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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As previously discussed here and here, several Circuit courts have recently upheld use of the “half time” calculation of damages in FLSA misclassification cases. Urnikis-Negro v. Am. Family Prop. Servs., — F.3d. —, No. 08-3117, 2010 U.S. App. LEXIS 16126 (7th Cir. 2010); Desmond v. PNGI Charles Town Gaming, L.L.C., 2011 U.S. App. LEXIS 702 (4th Cir. Jan. 14, 2011). In its Order List for February 22, 2011, the Supreme Court denied the employee’s petition for review of the Seventh Circuit’s decision in Urnikis-Negro. While this denial means the high court will not provide definitive guidance on this issue, the Circuit courts which have addressed the issue and the Department of Labor all have held the half time method of calculation to be appropriate if the salary paid was intended to cover all hours worked.

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It is well understood that employees misclassified as exempt under the FLSA are entitled to overtime pay for hours worked in excess of forty in a week. However, while the United States Department of Labor takes the position that any unpaid overtime is calculated using the “half-time” method, not all of the Circuit Courts have confirmed the appropriateness of such calculation. Last week, the Court of Appeals for the Fourth Circuit (which covers Maryland, Virginia, West Virginia, North and South Carolina), joining the First, Fifth, Seventh and Tenth Circuit courts, held that such calculation is appropriate. Desmond v. PNGI Charles Town Gaming, L.L.C., 2011 U.S. App. LEXIS 702 (4th Cir. Jan. 14, 2011).

Desmond involved three former employees who worked as racing officials at Defendants’ race track who alleged that Defendants had misclassified them as exempt “administrative” employees. The court agreed with Plaintiffs, and held that they were owed “half time” overtime. Under this method, for each week within the limitations period, an employee’s weekly salary is divided by the number of hours they worked to determine their “regular rate,” and the employee receives 50% of that rate for each hour in excess of 40. Plaintiffs appealed, urging that an employer who is found to have misclassified an employee must calculate overtime by dividing the weekly salary by 40, then paying time-and-one-half (150%) of that rate for each overtime hour.

The Court first reviewed the appellate authority from other Circuits authorizing and approving the half time calculation, including the Seventh Circuit’s 2010 decision in Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir. 2010), discussed here. In reaching its decision, the court also noted “In addition to these decisions from our sister circuits, the Department of Labor also has approved using a 50% overtime premium to calculate unpaid overtime compensation in a mistaken exemption classification case.” Id. at * 11 citing Retroactive Payment of Overtime and the Fluctuating Workweek Method of Payment, Wage and Hour Opinion Letter, FLSA 2009-3 (Dep't of Labor Jan. 14, 2009).

While this decision is positive for employers, the appropriate calculation remains unaddressed in seven federal circuits, including the Second, Ninth and D.C. Circuits. Additionally, the plaintiff in Urnikis-Negro has petitioned the United States Supreme Court to review the Seventh Circuit’s decision, Supreme Court Docket No. 10-745. Employers should continue to monitor the state of the law in this area, given its impact on misclassification exposure. Further, employers should ensure that employees classified as exempt are not told anything other than that their salary covers all hours worked.

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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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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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