Supreme Court Clarifies the Meaning “Salary Basis” Under Federal Overtime Law

The U.S. Supreme Court recently held that an employee who earned in excess of $200,000 annually was entitled to overtime pay because he did not qualify for the FLSA’s highly compensated employee exemption.  This decision – which turned on whether the employee was paid on a “salary basis” – requires employers to take a close look at their employee compensation pay structure to ensure that exempt employees are being paid in accordance with applicable law.  Read on for the Supreme Court’s reasoning in this particular case.  

In Helix Energy Solutions Group, Inc. v. Hewitt, 598 U.S. __ (2023), an offshore oilrig supervisor earning over $200,000 annually sued his employer seeking overtime pay.  The employee regularly worked over 80 hours a week and was paid on a daily rate ranging from $963 to $1,341 “so that he receives a certain amount if he works one day in a week, twice as much for two days, three times as much for three days, and so on.”  In defense, the employer raised the FLSA’s highly compensated employee exemption.  This exemption requires, among other things, that the employee’s total annual compensation be at least $107,432, which must include at least $684 per week paid on a salary or fee basis.  The issue before the Court turned on whether the employee was paid on a “salary basis” when his “paycheck [was] based solely on a daily rate.”

The Supreme Court found the exemption inapplicable because the employer did not guarantee a “predetermined amount” constituting “a steady and predictable stream of pay, week after week after week” regardless of the time worked – a requirement of the exemption’s “salary basis” test.  In other words, the exemption is not met based purely on meeting a simple income level.  

While not applicable in this case, the Supreme Court’s majority opinion noted that the FLSA regulations provide for another way to satisfy the salary basis test for employees whose compensation is calculated on an hourly, daily, or shift basis. More specifically, the regulation requires (i) that the employer guarantee the employee a minimum salary level (currently $684 per week), and (ii) that such amount be “roughly equivalent to the employee’s usual earnings at the assigned hourly, daily or shift rate for the employee’s normal scheduled workweek.”  This creates “a compensation system functioning much like a true salary.”

In the wake of this decision, and because of the penalties associated with FLSA violations, employers should proactively review and analyze their use of the highly compensated employee exemption. When in doubt, consult legal counsel, as the consequences for failure to pay overtime can be steep. The Mintz Employment, Labor & Benefits group can help if your business has questions about overtime pay or employee classification.

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