By Michael L. Dodd, Partner, Ferrara Fiorenza PC, Association Counsel
A recent Supreme Court case serves as a stark reminder for employers to adhere to the specific requirements of the Fair Labor Standards Act (FLSA) rules for exempting employees from required overtime payments. (See Helix Energy Solutions Group, Inc. v. Hewitt, __ U.S. __, Case No. 21-984 (U.S. Sup. Ct. Feb. 22, 2023).) In Helix, an oil rig supervisor earning more than $200,000 per year was determined to be entitled to overtime payments for any week he worked more than 40 hours because he was paid on a per diem (daily) basis, not a weekly salary. Please join us at our 21st Annual Human Resources and Employment Law Solutions Conference for a more in-depth discussion of these and other important developments.
To be exempt from overtime, an employee — working in a supervisory capacity — must satisfy three tests. First, under the federal FLSA, the employee must be paid at least $455 per week (please note that states like New York have a much higher threshold that must be met under State law to be considered exempt. In New York State, the salary threshold is $1,125/week downstate and $1,064.25/week upstate). Second, the employee must be paid on a “salary basis”. The FLSA regulations (29 CFR §541.602(a)) state that:
“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.”
Third, the employee’s primary duty must be: 1) managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; 2) customarily and regularly directing the work of at least two or more full-time employees; and 3) possessing the authority to hire or fire other employees, or at least provide significant input as to the hiring, firing, advancement, promotion or any other change of status of other employees.
In Helix, it was undisputed that the oil rig supervisor clearly satisfied the first and third tests for the exemption. However, even though his annual compensation was far beyond the basic federal threshold of $455 per week (his daily rate ranged from $963 to $1,341 throughout his employment), if he did not work on a particular day of the week, he would not be paid for that day. As the Court described it:
“His [Hewitt’s] paycheck, issued every two weeks, amounted to his daily rate times the number of days he had worked in the pay period. So if Hewitt had worked only one day, his paycheck would total (at the range’s low end) $963; but if he had worked all 14 days, his paycheck would come to $13,482. Under that compensation scheme, Helix paid Hewitt over $200,000 annually.”
In other words, despite the large pay scale, Hewitt’s pay was still subject to reduction because of “variations in the … quantity of the work [he] performed.” Accordingly, Hewitt failed the “salary basis test” and therefore could not be treated as exempt from overtime.
While the Supreme Court did not discuss the back wages amount that would be owed to the employee because of this decision, a few simple calculations reveal the scale of the damages the employer, Helix, will be required to pay. The Court noted that Hewitt routinely worked 84 hours a week when on the oil rig (which was roughly six months out of the year). If he earned exactly $200,000 per year for six months of work, his average hourly rate would end up being approximately $192 per hour. For overtime hours, he would be entitled to one-and-a-half times this hourly amount or approximately $288 per hour for every hour of overtime worked. If he averaged 44 hours of overtime per week for six months of the year, that is 1056 hours of overtime.
Based on these calculations, Helix could have to pay Hewitt back wages for the overtime hours in an amount exceeding $300,000 for one year. It is also important to note that the U.S. Dept. of Labor frequently adds “liquidated damages” to these back wage claims in an amount equal to the back wages owed. In other words, for a single year, Helix may be paying more than $600,000 for Hewitt’s misclassification.
While these are only rough calculations based on the information available, the point should be clear that employers must be careful to adhere to the letter of the law with respect to the FLSA and, more specifically, classifying employees as exempt. Never assume that simply because you pay employees well or pay them a salary in excess of the statutory thresholds, that an employee is exempt from overtime. Work with your attorney to make sure that each would-be exempt employee satisfies every element of the applicable test.
As noted above, this and other important HR-related developments will be explored at our 21st Annual Human Resources and Employment Law Solutions Conference. REGISTER TODAY!
Michael L. Dodd, Partner
Ferrara Fiorenza PC, PGCA Association Counsel