Wage and hour law is full of traps for the unwary. Even compensation practices that are well-accepted across an entire industry can sometimes create huge headaches for employers in the face of a legal challenge. Case in point: A recent decision by the Fifth Circuit Court of Appeals in Hewitt v. Helix Energy Solutions Group, Case No. 19-20023, in is causing upheaval in the energy sector by suggesting that even highly paid supervisory employees may be entitled to overtime pay on top of their six-figure compensation because they are paid a day rate rather than a weekly salary.

The Highly Compensated Employee Exemption

Before we launch into a discussion of the Fifth Circuit’s opinion, let’s briefly review the requirements for an employee to be considered exempt from the FLSA’s overtime pay requirements.

To qualify for the executive, administrative, or professional exemptions, employees generally have to satisfy three conditions: they have to perform certain kinds of job duties, as detailed in Department of Labor regulations; they must be paid at least a certain minimum rate of pay; and they must be paid on a “salary basis.” The job duties tests for the executive, administrative, and professional exemptions each have multiple elements. For example, executive employees must have a primary job duty of managing an enterprise or a recognized department or subdivision of an enterprise, must customarily and regularly direct the work of at least two other full-time employees or their equivalents, and must have authority to hire or fire, or their suggestions and recommendations regarding hiring, firing, advancement, promotion, or other changes of status must be given “particular weight.”

Certain “highly compensated” employees can be considered exempt if they perform any of the exempt duties for one of the other positions, even if they do not meet all of the elements for that exemption test. So, for example, an employee might meet the exemption if they supervise at least two other full-time workers, even if they do not have hiring or firing authority. To qualify as “highly compensated,” an employee must receive total annual compensation of at least $107,432 (as of January 1, 2020). At least $684 per week of that compensation must be paid on a “salary or fee basis,” while the rest can include commissions and other nondiscretionary compensation earned over the course of a 52-week period.

Ordinarily, to pay an employee on a “salary basis” means that the employee receives at least a guaranteed minimum amount for each workweek in which the employee performs any work, regardless of the number of days and hours worked during the week.

The Fifth Circuit’s Decision

Michael Hewitt worked for Helix Energy as a “toolpusher,” supervising a crew of twelve to fourteen offshore oil and gas workers. Like many oil and gas workers, his compensation was calculated at a day rate. Hewitt received $963 per day, with total compensation in excess of $200,000 per year.

Helix Energy argued that this arrangement satisfied the requirements for the highly compensated employee exemption. The parties did not dispute that Hewitt performed exempt duties or that his total annual compensation was sufficient for the highly compensated employee exemption. Helix Energy argued that the salary basis requirement was met because Hewitt received at least $963 (his day rate) for any week in which he worked, well in excess of the minimum salary of $684 per week. However, a majority of 12 judges on the Fifth Circuit disagreed.

The DOL’s exemption regulations specify at 29 C.F.R. § 551.604(b) that an employee who is paid at a daily rate is paid on a “salary basis” if certain conditions are met:

An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.

According to the Fifth Circuit majority, Hewitt’s compensation did not meet this test because there was not a “reasonable relationship” between the guaranteed amount (at least one day of pay at the rate of $963) and Hewitt’s actual compensation for the weeks in which he worked, which substantially exceeded $963. The court found that Helix easily could have complied with the regulation by guaranteeing Hewitt a minimum weekly guarantee of $4,000 based upon his day rate of $963. However, because it did not do so, Hewitt was not exempt and was entitled to additional overtime pay for all hours worked in excess of 40 in a given workweek.

Six of the court’s judges vigorously dissented. The lead dissenting opinion argued that the language in 29 C.F.R. § 551.604(b) was intended to allow employers to pay a “minimum guarantee plus extras” to executive, administrative, and professional employees without jeopardizing employees’ exempt status. That concept is not relevant to highly compensated employees, because the concept of a “minimum guarantee plus extras” is already embodied in the separate regulation for highly compensated employees, with its requirement of a $684 per week guarantee plus total annual compensation of $107,432.

In a separate dissenting opinion joined by five judges, Judge Jacques Weiner, Jr. expressed incredulity at the majority’s opinion:

Frankly, I cannot fathom how a majority of the active judges of this court can vote to require Helix to pay overtime to Hewitt, the supervisor of 12 to 13 hourly, hands-on workers, when he was already paid more than twice the cap of $100,000 per annum for overtime eligibility.

“And, if that is not incomprehensible enough, keep in mind that Hewitt worked for Helix no more than half of the days during the calendar years at issue!

Insights for Employers

While perhaps an unwelcome surprise to the energy sector and “incomprehensible” to the dissenters, the majority decision in Hewitt is now the law in the Fifth Circuit (covering Texas, Louisiana, and Mississippi). However, the court’s decision is arguably at odds with prior rulings from the First and Second Circuits, which have held that the requirements of 29 C.F.R. § 551.604(b) do not apply to the exemption for highly compensated employees. Given the potential impact upon the energy sector, this split in opinions between federal appeals courts may prompt employers to take the issue to the U.S. Supreme Court.

Leaving the esoteric regulatory issues aside for a moment, employers in every instance can draw two lessons from this case:

  1. A given pay practice is not necessarily legal just because it is “standard” across an industry.
  2. Paying an employee a lot of money does not in itself make the employee exempt. Higher compensation just means that the employer will owe more overtime if the employee is found to be misclassified.