Yes, if the employer is not careful when structuring the pay arrangements.

Written by Jonathan Turner and Gabriel Hemphill

Employers under the Fair Labor Standards Act (“FLSA”) need to be aware of how to structure “salary” compensation arrangements with persons they are employing in an “executive” capacity to manage all or part of the employer’s business; otherwise, employers may find themselves subject to claims that such “executive” employees – even if paid well in excess of six figures – are still owed overtime pay for their work.  

Recently, the United States Supreme Court issued a decision holding that an employee whose duties and responsibilities included executive functions within the meaning of the FLSA, and who already had been paid approximately $200,000 annually based on a daily flat rate, was owed additional amounts in overtime pay.  The case is Helix Energy Solutions, Inc. v. Hewitt, decided on February 23, 2023.  Although the court did not discuss how much additional pay Hewitt was owed, those amounts could be substantial, since Hewitt was paid an initial daily rate of $963, which later went up to $1,341. Under the FLSA, hours worked in excess of forty in a work week must be paid at time and a half of the employee’s “regular rate of pay,” which would have required the employer to take the total amount of daily compensation paid to Hewitt in a given work week, divide that amount by the number of hours Hewitt worked in that week to determine his “regular rate,” and then pay Hewitt additional amounts at time and a half of that rate for every hour he worked beyond forty in that week.

How is it that the Court determined that Hewitt, despite his executive responsibilities and his high level of compensation, did not qualify as an exempt employee under the FLSA?  The answer lies not in the wording of the statute itself but in regulations promulgated by the Department of Labor, the agency charged with administering and enforcing the statute.  Under FLSA regulations, overtime pay is not required for employees if they perform executive duties, and, provided they also are paid on a “salaried” basis as opposed to an hourly basis. To meet the “duties” test for an executive employee under the FLSA regulations, the employee essentially must be responsible for the management of all or part of the employer’s business operations and the supervision of employees when carrying out those responsibilities.  To meet the “salary” test under the FLSA regulations, the employee must be paid a flat amount at regular intervals of no greater frequency than once per week; the amount must be no less than $455 per week; and the amount cannot be reduced by reason of the quantity or quality of the work performed by the employee.   

Unfortunately, while Hewitt admittedly satisfied the “duties” test for an executive employee, his compensation arrangement did not meet the test for a “salaried” employee.  Hewitt was paid a flat daily rate which he was guaranteed to receive for every day he came to work, regardless of whether he worked less than 8 hours on any given day.  While the daily rate was generous by any standard – as noted it started at $963, and later went up to $1,341 – it did not apply to days in the week that Hewitt did not work.  Hence, while this flat rate arguably is a form of “salary” compensation as opposed to hourly compensation traditionally paid to non-exempt workers, it did not satisfy the definitional test of a “salaried” employee under the FLSA exemption for executive employees. As noted, that test requires that the compensation guaranteed to employees must be based on a fixed amount to occur at regular intervals of no greater frequency than once per week.  In other words, employees who are paid on a salary basis at any interval less than weekly – which naturally would include daily flat rates – do not satisfy the FLSA exemption, no matter how generous that flat rate may be.

The takeaway is that employers who make arrangements to compensate their employees on the basis of a daily flat rate must be prepared to pay additional amounts for any overtime hours worked by that employee, no matter how generous the employee’s daily rate is, and despite the nature and amount of managerial responsibilities the employee might be tasked to perform.  The Helix Energy Solutions case is particularly an important case for employers in the filmed entertainment industry, where high level production executives frequently are hired on a freelance basis, sometimes on a daily flat rate basis.