The last two years have brought uncertainty to the issue of whether oilfield workers paid on a day-rate compensation plan may be properly classified as exempt from overtime under the Fair Labor Standards Act (FLSA). In a series of decisions from August 2019 to March 2021, the Fifth Circuit attempted to clarify whether a day rate is a salary under the FLSA. But, the barrage of issues and withdrawn decisions present a legal quagmire for employers seeking to make proper classification decisions. This article clarifies the law for employers seeking to maintain exemptions from overtime for certain oilfield workers.
Exempt workers do not have to be paid overtime premiums for any hour worked over 40 in a single workweek. Some of the most common include the executive, administrative, and highly compensated exemptions. Each of these exemptions incorporates a salary basis test – meaning that the exemption cannot be established unless the employee is also being paid on a salary basis.
Federal regulations define “salary basis” as a predetermined amount constituting all or part of the employee’s compensation which is not subject to reduction because of variations in the quality or quantity of the work and which is received on a weekly or less frequent basis. However, what if an employee’s compensation is computed with respect to daily work rather than work performed on a weekly or monthly basis? In other words, can an employee paid solely a day rate basis satisfy the salary basis test?
The Fifth Circuit first attempted to answer this question in Faludi v. United States Shale Solutions decided on August 22, 2019 (Faludi I). In Faludi I, the Fifth Circuit determined that Faludi — who was paid $1,000 per day for legal consulting services — satisfied the salary basis test and was properly classified as exempt under the FLSA. Specifically, Faludi I noted that the salary basis test only required that compensation be received on a weekly or less frequent basis rather than calculated on a weekly or less frequent basis. Thus, because Faludi was guaranteed to receive at least $1,000 for any week in which he worked at least one day, his twice a month payment from U.S. Shale satisfied the salary basis test.
Following the Faludi decision, the plaintiff requested the case be heard en banc – if granted, this means the previous opinion is withdrawn, the case is heard by the full Fifth Circuit rather than the initial panel of judges, and a new opinion is issued. However, on February 14, 2020, rather than granting or denying the en banc request, the panel withdrew the August 22, 2019, opinion and decided the case on separate grounds, which did not implicate the salary basis issue (Faludi II). However, the Faludi II panel did note that it took U.S. Shale’s argument that Faludi satisfied the salary basis test and was thus properly classified as exempt, as “well taken.”
The Fifth Circuit next revisited the issue on April 20, 2020, with its opinion in Hewitt v. Helix Energy Sols. Grp., Inc. (Hewitt I). In Hewitt I, the issue presented was the one ultimately sidestepped by the Fifth Circuit in Faludi II – can an employee paid a day rate satisfy the salary basis test under the FLSA? The Hewitt I panel, in contradiction to the withdrawn holding of Faludi I and dicta within Faludi II, answered no. In reaching this conclusion, Hewitt I emphasized that a day rate employee can only determine his compensation at the conclusion of a pay period as compared to a salaried employee who receives the same amount of compensation each pay period and can thus determine his compensation before each pay period. However, Hewitt I also recognized that an employer could avoid this issue by agreeing to the length of each hitch in advance with the employee, thus allowing him to predetermine his compensation before each pay period.
On December 21, 2020, following a request for rehearing and additional briefing, the Fifth Circuit withdrew its April 20, 2020, Hewitt I opinion and issued a revised opinion (Hewitt II). In Hewitt II, the Fifth Circuit again changed course and determined employees paid a day rate can satisfy the salary basis test provided several requirements are met. These requirements are 1) a guarantee and 2) a reasonable relationship between the guarantee and the amount actually paid.
The first condition requires the worker be guaranteed a minimum weekly payment he or she can expect to receive – regardless of the hours actually worked. In other words, a guarantee that they will receive a certain amount of money per week, whether they work one day or seven days, provided that they are ready and willing to work. Hewitt II states this guarantee can be thought of as a “floor” that establishes an absolute minimum a worker can expect to be paid in any given week. The second condition requires a reasonable relationship between the above-mentioned guarantee and the amount actually paid. Hewitt II explains this requirement as establishing a “ceiling” on how much a worker can expect to work in order to earn their weekly guarantee.
Hewitt II notes that employers need to be prepared to offer more evidence of a guarantee than a pure day rate arrangement to satisfy the first prong. Of course, this is consistent with language from Hewitt I. Hewitt II also concludes that day rate employees could satisfy the reasonable relationship test but doing so requires the employee not to be paid “orders of magnitude greater than the weekly amount” he or she was guaranteed to receive. Ultimately, Hewitt II stood for the proposition that a day rate worker may be properly classified as exempt, provided that certain caveats are met.
However, the tale does not end here. On March 9, 2021, following a petition for an en banc hearing by Helix Energy, whose pay practice did not meet the requirements set forward in Hewitt II, the Fifth Circuit withdrew its December 21, 2020, Hewitt II opinion and granted oral argument before the full Fifth Circuit with a tentative date of May 24, 2021. The en-banc hearing and subsequent opinion (Hewitt III) should ultimately settle the question of whether a day rate can constitute a salary for purposes of exemptions under the FLSA.
About the authors: Annette A. Idalski is a shareholder and the National Chair of Chamberlain Hrdlicka’s Labor & Employment Practice. She may be reached at [email protected] Brian Smith is an associate
in the practice.