United States: Fifth Circuit Hands Employers A Big Win, Rules Day Rates Can Satisfy The Salary Basis Under The Highly Compensated Employee Exemption

Last Updated: September 20 2019
Article by John P. Phillips, Esteban Shardonofsky and Vanessa Rogers

Seyfarth Synopsis: Employers were handed a big win recently when the U.S. Court of Appeals for the Fifth Circuit held that a day rate can satisfy the salary basis requirement for overtime exemptions under FLSA and also advocated for an award of costs to the prevailing employer. Specifically, the Fifth Circuit held that a sufficiently-high, guaranteed day rate no less than $455 paid on a weekly or less frequent basis can be used to satisfy the salary basis requirement under the highly compensated employee exemption. The Fifth Circuit also remanded the lower court's decision denying costs to the prevailing employer, and directed the court to either award costs or articulate its reasons for declining to do so. Employers in the oil and gas industry and other sectors where day rates are common should read on, as should defense-side practitioners who can use this case to defend future overtime and contractor misclassification claims.

Summary of the Case

In Faludi v. U.S. Shale Solutions, L.L.C., the Fifth Circuit found that a former, unlicensed attorney who was paid on a day rate basis while doing consulting work as an independent contractor was exempt under the FLSA's highly compensated employee ("HCE") exemption and therefore not entitled to overtime even if he was misclassified. The plaintiff was paid a guaranteed rate of at least $1,000 per day regardless of the number of hours worked. He earned at least $1,000 every week he worked and was paid well over $100,000 annually.

On summary judgment, the district court found questions of fact about whether the plaintiff was an employee or an independent contractor, and whether the professional exemption applied. The lower court ruled, however, that the plaintiff was exempt under the HCE exemption, but nevertheless denied the company's request for costs.

Because the parties did not dispute that the plaintiff was paid at least $100,000 annually and regularly performed exempt work, the Fifth Circuit focused on whether the plaintiff was compensated on a "salary basis" under 29 C.F.R. § 541.602(a). Faludi argued he was not paid on a salary basis because he did not receive a salary and because his compensation was not calculated on a weekly or less frequent basis. The Fifth Circuit rejected these arguments, relying on the plain language of the regulation and the recent ruling in Encino Motorcars, LLC v. Navarro, where the Supreme Court made clear that FLSA exemptions must be given a "fair reading," rather than being narrowly construed against the employer.

In particular, the Fifth Circuit found that the pay plan at issue met the salary basis requirement because the plaintiff's day rate guaranteed he received at least $1,000 every week he performed any work at all and because he received each pay period, on a weekly or less frequent basis, a predetermined amount ($1,000 per day) as required under Section 541.602(a). The Court also held that Faludi's voluntary decision to reduce his own pay on days when he did not work a full day (and the Company's payment of those prorated invoices) did not render the compensation plan subject to impermissible reduction under the salary basis test. "To hold otherwise," the Fifth Circuit explained, "would permit employees to preclude reliance on [an] exemption by intentionally reducing their own pay." Finally, the plaintiff argued that his pay did not comply with the "reasonable relationship" test under 29 C.F.R. § 541.604(b). But the Fifth Circuit also rejected this argument, finding that Section 541.604(b) and its corresponding requirements do not apply to the HCE exemption.

On the issue of costs, the Fifth Circuit also ruled in favor of the putative employer. Although the FLSA is silent on whether courts can award costs to prevailing defendants, the Fifth Circuit re-affirmed that defendants may recover costs under FRCP 54(d), which permits the recovery of costs by "the prevailing party" absent a federal statute, rule, or court order to the contrary. With this backdrop, the Fifth Circuit directed the district court to award U.S. Shale its costs in the litigation or articulate good reason(s) for not doing so.

Case Highlights and Takeaways

The Fifth Circuit's decision is a significant win for employers. At least in the Fifth Circuit (which covers Texas, Louisiana, and Mississippi), assuming the other elements of the exemption are met, employers can now satisfy the HCE exemption by paying a sufficiently-high day rate (and remember that "catch up" payments at the end of the year are also permitted to meet the current $100,000 salary threshold under this exemption). This could prove to be a useful tool to mitigate wage-hour liability in the oil and gas industry and other sectors that regularly employ independent contractors. The decision is also a good reminder that prevailing defendants may recover their costs in FLSA litigation. This can be a helpful lever for employers during settlement negotiations or at mediation, especially in collective actions where multiple depositions and other costs can have an outsized impact on a potential resolution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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