On August 21, 2019, the U.S. Court of Appeals for the Fifth Circuit issued an opinion in Faludi v. U.S. Shale Solutions, L.L.C. that may prove to be an important decision for companies that utilize day rate compensation.¹ The decision settled two important issues, concluding that: (1) a guaranteed day rate that provides compensation exceeding $455 can meet the Fair Labor Standard Act (“FLSA”) salary requirements for the white collar overtime exemptions, and (2) the FLSA’s reasonable relationship test does not apply to the highly compensated exemption. 

The underlying lawsuit seeking overtime compensation under the FLSA was filed by an attorney (who had allowed his law license to lapse without telling the company) who held a consulting position at U.S. Shale from November 2014 through March 2016 pursuant to an Independent Contractor and Master Consulting Services Agreement (“IC Agreement”).  The IC Agreement provided for a rate of $1,000 per day for each day he performed services, making his annualized compensation approximately $260,000. The IC Agreement also provided for the plaintiff’s submission, and U.S. Shale’s payment of, invoices twice per month.   

On cross motions for summary judgment, the district court concluded the attorney was exempt from overtime because the daily guarantee was sufficient to meet the salary basis requirements of the FLSA’s highly compensated exemption.  Of note, because the plaintiff had allowed his law license to lapse, the district judge found that the attorney exemption under the FLSA did not apply.  While licensed attorneys are one of only a few occupations that are not required to meet the salary basis requirements of the FLSA’s white collar overtime exemptions, the plaintiff’s law license was not active, which triggered the court’s need to consider the salary basis requirements of the FLSA’s overtime exemptions. 

In a 2-1 ruling, the Fifth Circuit affirmed the district court’s ruling.  The Fifth Circuit explained that because the attorney’s $1,000 day rate guaranteed him at least $455 per week, and he regularly received that amount on a weekly or less frequent basis, he was exempt from the FLSA’s overtime requirements.  The court rejected the attorney’s argument that his compensation was not calculated “on a weekly, or less frequent basis.” Instead, the court found that the text of the regulation only provides that the attorney must have regularly received a predetermined amount and that his agreement provided for these “weekly or less frequent” payments.  The court reasoned that the company guaranteed the attorney would receive more than the $455 per week because “if [the attorney] worked for even one hour in a given week he was guaranteed $1,000, which exceeds the regulatory minimum of $455.”

The attorney also argued on appeal that the overtime exemption failed because his total weekly compensation significantly exceeded the alleged single-day guarantee by four or five times, and therefore violated the FLSA’s “reasonable relationship test.”  The reasonable relationship test set forth in 29 C.F.R. § 541.604(b) states that the overall compensation must bear a reasonable relationship to the guaranteed salary.  The court held, however, that the reasonable relationship test was irrelevant because 29 C.F.R. § 541.604(b) does not apply to employees who meet the requirements of the highly compensated exemption set out in 29 C.F.R. §§ 541.600, 541.601, and 541.602.  Therefore, because the attorney’s compensation exceeded the highly compensated threshold of $100,000, and there was no dispute that he would otherwise meet the duties test of the highly compensated exemption, the Fifth Circuit concluded that the highly compensated exemption applied.

The case is an important decision for companies that utilize day rates for positions that are highly compensated, particularly in the energy exploration and production industry that operate in regions covered by the Fifth Circuit (Texas, Louisiana and Mississippi).