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A Refresher on “Salary Basis” under the FLSA A Refresher on “Salary Basis” under the FLSA

A Refresher on “Salary Basis” under the FLSA

In light of last month’s U.S. Supreme Court decision in Helix Energy Solutions Group, Inc., et al., v. Hewitt, it may be a good idea to provide a refresher about the “salary basis” requirement for white-collar employees under the Fair Labor Standards Act (FLSA). In order to be exempt from overtime under the FLSA, white collar employees generally have to be paid on a salary basis. This is true for the executive, administrative, and professional exemptions, as well as the highly compensated exemption. The salary basis is an option for the computer related occupations exemption. It is not required under the outside salesperson exemption. Out of the six different categories of white collar exemptions, the salary basis is a standard in four of the six, an option in a fifth, and is not required in the sixth. 

What is salary basis? To be paid on a “salary basis” according to the Department of Labor, the employee must regularly receive each pay period, on a weekly or less frequent basis, 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 work performed. That is quite a mouthful, so here are the important elements:

A salary must be paid at least on a weekly basis. An employer can pay bi-weekly, monthly, or on a longer basis, but it must be at least weekly. The salary cannot be paid strictly on a daily or an hourly basis. 

Notably, the salary must be a predetermined or fixed amount. The current minimum salary under the FLSA is $684 per week. An employer can certainly pay an exempt employee a fixed amount that is more than the minimum salary, but it cannot pay them less. This salary has to be “all or part” of the total compensation. That means that the employer can pay bonuses, extra compensation, commissions and the like, but the agreed-upon salary amount must always be paid.

The salary cannot be subject to reduction either. In other words, an employer cannot dock salary based upon the quality of work or the quantity (a euphemism for “hours”) of work performed. There are a few exceptions to this rule when a salary can be docked. But, generally speaking, if an employee works one minute on Monday morning or 168 hours (i.e., 24 hours a day, 7 days a week) during the work week, the employee has earned their full salary for that week. 

The Helix case involved an oil rig worker, Michael Hewitt. He would typically work 12 hours a day, seven days a week, averaging about 84 hours per work week. He would work for 28 days straight on the oil rig, and then have another 28 days off. Hewitt supervised a crew of 12 to 14 employees on the rig and would have easily qualified as a white-collar exempt employee under the FLSA except that he was not paid on a salary basis. 

Instead, he was paid a daily rate, between $963 and $1,341 per day. His bi-weekly paycheck was the total of the number of days worked multiplied by the day rate then in effect. At the higher end of his compensation ($1,341 per day), if Hewitt worked one day during the pay period, he would earn $1,341. If he worked 14 days straight during the pay period, his check would gross $18,774. Based on his 28 day on-off schedule, he was earning over $200,000 annually. 

However, Hewitt did not get any overtime pay for the hours in excess of 40 per work week and he was not paid any guaranteed minimum salary. He ended up filing a lawsuit claiming that he was entitled to overtime because the lack of a guaranteed weekly salary made him non-exempt under the FLSA. 

Initially, the trial court found that his daily rate equated to a salary under the FLSA. The Fifth Circuit Court of Appeals held the opposite. When the case ultimately got to the U.S. Supreme Court, the Court found that the daily rate in this case was not the equivalent of a weekly salary. The analysis turned on the Court’s interpretation of a Department of Labor regulation that allows an exempt employee’s earnings to be calculated on the “reasonable relationship” test. This test is met when the employee is guaranteed at least a minimum weekly amount regardless of the number of hours, days, or shifts worked; the employee’s actual pay is calculated based upon an hourly, daily, or shift rate; and a reasonable relationship exists between the guaranteed amount and the amount actually earned.  For example, an exempt employee who is guaranteed compensation of at least $1,000 for any week in which the employee performs any work, and who normally works four or five days each week, may be paid $275 per day without violating the salary basis requirement. This is because the minimum guaranteed amount is “roughly” equivalent to the employee’s usual earnings. But the key is that the employee has a guaranteed minimum amount each week.  

Because Hewitt had no guaranteed weekly amount or salary, the Court held that Hewitt was not exempt from overtime and would be entitled to overtime payments for all of the hours worked in excess of 40 hours per work week. That would average 44 hours of overtime per week

Interestingly, a mix of both conservative and liberal Justices were in the majority opinion of the Supreme Court’s 6-3 ruling in favor of Hewitt. 

Circle back now to the salary requirement and why this all matters. First, keep in mind that an employee must be paid, at minimum on a weekly basis, a fixed salary for all work that they perform, regardless of the number of hours that they worked and regardless of the quality of the work performed. Simply being paid a large amount on a daily basis, even if it is steady income, does not equate to a fixed weekly salary. 

Second, because an employee makes a lot of money—well into the six-figure range—does not mean that they are exempt. They still have to meet the requirements of an exemption under the FLSA, and that often includes a salary if the employee is classified as a white collar employee. The Supreme Court even commented on this. Helix argued about “windfalls” for high earners, as Congress chose not to set a simple income level as the test for exemption. The Court stated, “The whole point of the salary-basis test is to preclude employers from paying workers neither a true salary nor overtime.” 

Finally, employers should familiarize themselves with the salary requirements under the FLSA in order to avoid inadvertently creating exemption issues and finding themselves facing substantial overtime liabilities. This includes not adopting policies that would reduce or dock pay from an employee’s salary for variations in quality or quantity of work performed.

You can always contact Paul Bittner at Ice Miller or any member of the Workplace Solutions Practice Group to discuss the salary requirements in detail and ensure that your policies are compliant. And, if you want to talk about college football or the NHL, Paul is always happy to oblige.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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