relationship requirement employees otherwise meeting the HCE.  Nonetheless, the Supreme Court held that Section 541.604(b) applied on the facts before it—namely, an employee paid purely on the basis of a daily rate.

The plaintiff was paid from $963 to $1,341 per day for any day worked (regardless of hours worked).  Justice Kagan, writing for the majority, found that the plaintiff’s pay structure did not satisfy Section 541.602, because the “predetermined amount” an employee receives must be computed with respect to the week as a unit of time.  Because the plaintiff’s predetermined amount—his day rate—was calculated with respect to a daily unit of time, his pay did not satisfy Section 541.602(a).  Thus, the Court held that to satisfy the salary basis requirement, the plaintiff’s pay had to meet the reasonable relationship test, which was not met.  

The case therefore turned on the fact that the employee was only paid a day-rate.  The Court suggested in several footnotes that the outcome may have been different if the plaintiff was paid a base salary in addition to a daily rate.  The Court explained that Section 541.602(a)’s reference to “all or part” means that a worker “can be paid on a salary basis even if he additionally gets non-salary compensation,” and that if a highly-compensated worker’s pay satisfies Section 541.602(a), the employer “does not also have to meet § 604(b) to make a worker exempt.” 

Justice Kavanaugh, joined by Justice Alito, dissented[1] and opined that the underlying regulatory framework may not survive if subject to a direct statutory challenge.  As Justice Kavanaugh explained, the FLSA’s white-collar exemptions (as set forth in the statute itself) focus on job duties, not salary.  “So it is questionable 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.”  Thus, time will tell if the salary-basis requirements of the HCE, and related exemptions, survive judicial review.  

In light of Hewitt, employers who pay their exempt workers on a daily basis should consider assessing their pay practices with the support of competent counsel to ensure continued compliance.  Please feel free to reach out to your Seyfarth attorney for questions regarding this decision and its implications.

 

[1] Justice Gorsuch also authored a dissent, indicating he “would dismiss this case as improvidently granted because “[w]ith the benefit of briefing and argument, it has become clear that the ‘critical question here’ is not how §541.601 and §541.604 interact. Instead, the critical question is an antecedent one—whether Helix Energy paid Michael Hewitt . . . ‘on a salary basis’ under §541.602. (internal citation omitted).