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Day Rate Satisfies Salary Requirements for FLSA Overtime Exemptions, Says Fifth Circuit

August 26, 2019

In an important ruling that could have a big impact on oil and gas related industries in Louisiana, Mississippi and Texas, the U.S. Court of Appeals for the Fifth Circuit settled a crucial question on companies’ use of day rate compensation and overtime.

In Faludi v. U.S. Shale Solutions, L.L.C., the Fifth Circuit ruled that employers who pay their employees using a day rate are able to meet the salary requirement of the Fair Labor Standards Act ("FLSA” or “the Act”) for purposes of claiming overtime exemptions under the Act. Also of note is the Fifth Circuit’s direct reference to the Supreme Court’s recent decision in Encino Motorcars, LLC v. Navarro, in which the High Court held that courts must give FLSA exemption a “fair reading” rather than narrowly construing them against the employer.

The plaintiff in the case, Jeff Faludi, was an attorney who accepted an in-house consulting position with an oil and gas services company. He was paid $1,000 per day for every day he worked in Houston and $1,350 per day for every day he worked outside of Houston, with an annual salary of $260,000. Faludi worked for U.S. Shale Solutions for about 16 months. After his employment terminated, he filed a lawsuit against the company claiming he was owed unpaid overtime wages under the FLSA.

Under the FLSA, an employer must pay overtime compensation to its non-exempt employees who work more than 40 hours a week. However, the FLSA excludes from the overtime requirement those employees working in a bona fide executive, administrative or professional capacity, which includes the “highly compensated exemption” that applies to employees who make over $100,000 per year. A key requirement for an employer to claim an exemption from overtime is that the employee “must be compensated on a salary basis at a rate of not less than $455 per week.”

In his lawsuit, Faludi argued that the day rate he received from the company did not satisfy the salary requirement because it was not calculated “on a weekly, or less frequent basis.” However, a District Court in Texas ruled against Faludi, holding that he was compensated on a salary basis because his day rate guaranteed him $1,000 for every day he worked, so he would always receive more than the $455 per week minimum during any week in which he performed any work.

Faludi appealed the decision dismissing his case. In their ruling affirming the lower Court, the Fifth Circuit held that:

Faludi's $1,000 day rate plainly constituted “a rate of not less than $455 per week” under 29 C.F.R. § 541.600(a): If Faludi worked for even one hour in a given week, he was guaranteed $1,000, which exceeds the regulatory minimum of $455. And although Faludi contends that 29 C.F.R. § 541.602(a) required his compensation to be calculated “on a weekly, or less frequent basis,” the text of the regulation only provides that Faludi must have "regularly receive[d] each pay period on a weekly, or less frequent basis, a predetermined amount[.]” . . . Thus, Faludi regularly received a predetermined amount of compensation on a weekly or less frequent basis in accordance with 29 C.F.R. § 541.602(a).

While this ruling is good news for employers that typically use day rates in oil and gas exploration related businesses, employers should note that this case hinged on the fact that the day rate in question exceeded the weekly requirement under the FLSA. All day rate compensation arrangements may not necessarily meet the salary basis requirement under the Act.

Overtime exemptions under the FLSA can be very complicated and fact specific, and employers should always consult with counsel before seeking to claim exemptions under the Act.