News & Insights

Supreme Court Clarifies Analysis of the Salary Basis Test Under the FLSA

March 7, 2023

By: Stephen B. Stern

     In Helix Energy Solutions Grp., Inc. v. Hewitt, ___ U.S. ____, 143 S. Ct. 677 (2023), in a 6-3 decision, the United States Supreme Court held that an employee who is paid solely on a daily rate basis is not paid on a “salary basis” under the Fair Labor Standards Act (“FLSA”) and, therefore, is not exempt from the overtime requirements of the FLSA.

    The FLSA generally requires nonexempt employees to be compensated at least the minimum wage for the hours worked and time and one-half for every hour worked in excess 40 hours each workweek.  The FLSA exempts certain types of workers from its protections, including the requirement to pay overtime.  Among the exemptions are employees who qualify as bona fide executive, administrative, or professional employees.  Determining whether an employee satisfies the requirements of those exemptions generally involves a fact-intensive analysis that examines the nature of how the employee is paid and the employee’s job duties.  At issue in Helix Energy was an analysis of the compensation component of the exemption – the salary basis test.  To satisfy the “salary basis” test, an employee must receive a “predetermined and fixed salary” – “one that does not vary with the precise amount of time [the employee] works.”  In addition, the salary must exceed a specified amount.    

     With respect to the executive exemption, which was at issue in Helix Energy, two different analyses can be done – one for lower income employees and one for higher income employees.  The Supreme Court explained that the “general rule” applies to employees making less than $100,000 in “total annual compensation” and that general rule requires an exempt executive to be paid on a “salary basis” of at least $455 per week.  The rule that applies to “highly compensated” employees requires employees to make at least $100,000 per year.  Both types of exempt executives must be compensated on a “salary basis,” with the “duties test” easier to satisfy when looking at “highly compensated” employees in that an exempt “highly compensated” employee must regularly perform only one of the three general job responsibilities identified in the general rule, while employees who make less than $100,000 must regularly perform the three general job responsibilities identified – managing the enterprise, directing other employees, and exercising the power to hire and fire.

     The Supreme Court noted that Department of Labor regulations also recognize that workers may be compensated “on an hourly, a daily or a shift basis,” rather than a weekly or less frequent basis.  The regulation (Section 541.604(b)) states that an employer may base an employee’s compensation on an hourly, daily, or shift rate without “violating the salary basis requirement” or “losing the [bona fide executive] exemption” “so long as two conditions are met.”  The first condition requires that the employer guarantee the employee at least $455 each week, “regardless of the number of hours, days, or shifts worked.”  The second condition requires that the promised amount bear a “reasonable relationship” to the “amount actually earned” in a “typical week” – it 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.”  

     In Helix Energy, the plaintiff, Michael Hewitt, worked as a “tool-pusher” on an offshore oil rig.  He oversaw various functions and supervised 12-14 workers.  He typically worked 12 hours a day, seven days a week, during a 28-day “hitch” and then he would have 28 days off.  He was paid on a “daily-rate basis,” without overtime compensation.  The daily rate ranged during his employment from $963 to $1,341 per day.  Hewitt generally made more than $200,000 per year under this compensation system.  He ultimately sued Helix Energy, seeking overtime pay.  The district court granted summary judgment to the employer and the United States Court of Appeals for the Fifth Circtui reversed, finding that Hewitt was not compensated on a “salary basis” and, therefore, he could claim protection under the FLSA for overtime compensation.  The Supreme Court granted certiorari.

     The narrow issue before the Supreme Court was whether Hewitt was paid on a “salary basis” under Section 541.602(a) of the Department of Labor regulations (the parties agreed that Section 541.604(b) did not apply because Helix Energy did not guarantee the amount Hewitt was paid each week had reasonable relationship to the weekly amount he usually earned).  Section 541.602(a) requires that an 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.”

     The Court concluded that Hewitt was not paid on a salary basis as required by Section 541.602(a) because Section 541.602(a) requires employees to be paid by the week (or longer) and, in this case, Helix Energy paid Hewitt a daily rate.  To be exempt and paid at a daily rate, Helix Energy had to satisfy the requirements set forth in Section 541.604(b) according to the Supreme Court.  As the Court explained, “an employee paid on an hourly basis is paid by the hour, an employee paid on a daily basis is paid by the day, and an employee paid on a weekly basis is paid by the week – irrespective of when or how often his employer actually doles out the money.”  To satisfy the salary requirement of being paid on a weekly basis under Section 541.602(a), the employee must be compensated on a weekly basis (not on a daily basis) according to the Court.  The Supreme Court further explained that use of the word “basis” to describe the payment “typically refers to the unit or method for calculating pay, not the frequency of its distribution” and use of the word “receipt” in the regulation does not alter the meaning of “basis” to suggest actual receipt or delivery of funds.  In short, according to the Supreme Court, the plain text of Section 541.602(a) precludes finding that an employee is paid on a salary basis when the employee is paid at a daily rate.  The Court went on to provide a number of other textual and other analyses that all supported its conclusion that Hewitt was a nonexempt employee and eligible to receive overtime compensation under the FLSA.  

    The Supreme Court’s decision in Helix Energy is significant because it provides some clarification of the “salary basis” test that is applied when determining an employee’s exempt status under the FLSA and, in particular, it clarified that an employee paid at a daily rate cannot satisfy the salary basis test under Section 541.602(a); an employee paid at a daily rate can satisfy the salary basis test only under Section 541.604(b).  The Court’s analysis in Helix Energy also is an important reminder for companies to conduct careful analyses of which employees are exempt and which are not, as an incorrect classification can result in substantial liability, particularly for highly compensated employees like Hewitt in Helix Energy, and the numbers can grow significantly when a misclassification occurs for an entire classification of employees.  Under the FLSA, the liability is not only the back wages, but it also can result in liquidated (double) damages dating back two or three years, plus attorneys’ fees.  Companies may want to consider doing FLSA audits periodically, typically with the assistance of legal counsel, to ensure they have classified their employees correctly as exempt or nonexempt and that they are complying with various other aspects of the FLSA, including the recording of hours worked and calculating overtime pay when it is earned.