Energy Industry Take Note – Should You Be Paying Overtime to Your Highly Paid Employees?
The energy industry has long been a source of high-skilled and well-paid jobs, many paying six figures per year to employees. For those jobs, it’s easy for employers to get lulled into a false sense of security when figuring out whether a particular role is exempt or non-exempt from the overtime provisions of federal and state wage and hour laws, because highly compensated jobs are far more likely to be exempt and the “highly compensated employee” exemption allows for more company-friendly standards when analyzing whether an individual’s responsibilities satisfy the “duties” prong of the exemption analysis. But it’s important to remember the default position under the Fair Labor Standards Act (FLSA), which is that overtime must be paid to all employees who work over 40 hours per week unless an exemption applies, and that an exemption applies only if all applicable requirements for that exemption are satisfied.
Although the requirements for each of the principal exemptions (executive, administrative and professional) differ somewhat, three conditions must be met:
- the role must meet certain criteria concerning day-to-day duties and responsibilities;
- the role must meet certain minimum income thresholds; and
- the employee must be paid on a “salary basis.”
The U.S. Fifth Circuit Court of Appeals (which covers Texas, Louisiana and Mississippi) recently held that, no matter how highly paid an employee might be, all three elements must still be satisfied for an exemption to apply. In Hewitt v. Helix Energy Solutions Group, Inc., the court considered the case of an offshore rig worker who was paid over $200,000 annually and, in a 12-6 decision with significant dissents, held that his employer had failed to satisfy the “salary basis” test because his pay was calculated on a daily basis. The general rule under the FLSA is that employees must be paid “on a weekly, or less frequent basis” in order to meet the salary basis test, but there are circumstances under the FLSA in which an exempt employee could be paid on an hourly or daily basis, as follows:
An exempt employee’s earnings may be computed on an hourly, a daily or a shift basis, without losing the exemption or violating the salary basis requirement, if the employment arrangement also includes a guarantee of at least the minimum weekly required amount paid on a salary basis regardless of the number of hours, days or shifts worked, and a reasonable relationship exists between the guaranteed amount and the amount actually earned. (29 C.F.R. § 541.604(b))
The majority of the Hewitt court held that the employer had failed to satisfy these conditions on the particular facts of the case, but noted that it “could have easily complied” had it, for example, offered the employee a certain minimum weekly guarantee. Unfortunately for the employer in this case, the majority found that it had not done so. The dissents strongly criticized the majority’s reasoning, arguing that it runs contrary to common sense and a reasonable reading of the law. The dissent of Circuit Judge Edith Jones noted that “[f]or a statute designed to elevate the workingman, the majority’s result seems counterintuitive, and in fact it is incorrect.”
There is now a split among the federal courts of appeal, with the Fifth, Sixth and Eighth Circuits diverging from the First and Second Circuits on key aspects of the legal analysis. The U.S. Supreme Court may step in and resolve this split in the future, but until then, employers in the energy industry with significant operations within the jurisdiction of the Fifth Circuit will need to take note and adapt where necessary to reduce the risks of liability. The case reinforces the need for employers to ensure that all elements of an FLSA exemption have been satisfied, and to audit its wage and hour practices to make sure that any changes in job duties or compensation structure do not inadvertently undermine the factual basis for the exemption.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.