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.