On February 22, 2023, the Supreme Court issued its decision in Helix Energy Solutions Group, Inc. v. Hewitt, finding that an employee who earned over $200,000 per year was entitled to overtime. The case is a stark reminder to employers that even highly compensated executives must be paid on a salary basis if they are going to be exempt from overtime under the Fair Labor Standards Act (“FLSA”).
In Helix, an oil rig worker, Michael Hewitt, filed a suit against his employer for unpaid overtime under the FLSA. Under the FLSA, employees must be paid 1.5 times their regular rate of pay for all hours worked over 40 in a workweek, unless they satisfy the requirements of an FLSA exemption. One such exemption is the executive exemption. Helix argued that Hewitt was exempt as an executive and, therefore, not entitled to overtime. Hewitt argued that he was non-exempt because he was not paid on a salary basis.
To qualify for the FLSA’s executive exemption, all of the following requirements must be met:
- The employee is paid on a salary basis.
- The employee’s gross weekly salary is equal to or greater than the salary threshold specified in the regulations. (At the time of Hewitt’s employment, that threshold was $455 (gross) per week. Currently, it is $684.)
- The employee must perform certain job duties. For an executive, those job duties include managing the business, directing the work of two or more full-time employees, and having authority to hire and fire.
In Helix, the parties agreed that Hewitt satisfied prongs #2 and #3 of the test. So, the Court focused on the first prong: whether Hewitt was paid on a salary basis.
From 2014-2017, Helix paid Hewitt by the day. He did not receive any guaranteed minimum payment. From his day rate pay, Hewitt earned more than $200,000 per year. On a weekly basis, he received far more than $455 per week (prong #2, above). Helix argued that, as a result, he must be exempt. The Court disagreed.
The Court analyzed the definition of the term “salary basis.” 29 U.S.C §541.602(a) states:
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.
The Court determined that, because Hewitt was paid a day rate, with no minimum guarantee, the amount he was paid per week was not predetermined. Rather, it was subject to fluctuations based on the number of days that Hewitt worked (hence the term “day rate”). The Court explained: “A daily-rate worker’s weekly pay is always a function of how many days he has labored. It can be calculated only by counting those days once the week is over—not, as §602(a) requires, by ignoring that number and paying a predetermined amount.” Because Hewitt did not satisfy prong #1 of the exemption (paid on a salary basis), he was non-exempt and was therefore entitled to overtime even though he earned over $200,000 per year.
This case offers several important lessons for employers.
1) Don’t assume that your employees won’t sue you, even if you pay them well. As noted, Hewitt earned more than $200,000 per year. If and when the employment relationship sours, employees will look for any legal leverage available. One study from the US Department of Labor found that 70% of employers are not in compliance with wage-hour laws. Also, wage-hour lawsuits are one of the most common kinds of legal actions filed against businesses (both large and small). Therefore, the chances that an employee (or their attorney) will turn to the wage-hour laws for valuable legal leverage is high.
2) Don’t assume that well-paid employees are exempt. This is a common misunderstanding among employers: they think that, if the total annual compensation is well above the legal minimum (even if not paid as a salary), overtime is not applicable. Helix reminds us that assumption is dead wrong.
3) Don’t neglect the so-called “job duties” prong of the overtime exemption tests. Often, employers believe that their employees are exempt because they are paid on a salary basis and that salary is well above the required threshold. However, to be exempt (under the executive, administrative, or professional exemptions), the employee must perform certain job duties. In other words, the test is conjunctive, not disjunctive. If you pay a low-level employee $95,000 per year on a salary basis, they are still likely non-exempt and, therefore, entitled to overtime because they will not perform the required job duties.
4) If all your employees are exempt, i.e., if you don’t pay any of your employees overtime, you likely have a problem. The overtime exemptions were narrowly drawn and designed so that most employees will receive overtime. If all your employees are exempt, that’s a red flag.
5) Don’t forget about state law. The FLSA – the federal law at issue in Helix – is the floor for wage-hour compliance, not the ceiling. State law maps on top of federal law. To avoid a wage-hour lawsuit, you must be in compliance with both. For example, if you pay an employee $40,000 per year on a salary basis and they satisfy the job duties test for an executive, that employee would likely be exempt from overtime under the FLSA. However, that same employee would not be exempt from overtime under New York law because the weekly payment threshold for the NY executive exemption is much higher.
6) Don’t underestimate damages. Many employers mistakenly believe that wage-hour compliance is not important because the damages are small. Nothing could be further from the truth. For example, imagine you fail to pay an employee $100 per week in overtime because you mistakenly treated them as exempt. Under the FLSA and NY law, there are double damages (“liquidated damages”) of 100%. So, you automatically owe that employee an extra $100, for a total of $200. Now, imagine that employee has worked for you for 6 years. That’s $200 per week multiplied by 312 weeks. That’s $62,400 in overtime liability (not counting interest, which also applies under the NY Labor Law).
However, many of these actions are brought by groups of employees, all of whom have been subject to the same error. So, let’s assume you made the same overtime mistake with three other employees. Each have lost $100 per week in unpaid overtime for 6 years. That’s an additional $187,200 in unpaid overtime and double damages. Combined with the first employee, your $100 per week error for four employees has added up to $249,600 in liability. If the employee prevails, you will also pay the employee’s legal fees, which could be substantially greater than the overtime liability to the employees. (In an overtime case that goes to trial, the employee’s legal fees could easily reach the six-figures.)
This liability attaches not only to the company, but also to the individuals who control wages at the company. In other words, there is personal liability for certain management employees. (In NY, the 10 largest shareholders can also be personally liable.) All of this over a seemingly insignificant $100 per week underpayment.
7) Be proactive. A privileged wage-hour audit, performed by experienced employment counsel, can uncover many of these issues before they erupt into litigation. It is far better to confront them on your own timetable so they can be fixed discreetly. Settlements of FLSA lawsuits are public. There is no confidentiality. So, if you wait until a case is filed, the world – including all of your employees – will know.
If you have any further questions regarding compliance under the FLSA or state labor and employment laws, please contact Joseph H. Harris.
