Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

As previously discussed in this blog, many (if not most) courts agree that an employee who receives a fixed salary for varying hours of work has a “clear mutual understanding” with his/her employer that such salary covers all hours of work, and that in the event overtime is deemed owed because the employee was not properly classified as an exempt salaried employee, such overtime should be paid pursuant to the half-time calculation.   Following a trial, Judge John Steele of the United States District Court for the Middle District of Florida, recently ruled that this half-time calculation is also appropriate when the plaintiff was misclassified as an independent contractor. Crumpton v. Sunset Club Props., L.L.C., 2011 U.S. Dist. LEXIS 83987 (M.D. Fla. Aug. 1, 2011).

Plaintiff Crumpton was a real estate broker whose job it was to market the Defendants’ low income housing units. She characterized the monthly payments she received (in addition to commissions for finding tenants for the units) as a salary which only covered her first 40 hours of work. Defendants maintained that the payments were a monthly draw against commissions, and in any event were intended to compensate her for all hours worked. She estimated that she worked in excess of 30 hours of overtime each week, and that she had not received any compensation for her overtime hours under the FLSA. The court disagreed, observing that where “certain conditions are met…the [overtime] rate is reduced to ‘half-time.’” Id. at 11. The Court went on to find that plaintiff’s receipt of the fixed salary satisfied this test. Id. at 12 citing Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir. 2008). 

While many courts have adopted the reasoning articulated in Crumpton, thereby limiting exposure for overtime damages to half-time, until there is a governing Supreme Court decision, employers cannot be certain as to how a court will calculate damages. To bolster the argument that a half time calculation is appropriate, Employers should continue to take measures to refute any arguments that an aggrieved individual may make that any salary paid to any employee (or contractor) was not intended to compensate that worker for all hours worked and/or services performed.  Language in offer letters or agreements is invaluable in making such an argument.

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Following up on proposed regulations issued in 2008 for notice and comment, the U.S. Department of Labor issued final regulations last week, effective 30 days following publication in the Federal Register. These regulations address the issues below but other than in regard to use of the tip credit under Section 3(m), the changes to the text of the current regulations are minimal.

The final rule, consistent with the original proposed rulemaking, states that there is no maximum contribution percentage to valid mandatory tip pools, thus permitting employers to require tipped employees to pool their tips with other service personnel, without a hard cap restriction on the amount pooled.  The DOL previously has taken the position that a "customary and reasonable" maximum contribution meant 15 percent of an employee's tips. However, the rule also states that mandating an employee share his or her tips with a lawful tip pool is the only permissible use to which an employer can put an employee’s tips. This regulatory position contradicts the Ninth Circuit’s decision in Cumbie v. Woody Woo, Inc., 596 F.3d 577 (9th Cir. 2010). In Woody Woo, the Ninth Circuit ruled that an employee has no property right in his or her tips under the FLSA, unless the employer takes a tip credit pursuant to Section 3(m). The new rules also require advance notice of the employer’s use of the tip credit and how the employer calculates it.

In addition to these changes, the enacted regulations eliminated the “20 percent rule” applicable to employees engaged in fire protection activities. As the regulation creating such a rule – permitting fire protection employees to spend up to 20% of their time on non-exempt non-fire protection work – 29 C.F.R. § 553.212, had been superseded by an amended to Section 3 of the FLSA to define the term “employee in fire protection activities,” the DOL eliminated the rule as applied to such employees, consistent with case law interpreting the regulation in light of the new amendment. 

Disappointingly, the DOL declined to adopt regulations clarifying the rules relating to the fluctuating workweek method of overtime compensation and the payment of compensatory time off to public sector employee under Section 7(o) of the Act.

It is vital to note that the DOL’s preamble raises significant questions regarding the application of the fluctuating workweek method of overtime in certain situations. Employers who utilize this payment method should discuss these issues with counsel. 

Otherwise, the changes effected by the new rules are unlikely to be substantial. The hospitality industry should continue to monitor its tip practices closely under federal and state law.

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Under the FLSA (and most state laws), the fluctuating workweek method (FWW) of overtime payment allows employers to reduce overtime expense by paying “half time” for all overtime hours if the following four factors are satisfied: 1) employees’ hours fluctuate from week; (2) employees receive a fixed salary each week that does not vary with the number of non-overtime hours worked during each workweek; 3) the fixed salary provides compensation every week at a regular rate that is at least equal to the minimum wage, and 4) the employer and employees’ share a “clear mutual understanding” that Defendants will pay that fixed salary regardless of the number of hours worked.

However, as demonstrated by last week’s decision by United States District Court Judge Jose L. Linares of the United States District Court for the District of New Jersey, an employer who sets out to utilize the FWW approach pays a strict penalty for non-compliance. See Brumley v. Camin Cargo Control, Inc., 2009 U.S. Dist. LEXIS 126785 (D.N.J. Apr. 20, 2009). 

In his decision, Judge Linares denied summary judgment to defendants in this collective action based on the employer having made one impermissible deduction to one employee.   The Court rejected the employer’s argument that an isolated event of this type was statistically insignificant, stating that such an assertion goes to “weight.” More importantly, the Court granted summary judgment to the plaintiffs based on the employer making additional payments to employees, such as offshore pay, holiday pay and day-off pay, finding that due to such payments, the employer did not pay the fixed salary required to utilize the FWW overtime calculation method.

The negative implications of this decision did not end here.   In evaluating potential damages, the Court rejected the employer’s argument that damages should be calculated based on the half-time method that is part and parcel of the FWW calculation of overtime and held that “the default FLSA damage calculation, ‘time-and-a-half for all hours over 40,’” should apply to Plaintiffs who were not paid properly. The Court also denied summary judgment to both parties as to whether FLSA liquidated damages and a 3-year statute of limitations should be imposed, finding that trial testimony is necessary to determine whether the employer acted in good faith and took reasonable steps to comply with the FWW calculation methodology. Finally, citing to the FLSA regulations and precedent within the Third Circuit, the Court rejected the employer’s argument that overpayments from different pay periods be applied to offset liability.

Employees who avail themselves of the fluctuating workweek method of overtime should ensure they are properly implementing its requirements.

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