Seventh Circuit Upholds Pro-Employer Method of Overtime Calculation for Misclassified Employees

Posted on August 6, 2010 by Noel Tripp

The Fair Labor Standards Act requires employers to pay non-exempt employees one and one half times their regular rate of pay for any hours worked in a workweek in excess of 40. United States Department of Labor regulations, as set forth in 29 C.F.R. § 778.114(a), allow an employer to utilize the fluctuating workweek (“FWW”) method of overtime payment. Pursuant to FWW, in determining overtime due, an employer divides the weekly wage by the total number of hours worked during the week and then pays additional half-time for overtime hours. The more overtime hours worked, the lower the regular rate of pay and the overtime due for each overtime hour. 

One would think that if a salaried employee is found to have been misclassified as non-exempt, this same formula should be applied in determining any overtime due. However, while the federal appellate courts have applies such formula, some district courts have taken the position that any overtime must be calculated by dividing the salary by 40 to determine the regular rate and paying 1.5 times the regular rate for all overtime hours. The difference in calculations can be significant as demonstrated by the following examples.

SALARY: $1,000

HOURS WORKED: 50

Half-time calculation (FWW): $1000/50 hours = $20/hour regular rate of pay/2 = $10 times 10 overtime hours -=$100 due

Time-and-a-half calculation: $1000/40 hours = $25/hour regular rate of pay X 1.5 = $37.50 times 10 overtime hours = $375 due

The difference between the amounts of overtime due under these two calculation methods is always at least three-fold. As the number of hours in the workweek increases, the spread between the two methods grows.

Earlier this week, the Court of Appeals for the Seventh Circuit endorsed the first FWW-type calculation. See Urnikis-Negro v. Am. Family Prop. Servs., — F.3d. —, No. 08-3117, 2010 U.S. App. LEXIS 16126 (7th Cir. 2010).  In finding this method of overtime calculation appropriate, the Seventh Circuit affirmed the district court’s determination that the parties “had a ‘clear and mutual understanding’ that [the employee’s] weekly salary of $1,000 was meant to compensate her for however many hours she worked, not 40 or some other number.”  Id. at *18.  Notably, in reaching this conclusion, the Seventh Circuit referred to an article published by Jackson Lewis partner Paul DeCamp (head of the Firm’s Wage and Hour Practice Group and former Wage and Hour Administrator for the United States Department of Labor) and associate Jacqueline C. Tully, Half-Time or Time and a Half? Calculating Overtime in Misclassification Cases, 278 Fair Lab. Stds. Handbook for States, Local Gov’t & Sch. Newsl. 3 (Nov. 2008). The Court specifically relied on this article for the proposition that the “proper focus in calculating [the] regular rate of pay for [a] misclassified employee is on whether [the] parties intended [a] fixed salary to compensate [an] employee for all hours worked in [a] work-week or solely for [the] first 40 hours.”  Id. at *45. 

The employee argued that “use of the more employer-friendly FWW method gives employers an incentive to misclassify employees as exempt from the FLSA’s overtime requirements or otherwise withhold overtime pay, as they will be little the worse off if and when sued to enforce the statute’s requirements.”  Id. at *55.  In response, the Seventh Circuit stated that the district court awarded liquidated damages, attorney’s fees and costs to the employee, thereby causing the employer to endure penalties for miscategorizing her as an exempt employee.

As with many other wage and hour issues, courts have not been fully consistent even when determining the regular rate is based on salary divided by total hours worked. Some courts have taken the position that time and a half the regular rate is due for all hours over 40 and not just additional half time. Further confusing the issue, some of these courts divide the salary by 40 hours to determine the regular rate, while others still use the total hours worked. These calculations are not supported by regulation but generally based on the court’s view of the equities. 

While this issue may ultimately need to be resolved by the Supreme Court, this is a helpful decision for employers, especially those within the Seventh Circuit. It also reminds employers to reiterate to all salaried employees that their salary covers all hours worked. The Court’s reference to the article published by Jackson Lewis attorneys also demonstrates that the Firm is at the forefront of legal analysis and theory in the wage and hour arena, the forum that continues to pose the highest level of risk related to workplace compliance.

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The Pitfalls Of Excluding Payments from the Calculation Of The Regular Rate Of Pay

Posted on June 2, 2010 by Noel Tripp

In general, when calculating the regular rate of pay for purposes of determining overtime under the FLSA, all remuneration must be included.  This rule is subject to certain limited exceptions for, inter alia, discretionary bonuses and reimbursement of legitimate expenses.  But, if an employer decides to provide an hourly “per diem” and classify it as expense reimbursement, can the employer exclude the “per diem” from the regular rate of pay?  In a decision issued last week, the Fifth Circuit Court of Appeals, affirming the District Court’s finding of a willful violation of the FLSA, held that an employer violated the Act by excluding such “per diem” from the regular rate of pay in an attempt to artificially lower the regular rate of pay.  Gagnon v. United Technisource Inc., 2010 U.S. App. LEXIS 10880 (5th Cir. May 27, 2010).

The facts before the court were simple.  The employer initially paid the plaintiff a straight time rate of $5.50 per hour, plus a per diem of $12.50 per hour for the first 40 hours worked each workweek, and an overtime rate of $20 per hour thereafter.    Later on, the employer increased the plaintiff’s hourly per diem and hourly overtime rate by $1 (i.e., to $13.50 and $21.00 respectively) while leaving the straight time rate unchanged, characterizing this increase as a “raise.”  When Plaintiff sued for alleged unpaid overtime, the employer asserted that its overtime payments exceeded legal obligations as the overtime rate was much greater than time and a half the hourly rate of $5.50 per hour.  The employer further asserted that the per diem reasonably approximated reimbursable expenses and thus did not need to be included in the regular rate of pay.     

The Court rejected the employer’s defenses.  While recognizing that a per diem could be excludable from the regular rate, the Court deferred to the Department of Labor’s position, as delineated in the Field Operations Handbook, that any per diem or similar payment that is based upon hours worked must be included in the regular rate. Id. at fn. 6.  The Court expressed its belief that the employer had attempted to artificially reduce the regular rate and reduce overtime costs and stated “we can conceive of no reason why a legitimate per diem would vary by the hour and be capped at the forty-hour mark, which not so coincidentally corresponds to the point at which regular wages stop and the overtime rate applies.”  Id. at * 9. The Court also: (i) rejected the employer’s attempt to offset liability with allegedly overpaid per diem that the plaintiff should not have received based on a change in his home address which moved him closer to the workplace and theoretically reduced his expenses (on the basis that the per diem was actually part of the regular rate of pay and not expense reimbursement in the first place); (ii) reiterated that a counterclaim is inappropriate in an FLSA action pursuant to precedent (and must be brought separately, if at all); and (iii) stated that plaintiff’s attorneys were entitled to recover fees for their work on the appeal while vacating the initial fee award due to the District Court’s failure to explain the basis therefore (which, as an aside, was 6 times back pay and liquidated damages awarded to the Plaintiff, combined).

All employers should review their overtime calculation protocols to ensure they are paying time and a half the properly calculated regular rate of pay for all overtime hours.  To the extent an employer provides a per diem for expense reimbursement, if the per diem is based on hours worked, there is a significant concern with excluding the “per diem” from the regular rate calculation.

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