Deep Dive Episode 244 – Litigation Update: Helix Energy v. Hewitt
Some employers were surprised by the en banc Fifth Circuit’s December 2021 decision in Helix Energy Solutions Group, Inc. v. Hewitt that a supervisor for an offshore oil company who received approximately $1,000 per day for a total of over $200,000 annually was eligible for overtime pay under the Fair Labor Standards Act.
The Act exempts from overtime pay workers “employed in a bona fide executive, administrative, or professional capacity,” and the oil company argued that a highly compensated supervisor like Mr. Hewitt qualifies for this “EAP” exemption. The en banc Fifth Circuit applied a Department of Labor regulation requiring EAP-exempt employees to have a fixed weekly salary to conclude that, notwithstanding high pay and supervisory duties, Mr. Hewitt was non-exempt because he was paid on a daily rather than weekly basis.
However, that argument has not been accepted across the bench. Judge Jones dissented that the weekly salary rule is inapplicable for workers who satisfy a separate regulatory requirement for exempt “highly compensated employees” who make over $100,000 per year (now $107,432). Judge Wiener’s dissent added that application of the weekly salary rule—which dates from 1940s—is illogical and unreasonable under the circumstances. DOL took no view on this case.
Additionally, Helix Energy created an apparent split with the First and Second Circuits, and the Supreme Court granted on certiorari May 2, 2022. Oral argument took place October 12. If the Court upholds the decision, employers that relied on the First and Second Circuits may face significant retroactive liability.
In this podcast, experts provide a litigation update on Helix Energy, what it is, what the possible outcomes may be, and the potential consequences of the case.
Although this transcript is largely accurate, in some cases it could be incomplete or inaccurate due to inaudible passages or transcription errors.
Introduction: Welcome to the Regulatory Transparency Project’s Fourth Branch podcast series. All expressions of opinion are those of the speaker.
On November 2, 2022, The Federalist Society’s Regulatory Transparency Project hosted a virtual Litigation Update on Helix Energy Solutions Group v. Hewitt. The following is the audio from the event.
Chayila Kleist: Hello and welcome to this Regulatory Transparency Project webinar call. My name is Chayila Kleist, and I am the Assistant Director of the Regulatory Transparency Project here at the Federalist Society. Today, November 2, 2022, we are excited to host a post-argument litigation update webinar on Helix Energy v. Hewitt.
Joining us today is a stellar panel of subject matter experts who bring a range of views on this discussion. As always, please note that all expressions of opinion are those of the experts on today’s call as The Federalist Society takes no position on particular legal or public policy issues. In the interest of time, we’ll keep introductions brief, but if you would like to know more about each of our speakers, they have full bios on RegProject.org.
That said, today, we are pleased to have with us as our Moderator, Sheng Li, who’s litigation counsel for the New Civil Liberties Alliance. Prior to joining NCLA, Mr. Li served as counselor to the administrative Wage and Hour at the U.S. Department of Labor. I’ll leave it to him to introduce the rest of our panel.
One last note, throughout the panel, if you have any questions, please submit them to the question and answer feature so that our speakers will have access to them for when we get to that section of today’s webinar. With that, thank you for being with us today. Mr. Li, the floor is yours.
Sheng Li: Thank you, Chayila, and welcome everyone. We have a very interesting webinar today, and I’m excited to moderate the panel. I’ll first give a quick overview, and then we’ll introduce our speakers.
So until about a year ago, most employers would’ve said that a worker who performs executive duties and earns a six-figure income was exempt from overtime. But in September 2021, the Fifth Circuit en banc said that’s not necessarily true in a case Hewitt v. Helix Energy Solution Group. Helix is an offshore oil company, and Mr. Hewitt was an employee who worked as an oil rig supervisor. He was paid $963 each day of work for a total of over $200,000 annually. He sued for unpaid overtime under the Fair Labor Standards Act. The question was whether he’s entitled to overtime at all or is, instead, an exempt executive employee.
The Fair Labor Standard Act exempts from overtime pay workers who “are employed in a bona fide executive, administrative, or professional capacity,” which the Department of Labor has defined through regulations including a short forum test for certain highly compensated employees such as Mr. Hewitt. To meet that test, there are three basic requirements. First, there’s an income threshold requirement of $100,000. The number’s a little higher now, but it was $100,000 when the lawsuit was filed. And Mr. Hewitt certainly meets that.
Second, the employee must perform executive duties. And everyone agrees that Mr. Hewitt meets that requirement as well. The third requirement, and that’s the key to the case, is that the employee must be paid at least in part on “a salary basis,” meaning he gets a pre-determined amount of $455 on a weekly or less frequent basis. Judge Ho, writing for a 12-judge majority, concluded Mr. Hewitt failed the salary basis requirement because he was paid on a daily rate rather than a weekly basis.
Important to his assessment is a part of the regulations 29 CFR 541.604 which says although an employee may be paid on an hourly or daily rate, that employee could still meet the salary basis test if there is somehow a weekly minimum that is paid regardless of the hours worked and has a reasonable relationship with the employee’s actual earnings. However, the Fifth Circuit held that Mr. Hewitt’s earnings had no reasonable relationship to any kind of minimum weekly salary or weekly compensation he had, and it applied 604.
This decision created a split with the First and Second Circuits which held that Section 604 does not apply to highly compensated employees. The case was taken up by the Supreme Court in May and oral argument took place just a few weeks ago on October 12. I think the oral arguments before the Supreme Court would’ve been impossible to follow without having the relevant regulations in front of you which were, simply put, very dense. I think Justice Kagan said the salary basis regulation was a clunker of a sentence. Fortunately, we have two distinguished speakers today with us who can help us disentangle these complex regulations and shed some light on how the Court might ultimately rule on this question.
Our first panelist, Tim Taylor, is an Employment and Litigation Partner with Holland & Knight. He has special expertise in employment law and the Administrative Procedure Act. Mr. Taylor served the Department of Labor in a variety of senior capacities including as the Department’s Chief of Staff and as the Deputy Solicitor of Labor where he oversaw litigation, enforcement, rulemaking, and legal counseling for the agency’s more than 400 attorneys. He also served as the employment counsel and as an investigative attorney for the Department of Treasury’s Office of the Special Inspector General for Pandemic Recovery. Mr. Taylor clerked for the Honorable Harris Hartz for the Court of Appeals for the Tenth Circuit and the Honorable Charles Lettow of the U.S. Court of Federal Claims. He graduated from BYU and Harvard Law School where he was an editor of the Harvard Law Review and the Harvard Journal of Law and Public Policy.
Our second panelist, David Dorey, is a Senior Litigation Counsel at The Fairness Center where he represents clients in state and federal courts and before administrative boards. Prior to joining The Fairness Center, Dave practiced law and held senior executive positions in the federal government including at the Departments of Labor and Homeland Security. Prior to his government service, Dave was a litigation associate at a major D.C. law firm where he represented clients in federal, district, and appellate courts, state trial and appellate courts, and before federal agencies. Dave has significant experience with federal class action litigation including acting as separate settlement counsel. Dave graduated from the University of Colorado – Boulder and the University of Pennsylvania Law School, where he was a member of the Law Review and President of the Custody and Support Assistance Clinic.
With that, I’ll turn it over to Tim who will help us understand these regulations and what they mean.
Timothy Taylor: Sure. And thank you, Sheng and Dave and to The Federalist Society. It’s great to be with you all, especially with old friends.
I wanted to start again with the statute which very interestingly isn’t what cert was granted on and isn’t really necessarily part of the case here. And I think, somewhat to a couple of the Justice’s frustration, that it wasn’t. Again, the statute says the overtime minimum wage rules, with a few little exceptions, do not apply to any employee employed in a bona fide executive, administrative, or professional capacity as such terms are defined and delimited from time to time by regulations of the Secretary.
So, again, if we’re looking at the statute, there may be some argument this is a pretty easy case where someone concedes that they performed executive duties, but we have before us about 80 years’ worth of regulatory accretion atop those statutory terms when it comes to the white-collar exception or, excuse me, exemption to the overtime requirements. And so we are dealing with one aspect of those.
As Sheng said, it’s a three-part test. It sounds simple in theory. In practice, as you can see here and if you open up to CFR, you will see that it is complicated in application. Again, there’s a threshold. You got to be paid a certain amount, and you must perform certain duties. And the duties are defined a little bit differently depending on whether you are an executive, administrative, or professional employee. Here, we’re talking about the executive exemption, and then lastly, a salary basis.
I think we need to be a little bit careful in how we describe the salary basis because there is a debate, which this case puts into higher leaf, as to what is a salary basis. And is a salary basis in fact a little bit different depending on whether you’re merely clearing the lower threshold for salaried employees or the higher one. I’m going to give everybody a visual aid here. It’s extremely complicated. It took me a long time to put together. In fact, I’m going to put it together right now so we can talk a little bit about this because I think it’ll help.
Okay. Here’s my visual aid, okay, these two lines. And it’s pretty simple. So down here, let’s say this is you’re getting paid zero. This is you’re getting paid $100,000 plus. And here’s the current threshold. At the time, it was about $23,000. Now, it’s about $36,000. If you are paid below this lower end, you can never be exempt under the EAP threshold, okay? It doesn’t matter if you’re a fulltime executive. It doesn’t matter if you’re paid on salary basis or whatever. It just doesn’t work.
In here, this is where the majority of disputes in litigation are. These are people who are paid enough but then there’s usually a fight over their duties and whether in fact they are an executive or an administrative type of employee. And then above here at what we call the highly compensated employee threshold, which at the time of this case and what they’re fighting about is $100 grand. Now, it’s about $107 grand due to a bump up in 2019. Up above here, there’s a streamline duties test. And so there’s a question whether this line and this line in fact have the same salary basis test or if there are some nuances and differences between the two that matter here.
I think what we can do, actually, is I will share my screen and as Sheng said, it was impossible to follow the oral arguments without seeing the regs. I think that our audience would benefit from being able to see the regs themselves here as well. Another great place you can look for these is in the government’s brief. They had a handy appendix in the back. Again, if you just pull it off Scotus Blog, they put everything in a nice little package.
So I’m going to share my screen here for just a minute and we can actually march through. Okay, I’m going to ask our technical personnel, are we good? Can we see the screen?
Sheng Li: Yes.
Timothy Taylor: Okay. Great, thank you. All right. Here we are in Title 29, and that is Labor. And here we have the Wage and Hour in Chapter 5, Wage and Hour division. And here are a sample of their regulations. And we’re going to go right down here to Part 541. And this, again, just like the statute says, defining and delimiting exemption for the white-collar employees. And you see a couple others there, computer employees, outside sales employees, we don’t need to worry about them.
And so I want to start with here. Actually, I’ll go ahead and open up 541 so you can see the whole thing and its structure. All right. I don’t think we need to look at the general regulations. And then you see here, executive employees, administrative employees, professional, computer, sales. We’ll just tighten those up because we’re not worried about them right now. We’ll look solely at executive employees. All right. And by the way, for these two, it’s generally just differences in their duties.
So let’s go look at the general rule for executive employees. Okay. “An employee employed in a bona fide executive capacity,” as it says in the FLSA, “means you must be compensated on a salary basis at a rate of not less than 684 per week.” Again, this is the current monetary threshold. The case has a different one, but that doesn’t really matter for our purposes today. So there’s your threshold, and there’s the words “a salary basis.”
Let’s hop down. Again, we have duties down here, but let’s hop down to B. The phrase salary basis is defined at 541.602, interesting. All right. Keep one thumb on that page for 602. Now we’re going to hop down to the 600s here: salary requirements, amount of salary required. Again, that’s not in dispute in the case. This particular worker was paid well over $100,000, well over $200,000 in fact. We have salary basis here. We have some nuances about the salary basis here in 604. And then we have a separate provision called 601: Highly Compensated Employees. And, again, going back to the fancy diagram, that’s the people up here above the second threshold.
Let’s look at our highly compensated employees first. And, again, this is my side of the argument. I’m supposed to be arguing for the company here, and this is where they would want to start is before we get to 602, before we get to 604 and all these other things, let’s look at 601. All right. So here’s what I want to march through, okay? An employee with total annual compensation of at least $107,432—again, under the case before the Court, it goes back a few years and it’s $100,000—they shall be deemed exempt. And, again, the petitioners in the case are putting some weight on that word deem there to essentially say look, regardless of this or that, we’re going right from the statute right to this to say you are deemed exempt. We have an expedited path to exemption through this. That’s the whole point of the highly compensated employee threshold is to say we want an easier, simpler way to do this for employees who are highly compensated because high compensation indicates so thoroughly that in fact they are employed in a bona fide executive capacity.
All right. Deemed exempt if they customarily and regularly perform any one or more of the exempt duties, not all of them. All right. And then down here next where we’ll go is what does it mean to have total annual compensation, here in (b)(1). Total annual compensation must include 684 per week paid on a salary or fee basis as set forth in 602 and 605. We don’t need to worry about 605. That has to do with fee basis stuff, except this blah, blah, blah, blah, blah, blah, blah. And then has some other little nuances here.
One other point I want to mention here. Again, I won’t read all this text but here in paragraph 2, what this provides is essentially for a catch up payment, meaning that if you have a highly compensated employee or rather someone you want to be treated under the highly compensated employee threshold and they’re not quite there or maybe not even close to there, you can actually do a catch-up payment at the end of their year and catch them up in the entirety to get them over that threshold and to those more relaxed rules. So that’s that part.
And then we go here to 602, finally. So let me jump into that. All right, a salary basis. An employee will be considered to be paid on a salary basis within the meaning of this part if the employee regularly receives each pay period on a weekly or less frequent basis a pre-determined amount constituting all or part of the employee’s compensation. And, again, one of the little nuances here, an exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked but exempt employees need not be paid for any work week in which they perform no work.
And so, as I understand Helix Energy’s position in this case, what they’re saying with this worker is that look, he goes out to the rig and works and sure enough, he is paid every single day. However, every single day he works, and he’s not paid on days he doesn’t work. But they say however, any day that he worked, he was paid $984, even if he worked just a single second or a single minute. And so what the argument is is that this complies with the salary basis — with being paid on a salary basis meaning that he’s getting $984 per week because if he works a single day in the week, then he’s getting paid that minimum. And when you calculate that all out to $984, he’s going to hit the threshold. And so what’s the problem here?
Well, there are probably two problems, at least those raised by the side. I’ll let Dave get into these a little bit more in detail, but one being the government’s argument, which is quite interesting, that at the end of the day, it really is just a day rate. It’s not a salary. It’s not a true salary in the sense of a guaranteed amount that you’re going to get paid regardless of your hours worked. And then secondly, they point at this Section 604, which I’ll bring up here as well really quickly. And I’ll let Dave dive into this if he would like to. And, again, it was contested in this case whether this Section 604 is even relevant, that provides some additional safeguards around employees who are paid both a salary and also additional payments.
In essence, what this regulation says here is that it’s okay to have additional payments for somebody who’s paid on a salary. They can have commissions. They can have a share of profits, etc., but it needs to bear some reasonable relationship to the underlying salary, right? Otherwise, you can gain the system and it becomes not really a salary at all if you can grossly vary their compensation based on things apart from the salary. So in essence, that’s a little bit of table setting for what we have in this case.
One comment I would have just generally, and I’ll stop sharing, is that an issue I have with the entirety of this case and it’s brought up a little bit by Justice Alito where he said, I think with a teeny little bit of sarcasm, talking about this fascinating microscopic, I think was the word, review of these regulations, is that I just wonder why we have ended up in a position where the Fair Labor Standards Act in this situation is so complicated.
Having been involved in the regulatory process, it often is a clockwork exercise where you’re trying to piece together so many complicated things to make it work and work well across the entire economy and for various industries. And as you’re building that little intricate clock, you get comments on the reg and that’s like someone throwing another 100 pieces at you that you’ve got to somehow fit in there the right way in a way that comports with policy objectives and is also legally sound. Often, that complication comes because of the underlying statute itself is complicated.
If any of you have ever worked with ERISA or the tax code or healthcare, for instance, the statutes themselves often tend to be very complicated and so the regulations must be as well. Often, sometimes, the regulations can be complicated because an underlying statute is actually quite the opposite and completely vague. You can think of something like the FTC’s unfair trade practices injunction, which is very vague and thus leads to a — you get to create a lot of doctrine. Our Constitution in some sense is similar.
Here, the FLSA, this is an exemption. It’s about ten words and it’s actually pretty clear, right? Any employee in a bona fide executive, administrative, or professional capacity. And yet, we have layer upon layer upon layer of complexity here. And I think it may behoove the Department of Labor or the justices or whoever might be able to help out on this a little bit to maybe take a step back from this 80-year history of regulation here to say maybe there is a simpler way to tackle these things because otherwise you end up with these counterintuitive and difficult situations that are not necessarily dictated by the statute but by regulatory accretion.
All right. I’ll leave it there, Sheng.
Sheng Li: Thank you, Tim. And we’ll leave the next for David. Are you ready?
Dave Dorey: Yes. Tim, thanks very much for that table-setting exercise. I think it’s really very, very helpful. And, Sheng, thanks for the kind introduction and thanks to The Federalist Society for having us today. I think this conversation is going to be really very, very interesting.
Respondent Michael Hewitt in this case was a tool pusher. He was previously employed by Helix on an offshore oil rig. He worked 28 days straight for 12 hours each day. That’s 84 hours a week without a break. Helix made the affirmative choice to pay him only on a daily rate of $963. And it only paid him for days in which he worked. If Hewitt only worked on a Sunday during a given week, his entire compensation for that week was just $963.
Nevertheless, Helix chose, it failed, to pay Hewitt overtime. Helix justified this by relying on an argument that Hewitt was a highly compensated employee, so it erroneously thought it was not required to pay him overtime. All told, Hewitt’s daily rig pay added up over the course of a whole year to total compensation of about $200,000. But he argues that doesn’t meet the standards set by the Department of Labor’s regulations that Tim showed us, interpreting the FLSA that are contained at 29 CFR, subpart G especially. That subpart is called salary requirements, and I think that that is very instructive to us just to start about what’s going on here. And it contains seven inter-related complex subsections.
There should not be any dispute under common understanding and the Department’s own regulations that paying an employee a day rate is almost never a salary. Let’s back up for a second to the beginning to understand why that’s so. FLSA generally requires that for an employee to be exempt from overtime pay, they must be employed in a bona fide executive, administrative, or professional capacity.
Congress chose to give the Secretary of Labor pretty much carte blanche to decide what that means. The Department of Labor accordingly has established a three-part test for the ordinary employee that Sheng mentioned: whether they’re paid on a salary basis, whether that salary meets or exceeds the weekly minimum—that’s firmly $684—and whether they meet a complex three-part duties test. The amount of salary requirement is in subpart G of the regulation set forth at Section 600. The subpart continues on in Section 601 to describe what the Department calls highly compensated employees.
These employees are deemed exempt from FLSA’s overtime requirement if they receive as total annual compensation at least a specified amount. The amount then relevant to Hewitt was $100,000 per year. As Tim mentioned, it’s a little bit more now. But importantly, the total compensation has to include at least $684 per week that’s paid on a salary or fee basis. And in that regard, 601 explicitly references Section 602 and 605. The benefit to employers of having a highly compensated employee is that they don’t have to meet the complex three-part duties test that’s required for the ordinary folks that’s in the middle on Tim’s diagram to get the overtime exemption. They only have to meet one, and that can really be as simple as just supervising two employees, pretty darn streamlined.
In 601, the Department opined that a high level of compensation is a strong indicator of an employee’s exempt status thus eliminating the need for a detailed analysis of the employee’s job duties. But importantly, and the Department never said, that highly compensated employees never said that highly compensated employees are altogether exempt from the FLSA overtime requirement. They still have to follow certain rules, albeit relaxed somewhat.
Turning next to 602 as Tim did thus defines what is a salary basis. Being paid on a salary basis is when an employee regularly receives each pay period on a weekly or less frequent basis a pre-determined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quantity or quality of the work performed. The way Helix chose to structure Hewitt’s pay flunks this test. It did not pay him a pre-determined amount on a weekly or less frequent basis. It paid him a variable amount based on the quantity of days in a pay period that he worked. That’s not a salary under the plain terms of 602 or frankly anyone’s ordinary understanding which would be a pre-determined amount for a week’s worth of work that’s not subject to reductions because of the work’s quantity.
But wait. The Department anticipated an objection for people whose employers want to pay them a daily rate still and want an overtime exemption. So it decided to go ahead and establish a separate special test for this in Section 604. If employers want to pay a daily rate but not pay overtime, they can establish a guarantee from those daily employees that they will be paid a minimum of $684 on a salary basis regardless of the number of hours, days, or shifts worked. And there has to be a reasonable relationship between the guaranteed amount and the amount actually earned.
But there’s no dispute that Helix also flunked that test. The amount it effectively guaranteed Hewitt for any pay period in which he worked was $963, but that had no reasonable relationship to what he would earn in a typical pay period. A reasonable relationship, according to the Department, is something about 1-1.5, that ratio. So Helix could have guaranteed Hewitt something like $4,500 per week and still pay him the 6671 for a seven day work week when he happened to work that much. In that case, they would’ve have run a foul the rules. But the problem is that Helix chose not to do that. It didn’t follow the rules.
The salary requirement is a long-standing pillar of determining that someone is a bona fide executive. Indeed, it’s probably the most important pillar. Salaries set stable amounts that folks will be paid in advance no matter how much they worked, and they’re generally inconsistent with daily rates. Daily rate payment shows that the person being paid is not a bona fide executive. The only way around that is meeting the test of 604 in DLA’s regulations. And the reasonable relationship requirement is built in suspenders. It shows that the guarantee an employer provides is actually a salary and not a charade that’s designed to avoid FLSA’s overtime rules.
Helix does not even purport to meet the text in 604. Hewitt, accordingly, is not a highly compensated employee under the Department’s regulations and is not exempt from FLSA’s overtime requirements. Helix owes Hewitt overtime. There’s no doubt that that sounds weird, that someone who ultimately made over $200,000 looking back over a year is entitled to overtime. What? That’s the system that we’ve got and making a policy objection to that funny sounding result can’t override the Department of Labor’s judgment on the matter across multiple administrations.
We have to analyze the Department’s regulations using ordinary tools of interpretation, not judgment substitute because we don’t like the result. And if the result is indeed ultimately disfavored, as Tim mentioned, Congress is welcome to amend the FLSA or the Department as well can amend its regulations after taking notice and comment.
Sheng Li: Thank you, Dave. So, Tim and Dave, those are some great overview of the case. And my first question might actually be something that’s not even in the case, and that’s the statutory question here which is debatable whether it’s in the case. I think at least one justice in the arguments said isn’t that forfeited. But I think it’s still important here. And the question is is Mr. Hewitt or is an employee working in an executive capacity?
And I think a lot of people might say well, what does being paid on a weekly basis, having to pay computed on a weekly basis, what does that have to do with being an executive? And, Dave, you alluded to that. You think that’s a really important aspect. I think, Tim, you differ on that. So could you guys talk about this? Why do we have this salary basis requirement in the regulation? What purpose did it serve? I understand it goes all the way to the 40s. Did it perhaps serve a purpose then and maybe not so much now or something like that? So, please, I’ll turn it to Tim first and then let Dave respond.
Timothy Taylor: Sure. First of all, in terms of whether it’s in the case, I think probably not. There was an interesting exchange with Justice Gorsuch where he was saying this looks like an easy case under the statute but that’s not before us. Should we dig the case? Should we dismiss it with cert and providently grant it? Of course, the advocates said no, no, no, keep the case. And so I imagine there’s probably some frustration especially among some of the justices who have a little bit of skepticism towards the administrative state more generally when those cases are brought before them where they have somebody who conceded that he performs executive duties.
Now, there is certainly under the regs, and I think you can think even just in the abstract, still a bit of a difference between someone who does executive duties and someone who’s employed in a bona fide executive capacity, if you want to say that that must include some additional bells and whistles beyond that. But I think, again, if it is carte blanche for the Department of Labor to find these, then certainly it seems very sensible that somebody who’s overseeing 12 plus people and running these folks with a great deal of discretion when he’s out there on the rig, that sounds a lot like somebody who’s employed in a bona fide executive capacity.
And when it gets to — here, what seemed to be very relevant questions about salary basis or not, but from I think a practical perspective and I think certainly form a business or industry perspective, they’re just trying to run their businesses and drill for oil. What they would probably view as just minutia, I’m not so sure that we can assert that a salary basis in terms of a guarantee on a — very strictly on a weekly plus basis rather than alternative compensation structures that, by the way, Dave, still do comport with the regs as they stand. And we can get into that if we want. But putting that aside, I just view real world people not getting caught up on that.
Sheng Li: Dave?
Dave Dorey: I agree with Tim that the statutory question seems to have been waived. No one really is disputing that at this point. It seems to me that that was raised by an amici in the Fifth Circuit and then quickly disposed of by Judge Ho’s concurrence, but that wasn’t really raised by the party to the matter. And so all we have here and all that cert was granted on, as I understand it, is the question what is going on with DL’s regulations and how do they apply to this employee and employees like him?
I think, perhaps, the problem with Tim’s argument is that if it’s not a salary question at all because that doesn’t comport with the statute which only discusses duties, then any salary threshold has to go out the window too and we’d only look at duties. And so a $10 an hour employee who’s performing executive function suddenly is not entitled to overtime, and I think that that probably takes us a little bit too far.
Timothy Taylor: Can I reply on that very briefly? I want us to not conflate salary basis with salary level. There was a little bit of skepticism with salary levels as well in the oral argument. I detected just a hint of that, but I don’t think that’s quite at issue. I think that’d be very, very hard to overcome because there is a very persua- — well, I don’t know how persuasive but there is a logic to the idea of using the amount of compensation as a proxy for someone’s importance, status, and duties within a company.
And that’s what the most recent Department of Labor regulations return to was the concept of the salary threshold being a proxy, essentially, for duties or capacity. So I don’t want to conflate those two things. As for the idea of just a salary basis quo salary basis, though, I’m less convinced that that’s so critical to a definition out of the statute.
Sheng Li: Well, Dave, I have a follow up question for you. While digging into this case, I didn’t realize this before, but apparently, the Department has in the 1950s, I believe, created a carve out to the salary basis test, an exception for Hollywood, for the movie industry. So it seems that at least in certain industries, the Department’s willing to concede that maybe being paid a salary is not indicative one way or the other of exempt status. How do you feel about — does the existence of these exceptions, at least one exception, undermine or affect the validity of the salary basis requirement?
Dave Dorey: It doesn’t at all. I think that the salary basis requirement is the general rule across the board no matter how much you are paid. The Department has from time-to-time carved folks out from that for reasons that it thinks are good. In the movie industry, folks gain really, really high payments and then often not working for a while or having super long days and then nothing. But I think we can think of 604 as exactly the same sort of accommodation for folks across the board which is that if you are employing people on an oil rig for 28 days straight and you choose to pay them a daily rate, all you need to do to shore yourself up is to provide some guarantee each week that isn’t the full salary but it is something that’s reasonably related so that we know that this isn’t some faking to get around the rule.
Sheng Li: So I think at least the justices and the parties who are sympathetic to the company here would find maybe a little incongruity between the common understanding of an executive and maybe the salary basis requirement. But I think at the same time, there’s little incongruity on the other side between the common understanding of a salary and what’s required in the regulations or — the regulations are certainly a lot more complicated than that. And I think it’s Justice Jackson who really seized on this and talked about well, isn’t the salary just something that you get that creates stability and regularity? And that’s what we mean by salary.
And I want to pose this question to Tim and let Dave respond. How does your interpretation of the salary basis, is there some tension with that interpretation and what — the common understanding of a salary being a regular thing that, I think Justice Jackson said lets you do direct deposits and pay mortgages?
Timothy Taylor: Yeah. I don’t think there’s a tension. There would be a tension if you were talking about the people in here, but we’re not. We’re talking about the people up here, okay? And, again, when you look at 601, right, it says you just need to be paid on a salary basis a certain minimum, right? And then you can have multiple layers of your cake made out of whatever kind of compensation you want to get you over that top salary threshold. So as long as that is satisfied, and I think here, it was, because again, any week where he works a single minute, he gets his regular guaranteed, can’t be deducted, can’t be changed amount that meets that bottom threshold, then I think you’re okay.
So, again, for these people that are in the middle, right, that’s why we have the protections in 604. And by the way, there’s no textual indication that 604 is supposed to apply to highly compensated employees. That’s where you get into these issues with needing to have your salary be regular, steady, and make up a bulk or a reasonable amount of your total compensation. But for folks that are getting paid very, very well, again, what the regs says is that the only regularity they need is that threshold minimum. And that’s met here.
Dave Dorey: I think that a lot of the problem with how we look at this case is that it’s in an ex-post fashion, looking back on the year before, to say this person was highly compensated because he happened to get $200,000. But if, for example, as Tim posits, he’s entitled to just $963 a day and he only worked one day in a given week, that’s all he gets. And if you do that math out and assume that he worked only half the year, which is what he was doing, then that’s $25,000. And that just doesn’t cut it, and he isn’t a highly compensated employee under that hypothetical.
Sheng Li: Under that scenario, could the company catch him up under that 601 — I forget, 601(b)(2), whatever it is, to the $100,000 threshold?
Dave Dorey: It could, but only if there was an existing salary basis. And that really is what this comes down to. Our point is that there was no salary basis at all. So what this company ought to have done is establish a minimum salary basis if they were going to choose to pay him and then plus it up based on what he actually ended up working.
Timothy Taylor: Sheng, I was going to raise the same point that the regs are designed to allow you to do an ex-post analysis for precisely this reason. So one, yes, you can catch him up. And then secondly, again, where he’s guaranteed an amount that’s going to hit the exemption minimum, even for working one minute and one hour for a week as his salary, then that’s enough. And, again, provided that the total compensation above that hits where it needs to be, then they’re compliant.
Sheng Li: So also, the weekly — under 602, the weekly basis, the minimum guarantee, the regulation, I believe, says it has to be received every week or — there’s a lot made of that word received in the argument where I think Justice Kagan said well, by received, we really mean computed, right? What do you guys make of that? Should receive mean computed in this circumstance or received? I think she made a very good point when she said Mr. Clement, when you bill your clients however much he bills them and you say I want to receive however many thousands of dollars he gets every hour, he doesn’t mean that his clients put $1,000 or $2,000 in his bank account every hour but rather just computes it at the end of the whatever period.
Timothy Taylor: A couple thoughts on that. Justice Kavanaugh hit that as well and was very interested in that argument too but I think from the opposite perspective. I like what the company had to say on this issue where this is not an agency, the Wage and Hour Division, right? If you go look at their technical guidance, you go read a few opinion letters, that doesn’t know how to use words like receive, calculate, compute, etc., when they’re drafting guidance or regulations for the workforce here. This is an agency where very often when you look at their manuals or their opinion letters, it has mathematical formulas etc. in what they put together. So I view receive as the plain and ordinary meaning of receive which is that’s when it’s going to go in there.
And there are other statutory and regulatory provisions that talk about the importance of in fact being paid, getting it into your bank account on certain days of the week, in a context distinct from that pay being calculated on whatever basis because that’s part of worker protection as well, right, that especially for lower paid workers in terms of cash flow and liquidity that you’re not paid some lump sum every three months. So receive means receive.
Sheng Li: Dave, you have a response to that?
Dave Dorey: I think that as many of the justices pointed out, this is simply confusing. And I know that none of us have ever seen a Department of Labor regulation that is confusing. But I think on the whole, when you construe these seven sub-parts of this subsection together, the understanding is that you’re being paid for a week’s worth of work and that is what a salary is. And I think that if you continue reading in 602(a), you’d see that, “regularly received each pay period on a weekly or less frequent basis a pre-determined amount that’s not subject to reduction because of variations in the quantity of work.”
So if you worked four days, he would still get paid for five under this sort of setup and rule which makes a heck of a lot of sense. And even if you hop down to (a)(1), there’s a discussion of receiving a full salary for any week in which the employee performs any work. The whole thrust of this is that there’s five or seven days that you’re being compensated for over that week. And if that’s not what you’re getting, then it’s a day rate and the only way to get around 602 then is you have to hop to 604.
Sheng Li: I saw — what interested me and maybe this is just explained by the timing and change of administrations so it might be a little dense here, but that the Department of Labor typically files amicus briefs in Court of Appeal cases to push or argue for its interpretation of certain regulations. They did not get involved, interestingly, in the Fifth Circuit. But when the case came up to the Supreme Court, the Department of Labor was involved and worked with the Solicitor’s Office in crafting an argument in support of the employee here and they actually participated in the argument. Do either of you have some sort of insights or ideas of why that might be?
Timothy Taylor: Sheng, I was there during the time that this was in the lower court so I’m not going to be able to say anything about that. But I would just say generally on the Supreme Court side that I would think it would just be unthinkable for the Department of Labor or the United States to not weigh in on some FLSA or other statute in this or by the Department of Labor to not file an amicus brief. I think that would just be glaring. And I mentioned, I just, I don’t ever see that happening. So the Department of Labor would definitely need to be involved in anything before the Supreme Court. That’s all I can say about that.
Dave Dorey: I totally agree with that. There’s no question that they had to get involved and did get involved at the Supreme Court level. Why they didn’t get involved in the Fifth Circuit, there are lots and lots of reasons why which can include bandwidth of attorneys at Labor, perhaps the perceived unsympathetic-ness of the defendant at issue here, an oil company. There are lots and lots of reasons.
Sheng Li: So speaking of the perceived unsympathetic-ness, it’s often said that bad cases make bad law. And I think one would not usually think of someone who makes $200,000 or more as a worker that’s deserving — the labor regulations are designed to protect. Yet, I think a decision here could have effects, broad effects, on employers and employees outside of this specific context of very well compensated employee versus evil oil company, playing on both their houses. But can you guys discuss a little bit about what some of these effects, depending on how this case goes, how could this have downstream effects on employers and employees.
Sorry, I’ll let Tim start.
Timothy Taylor: Yeah, sorry. I didn’t know who you wanted to begin there.
When I look at this, regardless of who wins, I think that you’re going to see, unless somewhere down the line, which I know the current administration I think would be unlikely, unless there were to be some regulatory reforms or clarity in this area, even if our employer is successful here, I can see employers looking at these kinds of arrangements and just saying this has gotten a little bit tight, maybe we pull it out on this one. But it made the — there may be some caution regardless here.
With that said, I think that the immediate effects if the plaintiffs prevail, it’s going to be extremely problematic, especially in the oil industry here, right. And that’s what we have from the amici, just massive latent ex-post facto liabilities. And we’ll see if there can be any sort of congressional regulatory fix to that. But it’s kind of the parade of horribles that were raised in Christopher v. SmithKline Beecham and in the Encino Motorcars, other industries where the FLSA regs were interpreted in a novel way to impose liabilities that hadn’t ever seemed to have existed coming home to roost.
Sheng Li: Speaking of Christopher and Encino, those were either the Department issuing guidance or —
Timothy Taylor: That’s true.
Sheng Li: — the Department issuing new regulations. But here, the text of the regulation has been the same for, at least that part of the regulations, it’s been the same throughout the relevant period. So is there the unfair surprise issue here?
Timothy Taylor: I don’t know. Technically, under the SmithKline Beecham standard of unfair surprise because, again, that has to do with more APA deference. But I think certainly in the practical real-world sense, there is surprise, right? I think at these — especially in the oil industry insofar as they’ve arranged their affairs this way. And I realize there’s been some past litigation on this, and Judge Ho said this is not so much as a surprise as they make it out to be. But I don’t know because the other people in those industries themselves said this is going to kill us. So — I mean, you understand what I’m saying. It’s going to cause major liabilities that we did not think existed. And I think in some ways, unfair surprise is worse not better when it’s imposed via litigation rather than through guidance or policy.
Dave Dorey: I agree entirely with Tim, certainly, the liability that is at issue here, if plaintiff ultimately prevails, is vast. As to unfair surprise, the opinion below really points out that the company shouldn’t be here to claim that because they have lost again and again and again these lawsuits for years. And so they should have known how to fix it. And as I pointed out, I think that there’s a very simple fix here and that probably would have not cost very much at the end of the day to appropriately structure the wages of these folks.
I think that down the line, one thing for companies like this to think about and one purpose for the FLSA in this regard is spreading the employment around. Why did Hewitt have to work 12 hours a day? And then have another person that was also working 12 when they could’ve had three folks that were doing the job and then were not in any issue when it comes to overtime. I think, also, something to think about is if Helix prevails, there’s a heck of a lot of people who might suddenly — who are used to getting overtime for a lump of shifts, suddenly get converted to day rates and we see that they lose a lot of money in the process, all the while still being overworked. And that could happen in the middle in Tim’s drawing for us, not just over the line.
Sheng Li: I wonder if the reason he was overworked on some days is — I don’t know the industry very well, but I understand he worked on an oil rig and probably just takes a lot of resources to put more people on an oil rig, so you try to be lean in that regard. But regarding prospective effects on not just oil employers but in the First and Second Circuit, there were different types of employers, how easy is it for employers to, moving forward, avoid this sort of liability by restructuring compensation? Is there a particular business reason why it’s the way it is now, and would it cost them much or would it be actually, as the government argued in their brief, be fairly simple?
Timothy Taylor: Sheng, I think to ask the question is to answer it when it comes to is there a business reason for X because it’s a business doing, so they probably have a business reason for it. So, again, I can’t speak for every industry and every structure, but I would imagine that they have — Helix was doing what it was doing potentially because of transaction costs of bringing out more folks. You have to helicopter them out to the rigs. Maybe that’s just long-standing industry practice and what everybody was used to. Maybe there’s a shortage of qualified personnel in the field.
So I just don’t see it going over well with at least my clients to tell them oh, there’s an easy way to comply with this. Just hire more people and/or pay them more money, right? That’s never the answer you want to give, especially here where, again, I think they’ve been fine. And in other industries, I just don’t know, right. Maybe some of them, there is an easy fix or just a way to restructure it. There was the nurses, of course, raised in their amicus brief in this case. I’m not familiar enough with that industry to speak as to what might be done there if there were an issue other than to say that yes, our nurses are overworked and yes, they have to get paid more money regardless because they’re great and they’re heroes for us.
You can understand the frustration, right, from industry and from employers where if the answer just comes well, there’s an easy way to comply with this is just pay out more money or pay more people, etc.
Dave Dorey: I think that that is right. And I think that the additional answer is let’s look to 604. If you want to pay a day rate, just make sure that you have a minimum guarantee that’s within the 1 to 1.5 ratio. And I think that in this case, Helix could’ve very easily done that.
Sheng Li: And that amount, I think, Dave, you said was something like in the $4,000 range. Is that right?
Dave Dorey: $4,500. And so functionally, if he’s out there from Sunday to Saturday in a given week, it would not make any difference.
Sheng Li: So what if the other result, the Supreme Court reverses and 604 were held not to apply to highly compensated employees. Would that have downstream effects on lower paid employees that the regulations are designed to support? And just my first sense is that this is only about folks making $100,000 or over. My intuition is no, but maybe I’m wrong on that. So I’ll turn that over to Dave, and then Tim can respond.
Dave Dorey: It’s certainly untold how all manner of people across the country might respond to a Supreme Court opinion that is, of course, about the narrow issue and then make choices based on their particular circumstances. I think the issues that the nurses raise about how their compensation might be restructured to remove overtime protections from them is really, very salient and something that should be considered as whoever is drafting this opinion makes clear what is and isn’t an issue here so that those people get protected because we all agree that they shouldn’t get — I mean, Tim agrees, you agree that their structure shouldn’t be changed.
Sheng Li: Are those nurses, are they — I didn’t read the amicus brief. Are those nurses in excess of whatever the highly compensated threshold is today?
Dave Dorey: Yes.
Timothy Taylor: Yeah. The brief says many of them are. Yeah. They’re paid upwards of I think it was $54-57 an hour.
Sheng Li: But they would be affected no matter —
Timothy Taylor: Yeah.
Sheng Li: — by this directly.
Timothy Taylor: Yeah.
Sheng Li: Okay.
Timothy Taylor: As just a little sidenote here, I have to scratch my head because, again, going back to the statute, anyone employed in a bona fide professional capacity, you know, we’re talking about nurses. So, again, going to the statute and whether there might be simpler, clearer ways to do this entire exercise. But more generally, other than the particular oil context that we’re talking about, I think that employers’ ability to do anything here would be constrained by two things. I think one is just a general sense of caution, right, where I don’t think a whole lot of employers, especially when it comes to employees making significant sums where there might be latent overtime ability — overtime liability, may not be inclined to try to cut the ice too thin.
And then secondly, I think we have to remember that the FLSA operates against the backdrop of a free market, right? And people who feel that they’re not getting paid well enough or steady enough, etc., can go to other employment where they can bargain for better wages, more steady, etc. And I think both those things would substantially mitigate any potentially problematic results here.
Sheng Li: Great. Well, that’s — I see we’re running near our time limit. We don’t have any Q&A from the audience to give you guys, and sorry, I’m all out of things. So if you have any closing remarks, Dave, I’ll let you say a few words and then turn it over to Tim for a quick close.
Dave Dorey: Again, thanks very much for doing this, Sheng and Tim. This was a great conversation. Thanks to The Federalist Society for having us here. I think this is a very interesting and complex case, and we will see how it plays out.
Timothy Taylor: Dave, I think you said it well. Nothing additional from me. Thank you again.
Sheng Li: Thank you both. Okay, Chayila.
Chayila Kleist: Indeed. Thank you to all on behalf of both myself and the Regulatory Transparency Project. I want to thank our experts for sharing their time and expertise, and I want to thank our audience for tuning in and participating.
We welcome listener feedback at [email protected]. And if you’re more interested in more from us at RTP, you can continue to follow us at RegProject.org or find us on all major social media platforms. Again, thank you all for joining us today and until next time, we are adjourned.
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