California law starts from a presumption that all employees are non-exempt employees, meaning that they are not exempt from the Labor Code requirements, such as overtime pay, meal and rest breaks, and minimum wage. Exempt employees are designated as such because they are “exempt” from certain wage and hour requirements due to their duties and pay. However, the employer bears the burden when classifying an employee as exempt, and simply providing a title to an employee does not make them exempt.

This week, the U.S. Supreme Court issued a decision in Helix Energy Solutions Group, Inc. v. Hewitt that examined the issue of the “salary basis” test under federal law.  As explained below, because California does look to federal law when interpreting its wage and hour laws, the decision needs to be understood by California employers and is a good reminder of the heightened requirements California employers have to meet the exemption requirements under California law. 

1. Overview of federal and California white-collar exemptions

The Fair Labor Standards Act (FLSA) exempts employees employed as in an executive, administrative, or professional capacity (these exemptions are often referred to as the white-collar exemptions).  The Department of Labor issued regulations that set forth the requirements for employees to meet these exemptions, generally looking to (1) the employee’s duties, (2) how much the employee is paid, and (3) how the employee is paid, such as by salary, wage, commission, or bonus.

Likewise, California law recognizes certain exempt categories (including the executive, administrative, and professional) of employees for purposes of overtime and other wage and hour requirements.  California Labor Code section 515 and California’s Wage Orders set forth the requirements for exempt employees in California.  It is important to note that while California and federal law are similar in some regards, and sometimes California looks to federal law when interpreting its own laws, there are significant differences that employers must be aware of for any exempt analysis under California law. 

2. California looks to federal law when interpreting its Wage Orders

The federal Fair Labor Standards Act of 1938 (29 U.S.C. § 201 et seq.) applies a “salary basis test” to determine whether employees who are classified by their employers as “salaried,” and therefore exempt from minimum wage and overtime requirements, are in fact properly subject to exemption. California state law must meet or exceed standards adopted under federal law, and California follows the federal salary basis test to a substantial degree. See Kettenring v. Los Angeles United School Dist. (2008). 

In Negri v. Koning & Associates, a California Court of Appeals explained that the “Division of Labor Standards Enforcement (DLSE) construes the IWC wage order to incorporate the federal salary-basis test for purposes of demining whether an employee is exempt or nonexempt.” (referring to DLSE Opinion Letter No. 2002.03.01 (Mar. 1, 2002).  The Court in Negri acknowledged that while the DLSE opinion letters are not controlling, they are instructive on the wage orders, and therefore look to federal law on the definition of “salary.” 

3. Salary basis test under the FLSA

At issue in Helix Energy Solutions Group, Inc. v. Hewitt, was whether the employee was paid on a salary basis.  Plaintiff worked as a “tool-pusher” for Helix Energy Solutions Group on an offshore oil rig.  He would work 12 hours a day, seven days a week, for a 28-day “hitch.”  Then he would have 28 days off.  Helix paid plaintiff on a daily-rate basis, which started at $963 per day and increased to $1,341 per day, which amounted to more than $200,000 on an annual basis.  Plaintiff claimed that because he was paid on a daily basis, he did not meet the salary basis requirement to be exempt, and therefore should be paid for his overtime. 

Federal regulations provide that “An employee will be considered to be paid on a ‘salary basis’ … if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. … [A]n exempt employee must receive the full salary for any week in which the employee performs any work without regard to the number of days or hours worked.” (29 C.F.R. § 541.602(a).)

The U.S. Supreme Court held that plaintiff was not paid on a salary basis.  The Court explained, “A daily-rate worker’s weekly pay is always a function of how many days he has labored.  It can be calculated only by counting those days once the week is over – not, [as the regulations require], by ignoring that number and paying a predetermined amount.”  The Court noted that the definition of “salary” refers to “fixed compensation regularly paid, as by the year, quarter, month or week,” which is distinguishable from “wages” for “[p]ay given for labor’ at ‘short stated intervals.’” (citing Webster’s New International Dictionary).

4. Salary basis test under CA Law

The California Court of Appeals in Negri v. Koning & Associates examined the same issue as reviewed in Helix, but under California law.  The case was decided in 2013, and reviewed the issue of whether an insurance claims adjuster who was paid $29 per hour with no minimum guarantee qualified as an exempt employee under California law. 

As the Court in Negri explained, “Exemptions from the overtime pay requirement are proper only where ‘the employee is primarily engaged in the duties that meet the test of the exemption, customarily and regularly exercises discretion and independent judgment in performing those duties, and earns a monthly salary equivalent to no less than two times the state minimum wage for full-time employment.’ (Lab. Code, § 515, subd. (a).)”  The Wage Orders also govern, and the Court explained that while they do not define salary, the term “salary” “is generally understood to be a fixed rate of pay as distinguished from an hourly wage.” The Court held that because defendant stipulated that it never paid plaintiff a guaranteed salary and that if plaintiff worked fewer claims he made less money, therefore “plaintiff was not paid ‘a predetermined amount’ that ‘was not subject to reduction based upon the quantity of work performed.’”  Since plaintiff was not paid a salary, defendant did not prove that he qualified as an administrative exempt employee under the Wage Orders. 

5. Rational for the salary basis test

The Court explained in Helix, that the overtime laws were “designed both to ‘compensate [employees] for the burden’ of working extra-long hours and to increase overall employment by incentivizing employers to widen their ‘distribution of available work. Employees therefore are not ‘deprived of the benefits of the [overtime compensation] simply because they are well paid.”  The salary basis test “create a compensation system functioning much like a true salary – a steady stream of pay, which the employer cannot much vary and the employee may thus rely on week after week.” 

The Court also explained that Helix could comply with the salary-basis requirement in two ways:

  1. Add to plaintiff’s per-day rate a weekly guarantee that satisfied the requirements; or
  2. Could convert plaintiff’s compensation into a straight weekly salary for time spent on the rig.

Remember, the salary basis test is only one aspect of the federal and California exemption test.  Employers still must show that the employee earned the required salary level and meets the duties test in order to qualify for the applicable exemption.  More information about common exemptions under California law and the requirements to meet the exemptions can be read here.

One last note for wage and hour practitioners: Justice Kavanaugh raised an interesting point in his dissenting opinion about whether the Department of Labor’s regulations that set out the salary basis and level requirements could be challenged in the future as being inconsistent with the FLSA.  He noted that the FLSA statute only “focuses on whether the employee performs executive duties, not how much an employee is paid or how an employee is paid” and may not survive a challenge.  He notes, “But I am hard-pressed to understand why it would matter for assessing executive status whether an employee is paid by salary, wage, commission, bonus, or some combination thereof.”