In a recent en banc decision the Fifth Circuit Court of Appeals effectively demolished the legal basis underpinning a long-standing oil and gas industry custom in compensating oil rig workers. In Hewitt v. Helix Energy Solutions Group, Inc., the Fifth Circuit held that an otherwise highly compensated rig worker who was paid on a daily-rate basis was not exempt from the Fair Labor Standards Act’s (“FLSA”) overtime provisions and therefore must be paid overtime for any time worked more than 40 hours per week. This decision is widely considered to be a major blow to the oil and gas industry which typically pays rig workers a daily rate without overtime even though such employees work far more than 40 hours per week while on a hitch—an extended period, usually two weeks to one month, working on an oil rig. The industry’s daily-rate practice relied on a long-standing assumption that such workers, who often earn more than $200,000.00 per year, are exempt from the FLSA’s overtime requirements due to their high level of compensation.

A majority of the Fifth Circuit, sitting en banc, rejected this assumption “as a matter of plain text” in applying the Department of Labor’s regulations implementing the FLSA’s statutory requirements. Focusing on an often overlooked provision, the Fifth Circuit majority determined that despite the daily-rate workers’ high level of compensation, to be considered exempt from overtime such workers must be paid on a “salary basis.” And for a daily-rate worker to be considered paid on a salary basis, such worker must receive a minimum weekly guaranteed amount and the guaranteed amount must be reasonably related to the amount the employee would earn over the course of a week at the daily rate. In other words, any worker paid a daily rate who does not also have a reasonably related weekly guaranteed minimum is not paid on a salary basis and is therefore non-exempt and subject to the FLSA’s overtime requirements. Both the Sixth Circuit and Eighth Circuit Courts of Appeal have made similar determinations in holding that workers paid a daily rate only are not paid on a salary basis. The Department of Labor has also indicated agreement with this interpretation of its FLSA regulations.

The Hewitt case thus presents immediate challenges for the oil and gas industry and its daily-rate pay structure for rig workers and other employees paid on a similar model. Employers must immediately revise their compensation structures to eliminate the day-rate method and move to an hourly structure or some other FLSA compliant compensation model. A potentially greater concern is that the FLSA provides workers compensated at the day-rate the ability to recover back overtime pay for a two (or potentially three) year period. Opportunistic plaintiff’s attorneys will be actively seeking willing plaintiffs and filing collective actions.

Employers who are faced with quickly revising their compensation model and/or looking to get ahead of any overtime claims resulting from the Hewitt decision should consult with a trusted L&E attorney who is also familiar with the oil and gas industry. If you would like more information or have a specific situation you would like to discuss, please contact us.

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