How does SCOTUS’ overtime pay rate ruling affect businesses?

Overtime pay isn’t just for hourly or lower-income employees; high earners may be eligible for it as well, the U.S. Supreme Court ruled in February. In Helix v. Hewitt, the court ruled 6-3 that a former employee who made more than $200,000 a year was eligible for overtime pay under the Fair Labor Standards Act (FLSA) — because he was paid a day rate, not a fixed salary.

While SCOTUS’ overtime pay rate ruling is a boon for those highly compensated employees who are paid on a day-rate basis, it increases the employer’s risk of overtime liability for day-rate compensation.

Delve deeper

Case background. Helix Energy Solutions Group, an offshore oil and gas company based in Houston, employed Michael Hewitt on its offshore oil rig from 2014-2017. Hewitt worked as a tool-pusher at intervals of 28 days on and 28 days off — 12 hours a day, seven days a week. He was paid once every two weeks at a daily rate that ranged from $963 to $1,341 and earned over $200,000 annually.

After his employment ended in 2017, Hewitt filed a suit claiming that his work arrangement with Helix Energy entitled him to overtime under the FLSA. Helix Energy, however, insisted that Hewitt was exempt from the federal overtime provisions — he was paid on a salary basis and was a bona fide executive employee.

Please note that the FLSA requires employers to pay employees time and one-half of their regular pay rate for all hours worked over 40 in a workweek unless an exception applies.

The justices’ reasoning. The Supreme Court held that Helix Energy’s pay structure for Hewitt  — wherein he was paid on a day-rate basis — did not meet FLSA’s salary-basis criteria for an executive exemption; and ordered Helix Energy to pay him retroactive overtime wages.

Justice Elena Kagan wrote that the exemption at issue “applies solely to employees paid by the week (or longer); it is not met when an employer pays an employee by the day, as Helix paid Hewitt.” She added, “employees are not deprived of the benefits of [overtime compensation] simply because they are well paid.”

How does SCOTUS’ overtime decision affect your business?

The recent decision on overtime pay can have significant implications for businesses, particularly for those that pay employees day rates rather than a fixed salary for periods of a week or more.

Businesses that use day rates to compensate employees face increased exposure post the SCOTUS ruling — that reinforces more stringent and employee-friendly FLSA overtime requirements. Many of the highly compensated employees may now be eligible for overtime pay — increasing the employer’s liability.

Besides, if employees sue for unpaid overtime, they are likely to win especially after the SCOTUS’ employee-friendly stance — further adding to the liability of the employers. And with employment practices liability insurance generally not covering overtime claims, businesses may be overburdened with paying back pay, liquidated damages, and hefty legal costs.

More broadly, the ruling serves as a wake-up call for businesses that think employees are exempt from receiving overtime pay simply because they are highly paid. On the contrary, higher compensation only serves to increase a non-exempt employee’s overtime rate.

To recap, employees must meet all salary and duties requirements under the FLSA to be exempt. Even employees compensated at or above the FLSA’s “highly compensated executive” amount (currently $107,432 per year) must meet all the requirements of the FLSA exemptions, including at least a weekly salary, to avoid overtime requirements. Daily pay rates will simply not suffice.

Here’s what affected businesses can do to shore up their overtime liability exposure.

Comprehend the overtime pay rules correctly. Businesses should spend time doing technical reading and understanding the nuances of the FLSA’s overtime pay standards. It will help them understand that for employees to be exempt from the overtime pay rule, they must be paid a salary. Plus, merely meeting the salary threshold doesn’t automatically make employees exempt from overtime pay standards; the job duties of the employees also must primarily involve executive, administrative or professional duties defined by FLSA.

Evaluate their current pay structures. Businesses that pay daily rates to employees currently classified as “exempt” should closely evaluate their payroll processes to ensure that the overtime compensation for salaried, non-exempt employees is being properly calculated. Plus, make certain that the pay structures comport with the law’s strict requirements.

In case businesses have any employees in the same scenario as Hewitt, they should consider adding a reasonable weekly guarantee to their day rate to meet the FLSA’s requirements or converting them to a straight salary for the weeks they work.

Ensure employee classification is correct and compliant. Given the increased exposure, businesses should thoroughly review employee classifications and ensure their employees are properly classified. Besides, HR teams should be very careful about classifying daily-rate workers as salaried employees and ensure it meets any applicable salary basis test. Else, it can result in serious consequences, including back overtime wages owed, and penalties for violations of federal and state employment laws.

Maintain accurate records of wage payments and hours. Exemptions from overtime laws can be difficult for employees to figure out because there are a lot of gray areas. Maintaining accurate records of wage payments and hours worked and things like that can help employers ensure compliance with regulatory bodies like the U.S. DOL and the IRS. Plus, it can help businesses defend against overtime pay and other employment-related litigation.

Consider outsourcing HR services. Determining which employees are overtime exempt under the FLSA, and which are not, can be very time consuming and complex, particularly for growing businesses. And to add even more to the confusion is the fact that some states have passed their own laws regarding overtime pay. Opting for outsourced payroll services for startups can ensure their wage-and-hour policies as well as practices are always in compliance. Plus, it can help businesses avoid payroll problems.

Review employment laws compliance regularly. Businesses should review their wage-and-hour compliance on a fairly regular basis because the employment laws are complicated, as evidenced by the recent SCOTUS’ ruling; and these laws are subject to different interpretations and changes.

Takeaway

Employers should be careful not to paint outside the lines of the strict requirements of the FLSA’s laws and regulations. Besides, businesses must be aware that despite agreeing to a creative compensation agreement with their employees, they can be subject to substantial back pay and liquidated damages liability if the arrangement does not comply with the federal law’s strict requirements.  

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.

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