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Supreme Court Confirms That a Day Rate is Not a Salary
Helix Energy Solutions Group Inc. v. Hewitt
In a widely anticipated opinion, on February 22, 2023, the Supreme Court of the United States ruled that an employee who was paid a daily rate more than $684 per day, who received a total of more than $200,000 per year, was not paid on a “salary basis” as required for application of the highly-compensated employee (HCE) exemption. As such, the court held that he was entitled to overtime pay under the Fair Labor Standards Act (FLSA) notwithstanding his high total annual earnings.
The ruling will have wide-ranging implications the oil and gas industry, the nursing field, and other industries which often rely on “day rate only” pay schemes and pay schemes which pay high hourly rates (but no overtime) to attract workers to remote locations, often on short notice.
Relevant Facts
The case concerned an employee who alleged he had been misclassified as exempt from the FLSA’s overtime provisions, and improperly denied overtime premium compensation. He worked twenty-eight day “hitches” on an offshore oil rig where he would work daily twelve-hour shifts, often seven days per week, totaling 84 hours a week. Throughout his employment, the plaintiff was on a daily-rate basis, without overtime compensation, earning between $963 and $1,341 per day, an amount that equated with more than $200,000 annually.
Helix had argued that the plaintiff fell under the DOL’s exemption for highly compensated employees found in 29 C.F.R. §541.601. At the time of the toolpusher’s employment, the highly compensated employee (HCE) exemption applied to employees whose primary duties included performing office or non-manual work; who customarily and regularly performed at least one duty of an exempt executive, administrative, or professional employee; and who were paid at least $455 per week on a “salary or fee basis”; and who earned at least $100,000 annually. (Currently, the threshold salary and total compensation amounts are $684 per week and $107,432 annually, respectively.)
Opinion of the Court
In its decision, the high court stated that the “critical question” in this case was whether the plaintiff was paid on a “salary basis” pursuant to 29 C.F.R. §541.602(a). That regulation states that an employee is paid on a “salary basis” when the “employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation.”
Helix had argued that in any week in which the employee performed any work, he was guaranteed to receive an amount above the $455 weekly threshold, such that his compensation met the requirements of the salary basis test.
The court rejected this argument, holding that §541.602(a) “applies solely to employees paid by the week (or longer)” and the test is “not met when an employer pays an employee by the day.” The court noted that a companion regulation, 29 C.F.R. §541.604(b), allows an employee’s earnings to be computed on an hourly, daily, or shift basis without violating the salary basis requirement, that regulation states that the arrangement must include a guarantee of at least the minimum weekly required amount paid on a salary basis and that there be a reasonable relationship between the guaranteed amount and the amount actually earned. However, the parties in this case agreed that the plaintiff’s compensation failed the reasonable relationship test, such that the sole issue was whether his admitted day rates qualified as a “salary basis” within the meaning of §541.602(a).
Writing for the court, Justice Elena Kagan stated that “[i]n demanding that an employee receive a fixed amount for a week no matter how many days he has worked, §602(a) embodies the standard meaning of the word ‘salary’” which generally refers to a “steady and predictable stream of pay.” Justice Kagan stated that even a “high-earning employee” who is compensated on a “daily rate—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, and so on” is “not paid on a salary basis, and thus entitled to overtime pay.”
Key Takeaway
The court’s decision will likely have wide-ranging impact. Employers have long-argued that the FLSA was not intended to protect highly-compensated employees, notwithstanding the unambiguous language of the statute itself and the DOL’s regulations. The majority squarely rejected this reasoning, adopting a typically conservative textualist approach and holding that the regulations mean precisely what they say and must be strictly construed to protect employees, both low-wage and higher-wage.
Click Helix Energy Solutions Group Inc. v. Hewitt to read the entire opinion of the court and the dissents.
DOL Publishes Final Rule Increasing Salary Thresholds for White Collar Exemptions
Following a court decision which struck down the prior regulations promulgated by the Obama administration, which would have rendered for more employees overtime eligible, the Trump has now increased the salary threshold for white collar exemption. This marks the first increase since 2004.
In addition to limiting the number of workers who will now receive overtime (versus the more expansive Obama-era rule), the current DOL rejected a provision automatically increasing the salary threshold over time, to ensure that another 15-20 years does not pass before the thresholds are re-examined and increased again.
The updated and revised the regulations issued under the Fair Labor Standards Act (FLSA) to allow 1.3 million workers to become newly entitled to overtime by updating the earnings thresholds necessary to exempt executive, administrative or professional employees from the FLSA’s minimum wage and overtime pay requirements.
The DOL has updated both the minimum weekly standard salary level and the total annual compensation requirement for “highly compensated employees” or HCEs to reflect growth in wages and salaries. The new thresholds account for growth in employee earnings since the currently enforced thresholds were set in 2004.
Key Provisions of the Final Rule
The final rule updates the salary and compensation levels needed for workers to be exempt in the final rule:
raising the “standard salary level” from the currently enforced level of $455 to $684 per week (equivalent to $35,568 per year for a full-year worker);
raising the total annual compensation level for “highly compensated employees (HCEs)” from the currently-enforced level of $100,000 to $107,432 per year;
allowing employers to use nondiscretionary bonuses and incentive payments (including commissions) that are paid at least annually to satisfy up to 10 percent of the standard salary level, in recognition of evolving pay practices; and
revising the special salary levels for workers in U.S. territories and in the motion picture industry.
Standard Salary Level
The DOL set the standard salary level at $684 per week ($35,568 for a full-year worker).
HCE Total Annual Compensation Requirement
In addition, the DOL set the total annual compensation requirement for HCEs at $107,432 per year. This compensation level equals the earnings of the 80th percentile of full-time salaried workers nationally. To be exempt as an HCE, an employee must also receive at least the new standard salary amount of $684 per week on a salary or fee basis (without regard to the payment of nondiscretionary bonuses and incentive payments).
Special Salary Levels for Employees in U.S. Territories and Special Base Rate for the Motion Picture Producing Industry
The DOL is maintaining a special salary level of $380 per week for American Samoa. Additionally, the Department is setting a special salary level of $455 per week for employees in Puerto Rico, the U.S. Virgin Islands, Guam, and the Commonwealth of the Northern Mariana Islands.
The DOL also is maintaining a special “base rate” threshold for employees in the motion picture producing industry. Consistent with prior rulemakings, the Department is increasing the required base rate proportionally to the increase in the standard salary level test, resulting in a new base rate of $1,043 per week (or a proportionate amount based on the number of days worked).
Treatment of Nondiscretionary Bonuses and Incentive Payments
The DOL’s new rule also permits employers to use nondiscretionary bonuses and incentive payments to satisfy up to 10 percent of the standard salary level. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, they must make such payments on an annual or more frequent basis.
If an employee does not earn enough in nondiscretionary bonus or incentive payments in a given year (52-week period) to retain his or her exempt status, the Department permits the employer to make a “catch-up” payment within one pay period of the end of the 52-week period. This payment may be up to 10 percent of the total standard salary level for the preceding 52-week period. Any such catch-up payment will count only toward the prior year’s salary amount and not toward the salary amount in the year in which it is paid.
When Will the Current Thresholds Be Updated?
Although initially proposed, the Trump DOL inexplicably rejected a provision of the rule, overwhelmingly supported by workers and workers advocates which would have automatically raised the thresholds over time without the necessity of further rulemaking. As a result it is possible if not likely that there will be no further increase to the current thresholds for another 15 years if not more. In its final rule the DOL reaffirms its intent to update the earnings thresholds more regularly in the future through notice-and-comment rulemaking, but given the anti-worker sentiment of the current DOL, including the recent confirmation of a steadfast anti-worker advocate as the head of the DOL, this is most-likely best viewed as lip service.
The DOL’s final rule is available at Final Rule to Update the Regulations Defining and Delimiting the Exemptions for Executive, Administrative, and Professional Employees.
DOL Issues Final Overtime Rule, Expanding Overtime Pay for Over 4 Million Workers; New Rule to Go Into Effect Dec. 1, 2016
The United States Department of Labor (DOL) Announced its long-awaited final rule regarding the update to the existing overtime rules. The new rule is set to take effect on December 1, 2016.
Most significantly, whereas the previous rule employees who met certain duties tests under the so-called “white collar” exemptions had to make at least $455 per week on a “salary basis,” the new rule brings that threshold to $913 per week (or $47,476 annually). This is approximately $3,000 less on an annual basis that an estimated $50,440 per year that a proposed version of the rule promulgated by the DOL had set last year, but over two times the current threshold amount.
The new salary basis threshold equates with the 40th percentile of weekly earnings for a full-time, salaried work in the United States’ lowest income region.
The final rule also raises the overtime eligibility threshold for highly compensated employees from $100,000 to $134,000.
While the rule raises the applicable thresholds for various exemptions, it also allows employers to count earnings paid to employees as bonuses and commissions toward meeting the salary threshold. Specifically, the rule permits employers to meet up to ten (10%) of the salary threshold with amounts paid to employees as bonus and commission payments.
Although the DOL had also asked for input on a proposed rule which would have tracked the California white collar exemptions and created a more bright-line test requiring that a worker spend at least 50 percent of his or her time on exempt duties each week to qualify for an exemption, the final rule abandoned any such change to the duties’ portions of the executive, administrative, professional, outside sales, and computer employee exemptions.
In a lesser publicized 2nd final rule, the DOL carved out certain employers from the new rule. Specifically, the 2nd rule announced a non-enforcement policy with regard to the 1st rule, for providers of Medicaid-funded services for individuals with intellectual or developmental disabilities in residential homes and facilities (i.e. group homes) with 15 or fewer beds. Under the 2nd final rule announced, from December 1, 2016 to March 17, 2019, the DOL will not enforce the updated salary threshold of $913 per week for this subset of employers covered by the non-enforcement policy.
For further information on all things pertaining to the new rules, visit the DOL’s website.
S.D.N.Y.: Where FLSA Defendants Admit Plaintiff Worked As Both Independent Contractor And Employee, Money Earned As Independent Contractor Not Included For Inquiry As To Whether Plaintiff Earned $100,000
Magnoni v. Smith & Laquercia, LLP
This case was before the Court on Defendants’ Motion for Summary Judgment, on several grounds. Summarized below is the Court’s discussion/decision regarding Plaintiff’s earnings and their impact on her status under the so-called “highly compensated employee” exemption.
The Court’s decision relied on the following facts:
Plaintiff’s “employment at S & L, where she worked as a litigation paralegal and handled the normal responsibilities of a paralegal in a litigation law firm, began in 1990. Beginning in 2003, Magnoni was paid a weekly salary with no extra premium for overtime work. S & L paid Magnoni a salary of $64,807.70 in 2005; $67,653.74 in 2006; and $21,846.12 from January 1, 2007 through April 13, 2007. Magnoni alleges that between 2003 and 2005 she did not receive compensatory time or overtime pay from S & L, but admits she received some compensatory time (though no overtime pay) in 2006 and 2007.
Magnoni estimates that she worked approximately six to seven hours of overtime per week between 2001 and 2005, and approximately eight hours of overtime per week in 2006 and 2007. Calculating her overtime on a weekly basis (omitting holidays and days off), Magnoni estimates that she worked about one hour of overtime per week in 2006 and 2007, and “more than that” in 2003, 2004, and 2005. [ ]
In or about November 1997, while employed at S & L, Magnoni formed a business entity named Contessa Legal Process (“Contessa”), which provided process serving and court filing services. S & L was one of Contessa’s many clients. Though Contessa was not incorporated at the time relevant to this action, Magnoni was the sole proprietor of Contessa and S & L made all payments for Contessa’s services directly to Magnoni. For Contessa’s services, S & L paid Magnoni $41,800 in 2005; $49,500 in 2006; and $11,820 through approximately April of 2007. S & L concedes that while Magnoni was S & L’s employee with respect to her paralegal responsibilities, she was an independent contractor with respect to her process
Defendants argue that Magnoni is exempt from coverage by the FLSA because the total annual compensation she received from S & L, when combining her S & L salary and the payments she received from S & L for Contessa’s services, was in excess of $100,000 for 2005 and 2006, and she was projected to receive approximately $125,000 in 2007.”
The Court discussed the applicable law and applied same to the case, noting Defendants CONCEDED that Plaintiff’s work performed for Contessa, was as an independent contractor not an employee.
“Under a regulation issued by the Department of Labor in 2004:
An employee with total annual compensation of at least $100,000 is deemed exempt under section 13(a)(1) of the Act if the employee customarily and regularly performs any one or more of the exempt duties or responsibilities of an executive, administrative or professional employee identified in subparts B, C or D of this part.
29 C.F.R. § 541.601(a). The determination of an employee’s “total annual compensation,” may include “commissions, nondiscretionary bonuses and other nondiscretionary compensation earned during a 52-week period.” Id. § 541.601(b)(1). However, the language of § 541.601 leaves no doubt that it applies only to an employee’s total annual compensation; indeed, under the FLSA, independent contractors are exempt from overtime requirements. See, e.g., Van Asdale v. Apollo Assocs., Ltd., No. 6:08-CV-531-ORL-19KRS, 2009 WL 36419, at *1 (M.D.Fla. Jan. 6, 2009) (“Independent contractors are exempt from the overtime requirements of the FLSA.”); see also Schwind v. EW & Assocs., Inc., 357 F.Supp.2d 691, 700 (S.D.N.Y.2005) (analyzing whether the plaintiff was an employee or independent contractor because “[t]he overtime provisions of the FLSA … apply only to individuals who are ’employees.’ “). Therefore, Magnoni’s compensation for her independent contractor responsibilities cannot be considered part of her total annual compensation as S & L’s employee under the FLSA.
Defendants concede that Magnoni’s process serving and court filing services on behalf of Contessa were rendered in her capacity as an independent contractor, not in her capacity as an employee of S & L as a paralegal. (See, e.g., Defendants’ Memorandum of Law in Support of Their Motion for Summary Judgment, dated March 27, 2009 (“Defs.’ Mem.”), at 1 (stating that Magnoni “was both an employee performing legal assistant responsibilities for S & L as well as an independent contractor providing significant process serving and court filing services for S & L and many other law firms”); id. at 2 (describing Magnoni’s total annual compensation to include compensation received “both as an employee and an independent contractor”); id. at 3 (describing Magnoni’s process serving and court filing services as independent from her paralegal responsibilities); id. at 10 (characterizing Magnoni as being compensated as “both S & L’s employee and S & L’s independent contractor”); id. at 15 (describing Magnoni as “operat[ing] a separate business” while at S & L); Defendants’ Reply Memorandum of Law in Further Support of Their Motion for Summary Judgment, dated April 29, 2009 (“Defs.’ Reply”), at 4 (describing Magnoni as being compensated as “both an employee and as an independent contractor”).) Thus, any compensation Magnoni received as an independent contractor for the services provided by Contessa was not part of her total annual compensation as S & L’s employee.
Defendants attempt to avoid this outcome by arguing that the Department of Labor’s regulations define “compensation” broadly. However, Defendants do not direct the Court to any case where an “employee[‘s] … total annual compensation,” 29 C.F.R. § 541.601(a), included payment for services rendered as an independent contractor. This absence of authority is unsurprising; because independent contractors are exempt from the FLSA, it would be antithetical to the spirit of the FLSA to consider payment received as an independent contractor to constitute “employee” compensation, particularly given the mandate that exemptions should be narrowly construed against employers. See In re Novartis Wage & Hour Litig., 593 F.Supp.2d 637, 643 (S.D.N.Y.2009) (“Due to the remedial nature of the FLSA’s overtime requirement, … exemptions should be ‘narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit.’ ” (quoting Bilyou v. Dutchess Beer Distribs., Inc., 300 F.3d 217, 222 (2d Cir.2002) (quoting Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960)))); see also Henry v. Quicken Loans Inc., No. 2:04-cv-40346, 2009 WL 596180, at *10 (E.D.Mich. Mar. 9, 2009) (“Defendants bear the burden of establishing the applicability of the highly compensated employee exemption because exemptions are to be narrowly construed and limited to those establishments plainly and unmistakably within the terms and spirit of the FLSA.”)
It would unquestionably violate the terms and spirit of the FLSA to construe an “employee’s” total annual compensation to include payment for separate services provided solely as an independent contractor, given that independent contractors are exempt from the FLSA’s overtime provisions. While Defendants argue that the Court should not delve into the details of Magnoni’s paralegal duties in order to determine her total annual compensation, Defendants’ concessions leave no doubt that regardless of what Magnoni’s responsibilities were as S & L’s employee, they did not include her process serving and court filing services. Indeed, on the 1099-MISC IRS forms Defendants submitted to the Court, S & L consistently listed “[ ]Magnoni d/b/a/ Contessa Legal Process” as receiving “nonemployee compensation” for which no state or federal income tax was withheld. (Certification of Thomas E. Chase, Esq., dated March 27, 2009 (“Chase Cert.”), Ex. D); see also Thibault v. BellSouth Telecomms., Inc., Civ. No. 07-0200, 2008 WL 4877158, at *6 (E.D.La. Nov. 10, 2008) (holding that employer’s lack of salary withholdings on 1099-MISC form indicated that plaintiff was an independent contractor rather than an employee).
Because Defendants concede that Magnoni’s Contessa-related process serving and court filing services were conducted in her capacity as an independent contractor, and narrowly construing the application of FLSA exemptions against S & L, compensation for such services cannot be included in the determination of Magnoni’s total annual compensation as S & L’s employee under the FLSA. Magnoni therefore is not exempt as a highly compensated employee under 29 C.F.R. § 541.601(a), as her total annual compensation as S & L’s employee never exceeded $100,000.”
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