US Supreme Court Reaffirms That Being Highly Paid Does Not Make an Employee ‘Exempt’

Under the federal Fair Labor Standards Act (“FLSA”) and many equivalent state laws, an employee who is “exempt” is not entitled to extra pay for working more than 40 hours in a workweek, while an employee who is “nonexempt” must receive premium pay at one and a half times the employee’s regular rate for working overtime. Failure to pay overtime that is due can result in a judgment of two times the back wages owed looking back three years.

There is a widespread misconception that salaried employees are automatically exempt. Then there are the employers and employees who think that anyone who is highly compensated is exempt. And there is a myth that an employee who is very important to the business is exempt. All of these are incorrect.

On Feb. 22, 2023, the U.S. Supreme Court issued its decision in Helix Energy Solutions Group, Inc. v. Hewitt (No. 21–984). Hewitt worked for Helix on an offshore oil rig, typically working 84 hours a week while on the vessel. Helix paid Hewitt on a daily-rate basis, with no overtime compensation, because Helix considered Hewitt to be exempt. Notably, Hewitt was taking home more than $200,000 annually, seemingly not the class of worker that the FLSA was created to protect.

Nevertheless, the Supreme Court found that Hewitt was a nonexempt employee entitled to overtime pay. The reason for the Court’s holding was simple: Hewitt did not fit into any of the categories of exemption defined in the federal FLSA regulations. In the Court’s words, its “conclusions follow from both the text and the structure of the regulations. And Helix’s various policy claims cannot justify departing from what the rules say.”

The Supreme Court’s precise parsing of the “Salary Basis” test component of the FLSA exemption test, as applied to daily rate workers, is important for employers who are paying employees on a daily rate. But there is a broader point that is relevant to all employers: Following rules matters. In most cases, being exempt means satisfying both the Salary Basis test and one of the Duties tests set forth in the FLSA regulations. There are some exemptions that involve only a Duties test, without a Salary Basis test, but an employee is never exempt just by being salaried or by being highly compensated. Likewise, an employee is never exempt just by being important to the business.

As mentioned above, the consequences of misclassifying a nonexempt employee as exempt are significant—two times the overtime pay owed looking back three years. (For government contractors, the consequences may also include civil penalties and, even worse, exclusion from contracting for three years.) These damages can be reduced significantly by undertaking an FLSA audit, which looks at the employer’s exemption decisions and payroll policies and practices to identify problem areas. Not only can such an audit catch mistakes before the Department of Labor or a plaintiff’s lawyer does, the mere fact that an employer conducted an audit can be introduced as evidence of the employer’s good faith intent to comply with the law—a mitigating factor in the damages phase of a lawsuit.

For more information about the Supreme Court decision, the FLSA, or an FLSA audit, please get in touch with your regular Brown Rudnick contact or with this author.