After three rounds of deliberation, the Fifth Circuit finally issued its ruling earlier this month in Hewitt v. Helix Energy Solutions Group, Inc. et al., a case with broad implications for employers with both exempt and non-exempt employees as defined by the Fair Labor Standards Act (“FLSA”). The Hewitt Court considered the case of an offshore rig worker who was paid over $200,000 annually and held that his employer did not satisfy the “salary basis” element to qualify the worker as an exempt employee because his pay was calculated on a daily basis.

The FLSA requires that overtime must be paid to all employees who work over 40 hours per week unless an exemption applies.  For an exemption to apply, an employer must meet all the requirements of that exemption. Exemptions include “highly compensated” employees per 29 C.F.R. § 541.601 (“Section 541.601”) as well as more modestly paid “executive,” “administrative,” and “professional” employees.

To fall within these exemptions, three conditions must be met:

1.   The employee must meet certain criteria concerning the performance of executive, administrative, and professional duties;

2.   The employee must meet certain minimum income thresholds; and

3.   The employee must be paid on a “salary basis.”

For employees whose salary is computed on a daily basis, 29 C.F.R. §541.604(b) (“Section 541.604(b)”) states that an employee must meet the following criteria to be characterized as exempt.

An exempt employee’s earnings may be computed on an hourly, a daily or 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 work, and a reasonable relationship exists between the guaranteed amount and the amount actually earned.

In Hewitt, Helix Energy Solutions Group, Hewitt’s employer, claimed that Hewitt was exempt as a highly compensated executive employee. Hewitt worked as a tool pusher for Helix for over two years, and managed other employees while working offshore on an oil rig during his “hitch.” Each hitch lasted about a month. The parties agreed that the first two prongs of the exemption had been met. Hewitt met both the duties requirement and income threshold. The third prong, that the employee must be paid on a “salary basis”, was the only contested condition.

Helix contended that Hewitt was a highly compensated executive employee, and, thus, not subject to the FLSA overtime penalty. Hewitt contended that Helix did not pay him on a “salary basis” because the company calculated his pay using a daily rate without satisfying the requirements of Section 541.604(b). Helix responded that it was not required to comply with those requirements.

The majority in the Hewitt decision disagreed with Helix and held that, when it comes to daily-rate employees like Hewitt, Helix was required to comply with Section 541.604(b). The Court held that Helix did not comply with either prong of Section 541.604(b).  Helix paid Hewitt a daily rate without offering a minimum weekly required amount “regardless of the number of hours, days or shifts worked.” Also, the Helix failed to show that the amount it paid Hewitt bore a reasonable relationship to the guarantee “of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts work”. The Court noted that although Helix “could have easily complied” had it, for example, offered Hewitt a certain minimum weekly guarantee, Helix failed to do so.

Of note is that there is now a split on this issue among the federal courts of appeal. The Fifth Circuit (Texas, Louisiana, and Mississippi), Sixth, and Eighth Circuits have interpreted Section 541.604(b) differently than the First and Second Circuits. It will likely require the U.S. Supreme Court to create consistency across the country on the proper interpretation of this portion of the FLSA.  Until that day comes, employers in Texas should revisit their pay practices to ensure all elements of the FLSA exemption requirements have been met.

The attorneys in our Dallas and Austin offices are available to answer any questions you may have and to help you comply with any applicable standards.  Please contact us at info@gstexlaw.com with any questions you may have.

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