The Fifth Circuit Clarifies the Limited Circumstances in Which an Employee Paid on a Day-Rate Basis May Be Exempt from Overtime Pay

In May, we advised employers that the en banc Fifth Circuit was considering the hotly contested issue of whether a flat day rate can be the equivalent of a weekly salary for purposes of meeting the Fair Labor Standards Act’s (“FLSA”) salary basis requirement to be exempt from overtime. Last month, the Court issued its opinion and determined that it does not.

The U.S. Department of Labor defines pay on a salary basis to mean that an employee regularly receives a “predetermined amount” that is calculated on a “weekly or less frequent” pay period, “without regard to the numbers of days or hours worked.” In Hewitt v. Helix Energy Solution Group Inc., the plaintiff Hewitt argued that his day rate of $963 did not meet the salary basis test because his pay was dependent on the number of days he worked. Helix, the employer, argued that Hewitt met the test because in each workweek in which he worked, he received a guaranteed amount of pay above the statutory weekly minimum of $684.

A majority of the en banc Court held that a day rate can only be considered a salary if an employer pays a guaranteed weekly minimum amount regardless of days or hours worked and there is a “reasonable relationship” between the guaranteed pay and the amount actually earned. The Court reasoned that Hewitt’s day rate did not comply with the guarantee requirement because “a daily rate, by definition, is paid with regard to—and not ‘regardless of’”—the number of hours or days the employee works. The Court further suggested in dicta that Hewitt’s pay did not comply with the reasonable relationship requirement because his total pay was “orders of magnitude greater” than the minimum guarantee of his $963 day rate, and Helix otherwise failed to argue that it satisfied the reasonable-relationship test. The Court explained that the test sets a “ceiling on how much the employee can expect to work in exchange for his normal paycheck, by preventing the employer from purporting to pay a stable weekly amount without regard to hours worked, while in reality routinely overworking the employee far in excess of the time the weekly guarantee contemplates.”

When discussing the reasonable relationship test, the Court confirmed the requirement that the minimum guarantee be more than a “charade.” It cited favorably the DOL’s conclusion that employers who routinely pay total weekly compensation of $1,500 or more based on work performed and yet guarantee only a minimum of $455 (the now-superseded salary threshold) are effectively docking the employee for partial day absences such that the arrangement would not be reasonable. The Court also pointed out that Helix “easily” could have paid Hewitt in a compliant manner by “offering a minimum weekly guarantee of $4,000 based on [a] daily rate of $963.” Assuming five days worked per week, this would suggest that total weekly compensation of 1.2x the minimum weekly guarantee would satisfy the reasonable relationship test. However, the Court did not establish a ratio or other clear criteria for determining that the guarantee bears a reasonable relationship to the amount actually earned.

The Bottom Line

This decision will undoubtedly affect pay practices in the oil and gas industry. Employers within Texas, Louisiana, and Mississippi that previously paid employees on a flat day rate basis in lieu of paying overtime, assuming that the employees would meet one or more FLSA exemptions, must now restructure the way that such employees are paid.  While the easiest way to ensure FLSA compliance is by paying employees hourly with overtime, a salary plus bonus arrangement may be acceptable and complaint if it is paid in accordance with applicable regulations . Employers should consult their employment counsel to determine the most effective way to restructure compensation for positions that were formerly paid a flat day rate.