Supreme Court Holds that Salary Test Still Applies to Highly Compensated Individuals Under FLSA

This week the United States Supreme Court held that highly compensated employees are not exempt from overtime requirements unless they are paid on a salary basis.  In other words, employers cannot avoid paying overtime to employees simply because they earn a high hourly or daily rate.  Rather, employers must provide employees with a reliable, predetermined compensation regardless of the number of days or hours worked in a given workweek, in order to satisfy overtime exemptions. 

The federal Fair Labor Standards Act (“FLSA”) governs minimum wage and overtime requirements for most employees in the United States. States may, and often do, set a higher minimum wage and impose more protective provisions for employees.  The FLSA requires that most employees are paid overtime at the rate of time and one-half the regular rate of pay for all hours worked over 40 hours in a given workweek. There are limited exemptions to the overtime requirements for employees whose jobs fall within certain categories defined by their primary duties, i.e., the “duties test.”  Those exemptions include employees whose primary role is in an executive, administrative, professional, or outside sales function. However, the FLSA also exempts employees who (1) make a total annual compensation of $107,432 or more, (2) are paid on a salary or fee basis, (3) perform office or non-manual work, and (4) regularly perform at least one of the exempt job functions.  This is known as the “highly compensated employee” or “HCE” exception.

In Helix Energy Solutions Group, Inc. v. Hewitt, the Supreme Court took up a challenge to the “salary basis” requirement of the HCE exemption.  In a decision authored by Justice Kagan and joined by Justices Roberts, Thomas, Sotomayor, Coney Barrett, and Jackson, the Court held that Helix violated the FLSA by classifying Hewitt, an oil rig worker, as exempt, and by failing to pay him overtime even though his annual compensation exceeded $200,000.  The decision turned on the manner in which Hewitt was paid.  Hewitt typically worked 12 hours per day, 7 days a week in 28-day stints, followed by 28 days off.  Hewitt received a daily rate for his work ranging from $963 – $1,341 with no overtime compensation, meaning that his compensation varied by week to week based on how many days he worked in a given week. According to the Court, in order to be exempt from overtime pay, employees must have a guaranteed, predetermined compensation that they can rely on and that does not vary based on the hours or days worked in a given workweek.  Employers can pay employees a daily or hourly rate and still meet the HCE exemption so long as the employer provides a guaranteed weekly salary of at least $684 regardless of the hours or days worked. Hewitt’s compensation did not meet those requirements, and therefore, he was improperly classified as exempt and entitled to overtime pay.

Note that Connecticut does not have a “highly compensated employee” exemption to its overtime requirements, so this decision will have little effect on employers with employees exclusively located in the state of Connecticut.  However, multi-state employers and employers with employees based outside of Connecticut may want to evaluate their current classification and compensation structure for employees currently classified as exempt under the HCE exemption. 

This ruling may create challenges for employers who pay high daily or hourly rates for employees who work irregular schedules, like Hewitt. However, as the decision makes clear, employers have options to create compensation structures to meet their unique needs while remaining compliant.  If you have questions please don’t hesitate to contact Shipman’s Employment Team.