Fifth Circuit Holds Day Rates Do Not Satisfy the Salary Basis Test

In a significant and adverse ruling for employers, especially in the oil and gas industry, the U.S. Court of Appeals for the Fifth Circuit on April 20, 2020, held that a "day rate" does not satisfy the salary basis test for overtime exemptions – at least not without a guaranteed minimum that bears a reasonable relationship to total weekly wages. See Hewitt v. Helix Energy Solutions Group, Inc., No. 19-20023 (5th Cir.).

Day Rates Have Spawned Significant Overtime Litigation

The historically common practice of paying workers in the oil and gas services industry a "day rate" for each day worked has been the subject of significant overtime litigation across the country for several years now. This is because the most common exemptions to overtime under the Fair Labor Standards Act (FLSA) require that the employee be paid on a "salary basis" of at least a certain minimum amount. And, the argument goes, a "day rate" is simply not a "salary."

But numerous oilfield jobs – such as drill site manager/company man, directional driller and toolpusher – routinely pay "day rates" approaching or exceeding $1,000 per day. These workers make twice as much in a single day as the weekly minimum required for an FLSA exemption. Surely, if the worker is guaranteed to make more than the weekly minimum in a single day, then this would satisfy the salary basis test, right? Unfortunately, the answer is not so clear.

The Fifth Circuit First Approves of Using Day Rates to Satisfy the Salary Basis Test

In 2019, the Fifth Circuit initially found that such highly paid day rate workers were not entitled to overtime. In Faludi v. U.S. Shale Solutions, LLC, 936 F.3d 215 (5th Cir. 2019), an employee who was paid a "day rate" that was more than the FLSA-required weekly minimum satisfied the salary basis test was not entitled to overtime. Circuit Judge James C. Ho dissented in Faludi, arguing that a "day rate" could not be a salary, even if it meant that the employee received more than the weekly minimum each week. Ultimately, the Fifth Circuit withdrew its original opinion in Faludi, and held that the worker was an independent contractor who was not entitled to overtime, regardless of whether he was paid a day rate. See Faludi v. U.S. Shale Solutions, LLC, 950 F.3d 269 (5th Cir. 2020).

The Fifth Circuit Reverses Course on Day Rates

On April 20, 2020, Circuit Judge Ho, now writing for the court, issued the opinion in Hewitt, which adopted the rationale of his dissent in Faludi. The Hewitt case involved an offshore toolpusher who was paid more than $1,300 per day and typically worked 28-day hitches. The Hewitt court held that under the U.S. Department of Labor (DOL) Regulation 29 CFR § 541.602(a) the salary basis test "requires that an employee know the amount of his compensation for each weekly (or less frequent) pay period during which he works, before he works." Since Mr. Hewitt could not know exactly how many days he would end up working (and therefore, how many $1,300 payments he would receive), his day rate did not satisfy the "salary basis" test. Notably, though, the Fifth Circuit indicated in a footnote that "[i]f Hewitt and Helix agreed beforehand on the length of each hitch, there could be an argument that Hewitt's salary was 'predetermined.' " Moreover, the Fifth Circuit indicated in another footnote that if the day rate had borne a "reasonable relationship" to the amount actually earned, it could still satisfy the salary basis test.

What Does It All Mean?

In short, it is too early to know. Helix Energy has asked for an extension of time to seek a rehearing en banc, and this case may present a good reason for the entire Fifth Circuit to weigh in. Two judges in the Faludi case held that a "day rate" could satisfy the salary basis test, while two judges in the Hewitt case held otherwise. Circuit Judge Ho, who was involved in both cases, has consistently maintained the latter position. Until this issue is finally resolved, any employer paying a "day rate" – especially to employees in Texas, Louisiana and Mississippi – should carefully examine their pay practices with counsel to determine whether they face any risk for unpaid overtime and take prompt steps to mitigate that risk. For more information or to examine the impact this decision may have on your company, contact the authors or another member of Holland & Knight's Labor, Employment and Benefits Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.