On September 9, 2021, the en banc Fifth Circuit Court of Appeals released its decision in the case of Hewitt v. Helix Energy Solutions Group, Inc., in which it considered whether an employee paid a day rate satisfies the “salary basis” requirement for certain overtime exemptions from the federal wage law — the Fair Labor Standards Act (FLSA). The Fifth Circuit ultimately held that an offshore oil toolpusher who managed at least a dozen employees and earned more than $200,000 a year is entitled to overtime pay because the $963 day rate he received was not a “salary” within the meaning of the FLSA. This ruling has major ramifications for the oil and gas industry, where it is a common practice to pay supervisors high day rates for each day worked. Under the Fifth Circuit’s ruling, workers paid a day rate may also be entitled to overtime pay for every hour worked over forty hours in a given week, no matter how high the day rate.
This article analyzes the Fifth Circuit’s ruling and identifies alternative compensation structures for day rate workers, as well as risk management strategies that businesses should consider.
The Fifth Circuit’s Decision Limits Who Qualifies as a “Highly Compensated Employee” Under the FLSA
The FLSA requires employers to pay employees overtime pay of at least 1.5 times the employee’s regular rate of pay for all hours worked over 40 hours in a single workweek. However, certain employees are exempt from overtime. In the oil and gas sector, companies frequently rely on the “highly compensated employee” (HCE) exemption for supervisory workers. This exemption from the overtime pay requirement applies to employees who: (1) have a total annual compensation of at least $107,432, which must include at least $684 per week “paid on a salary or fee basis,” and (2) regularly and customarily perform at least one of the duties of an executive, administrative, or professional employee, as set forth in the FLSA.
The Hewitt case asked the Fifth Circuit to decide whether an employee who is compensated solely by a day rate is paid on a “salary basis” for purposes of the HCE exemption. Interpreting the federal regulations, the Fifth Circuit held that day rate workers could be considered salaried for purposes of the overtime exemptions only if two conditions are met: (1) the employee is guaranteed a minimum weekly amount (which currently must be at least $684 per week), regardless of the hours, days, or shifts worked and (2) a “reasonable relationship” exists between the guaranteed weekly amount and the amount actually earned.
According to the Fifth Circuit, these conditions protect employees in two ways. The “minimum weekly” guarantee sets a baseline for how much the employee can expect to earn, and the “reasonable relationship” test prevents the employer from overworking the employee far in excess of the time the weekly guarantee contemplates. Notably, the FLSA does not require payment of the guaranteed weekly amount for work weeks in which no work is performed. However, if the employee works any time during a given week, the minimum weekly guarantee is triggered, subject to various deductions and exceptions allowed under the FLSA regulations.
The Fifth Circuit concluded that the $963 day rate paid to Hewitt failed to satisfy either of the two conditions. First, the Fifth Circuit found that a day rate cannot satisfy the minimum weekly guarantee requirement because a day rate is paid “with regard to,” and not regardless of, the number of days worked. Second, the Fifth Circuit found that even if the $963 day rate had satisfied the minimum weekly guarantee requirement, it would still fail the reasonable relationship test because the amount Hewitt actually earned per week was several multiples of the $963 day rate, depending upon the number of days worked.
The Fifth Circuit rejected Helix’s argument that the “reasonable relationship” test does not apply to the HCE exemption for employees who are paid a day rate that exceeds the FLSA’s $684 weekly salary threshold. Under the FLSA regulations, a “reasonable relationship” exists if the weekly guarantee is “roughly equivalent” to the employee’s usual earnings at the assigned daily rate for the employee’s normal scheduled workweek. Although there is no precise measure, the U.S. Department of Labor has opined that a 1.5-to-1 ratio of actual earnings to guaranteed weekly salary is a “reasonable relationship,” but that a ratio of 1.8-to-1 would be impermissible.
This ruling is unlikely to be the final chapter for the Hewitt v. Helix case, which already has an extensive procedural history. The Fifth Circuit’s ruling was sharply divided, with six judges dissenting. The significant impact of the decision on employers combined with conflicting interpretations by other circuit courts may lead to Supreme Court review.
Alternative Compensation Structures for Day Rate Workers
The Fifth Circuit’s jurisdiction covers Louisiana, Mississippi, and Texas. Businesses affected by the decision should not delay in seeking legal review of their current compensation practices. Because overtime is paid at 1.5 times the employee’s “regular rate” of pay, higher total compensation means a higher overtime rate. Consequently, paying high day rates may ultimately result in significant overtime liability for your company, as well as potential liability for liquidated (double) damages and attorneys’ fees.
It was undisputed that Hewitt was Helix’s employee and not an independent contractor. However, the Fifth Circuit’s ruling also affects companies paying independent contractors a day rate because, in defending against challenges to independent contractor classification, companies often rely on exemptions to the FLSA, including the HCE exemption, as an alternative defense. However, under the recent decision, this alternative defense may not be available.
Although the Fifth Circuit’s decision is an unfortunate outcome for employers, companies have several options for paying workers in a manner that satisfies the HCE exemption. For example, the Fifth Circuit acknowledged that, in paying Hewitt a day rate, Helix could have easily satisfied the “salary basis” requirement and avoided owing overtime pay if it had also provided Hewitt a minimum weekly guarantee of $4,000, the approximate economic equivalent of Hewitt’s $963 day rate for a typical work week. Employers that utilize this option and continue to pay a day rate must ensure the weekly guarantee satisfies the “reasonable relationship” test. Alternatively, employers may pay the employees a guaranteed salary of at least $684 per week. While the Fifth Circuit did not address this precise issue, other circuit courts of appeals, the FLSA regulations, and guidance from the Department of Labor indicate that employers utilizing this option may provide employees with additional compensation based on hours worked beyond the normal workweek, without violating the “salary basis” requirement or triggering the reasonable relationship test.
Additionally, for certain overtime exemptions, including the HCE exemption, employers may avoid the “salary basis” requirement entirely by paying employees on a “fee” basis. A worker paid on a fee basis receives an agreed amount for a single job, regardless of the time required to complete the job. The Fifth Circuit noted that Helix could have attempted to show it paid Hewitt on a “fee basis,” but that Helix did not make that argument. Because paying a worker on a “salary basis” or a “fee basis” is subject to very specific requirements, employers should consult legal counsel prior to utilizing these options. Regardless of which option the employer chooses, for the HCE exemption to apply, the amount paid to the employee must also satisfy the $107,432 total annual compensation requirement.
Insurance Risk Transfer as a Last Line of Defense
Employers should not assume that their Employment Practices Liability Insurance (EPLI) policy covers wage and hour claims, including overtime claims brought by day rate workers. While some companies may take comfort in having an EPLI policy, the reality is that EPLI policies often exclude all types of wage and hour claims or provide minimal coverage up to a $250,000 limit for defense costs only. Consequently, FLSA collective actions are generally not covered by the traditional suite of insurance products that comprise most corporate insurance programs.
Fortunately, a niche market has developed in Bermuda where larger employers can purchase up to $60 million of specialized Wage and Hour coverage from insurers such as Markel, AXA XL, AWAC, AIG, Argo, and Arcadian. Wage and Hour insurance covers the company and its executives for claims brought by current or former employees (including independent contractors asserting status as employees) alleging violations of the FLSA or any similar state or local laws. In addition to overtime violations, such claims often contend that the employer miscalculated wages, failed to properly pay employees for donning and doffing activities, and/or failed to provide the required meal and rest break periods. Once the policy retention is satisfied, Wage and Hour insurance reimburses the company for defense costs, compensatory and liquidated damages, pre- and post- judgement interest, the plaintiff’s attorney’s fees, and civil fines or penalties imposed pursuant to state law.
Since the pandemic, the demand for Wage and Hour insurance has increased significantly, with more than 200 Wage and Hour policies in effect as of today. Due to the frequency and severity of FLSA litigation, such policies generally do not cover the first $500,000 to $1 million of defense costs, and businesses can expect to pay $200,000 or more for a $5 million limit in today’s market. Consequently, specialized Wage and Hour insurance is generally neither attractive nor offered to smaller businesses. However, for larger employers, it can be a compelling part of an overall risk management program.
About the Authors: Julie Offerman is a shareholder in the Employment and Labor Group at Chamberlain & Hrdlicka. She defends employers nationwide against multi-plaintiff and single plaintiff lawsuits involving independent contractor status, wage and hour compliance, and other employment-related matters. She may be reached at (713) 654-9678 or [email protected].
Lee D. Snelgrove is a Senior Vice President and regional leader within Alliant Insurance Services, Inc.’s Management & Professional Solutions Group. Lee and a dedicated team of brokers specialize in providing executive risk insurance brokerage and advisory services to companies within the energy sector. Lee may be reached at (713) 470-4361 or [email protected].