Damages for Misclassified Employees Under the FLSA: Growing Support for the Half-Time Rate
December 31, 1969
as published in The Job Description by DRI, May 2011
The United States Court of Appeals for the Fourth Circuit recently provided additional support for calculating unpaid overtime compensation under the Fair Labor Standard Act (“FLSA”) by paying damages to misclassified employees at 50% of the regular rate. This half-time ruling brings the Fourth Circuit in line with the First, Fifth, Seventh, and Tenth Circuits, all of which have deemed the half-time method to be proper, and is an important decision in light of increased enforcement efforts against misclassified employees.
The damages provision of the FLSA states, “Any employer who violates the provisions of [29 U.S.C. 206 or 207] shall be liable to the employee or employees affected in the amount of their unpaid minimum wages, or their unpaid overtime compensation, as the case may be, and in an additional equal amount as liquidated damages.” 29 U.S.C. 216(b). In determining that the half-time method is proper for calculating damages for misclassified employees, the Fourth Circuit emphasized the Supreme Court’s express guidance in Overnight Motor Transportation Co. v. Missel, 316 U.S. 572 (1942), as well as general principles of compensatory damages.
In Desmond v. PNGI Charles Town Gaming, LLC, 630 F.3d 351 (4th Cir. 2011), Plaintiffs were racing officials whom the employer treated as exempt, originally paying them a per diem rate. Over the ensuing years, the employer changed their pay structure to a fixed weekly salary that the parties intended to cover all hours worked, and they were treated as exempt under the administrative exception to the FLSA. 630 F.3d at 353. Plaintiffs often worked in excess of forty hours per week. Id. at 354. After Plaintiffs unanimously declared the wrong horse to have won a race, the employer dismissed them from employment. Id.
The Fourth Circuit previously reviewed the district court’s determination that Plaintiffs held administrative positions and were exempt from the overtime provisions of the FLSA. 564 F.3d 688 (4th Cir. 2009). After concluding that Plaintiffs did not qualify for the administrative exemption under the FLSA, the Fourth Circuit remanded the case for further proceedings. Id. In this most recent appeal, Plaintiffs challenged the manner in which damages for unpaid overtime compensation were calculated, claiming that they should receive 150% of the regular rate for all hours worked over 40 in a given workweek, rather than 50% of the regular rate for all hours worked over 40 in a given workweek. Desmond, 630 F.3d at 353. Additionally, the employer appealed the district court’s grant of summary judgment on the issue of willfulness, which the Fourth Circuit overturned.
Analysis of Overnight Motor and Cases Regarding the 50% Multiplier
In reaching its decision that paying damages at the half-time rate is proper, the Fourth Circuit reviewed the Supreme Court’s Overnight Motor decision, which addressed how to calculate unpaid overtime compensation under 29 U.S.C. 216(b). The Supreme Court held that when calculating the “regular rate” of pay for an employee who agreed to receive a fixed weekly salary as payment for all hours worked, a court should divide the employee’s fixed weekly salary by the total hours worked in the particular workweek. 316 U.S. at 579-80 (analyzing section 7 of the FLSA, now codified at 29 U.S.C. 207(a)(1)). The court should complete this calculation for each workweek at issue to obtain a regular rate for a given workweek, which could vary depending upon the total hours worked. Id. The employee should receive overtime compensation for all hours worked beyond 40 in a given workweek at a “rate not less than one-half of the employee’s regular rate of pay.” Id.
The Fourth Circuit recognized the four other circuits that all have determined that a 50% overtime premium was appropriate in calculating unpaid overtime compensation under 29 U.S.C. 216(b) in mistaken exemption classification cases, “so long as the employer and employee had a mutual understanding that the fixed weekly salary was compensation for all hours worked each workweek and the salary provided compensation at a rate not less than the minimum wage for every hour worked.” See Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir. 2010); Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir. 2008); Valerio v. Putnam Assocs., Inc., 173 F.3d 35 (1st Cir. 1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135 (5th Cir. 1988).
In reviewing the considerations that each sister circuit considered in finding that a 50% overtime premium was appropriate, the Fourth Circuit reviewed the key facts of the four mistaken exemption cases. The Courts of Appeals in Blackmon, Valerio, and Clements all relied on 29 C.F.R. § 778.114 to determine that a 50% multiplier was appropriate and did not discuss Overnight Motor. However, the Urnikis-Negro Court rejected the district court’s application of 29 C.F.R. § 778.114, instead relying on Overnight Motor. 616 F.3d at 679-84. The Seventh Circuit held that when an employer and employee agree that a fixed salary will constitute payment at the regular rate for all hours worked and the rate is not lower than the minimum wage, a court should rely on Overnight Motor to calculate unpaid overtime compensation under the FLSA. Additionally, the court calculates the unpaid overtime compensation using a 50% multiplier rather than a 150% multiplier.
In addition to decisions of federal courts, the Department of Labor has approved using a 50% multiplier to calculate unpaid overtime compensation in a mistaken exemption classification case. See “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). The employer requesting the opinion letter asked how to compensate employees mistakenly classified as exempt, and the DOL expressly endorsed the half-time rate for unpaid overtime compensation. The DOL reasoned that “the fixed salary covered whatever hours the employees were called upon to work in a workweek” and “the employees received and accepted the salary knowing that it covered whatever hours they worked.” Accordingly, the DOL said that using the 50% multiplier conforms with FLSA requirements.
The Correct Measure of Damages
After reviewing and analyzing the decisions of other jurisdictions, the Fourth Circuit concluded that the district court was correct in holding that Overnight Motor provides the appropriate method for calculating unpaid overtime compensation under 29 U.S.C. § 216(b). The district court found there was an agreement that Plaintiffs’ fixed weekly salary covered all hours worked, and then reasoned that Overnight Motor’s regular-rate determination implies the previously paid weekly salary covers the base compensation for all hours worked. As such, an award of 50% of the regular rate would provide the employees their “unpaid overtime compensation.” 661 F.Supp.2d at 584.
The Fourth Circuit made short order of Plaintiffs’ counterarguments. Plaintiffs attempted to argue that relying on Overnight Motor improperly expands federal common law; that Chevron deference to 29 C.F.R. § 778.114 requires application of a 150% multiplier; and that allowing a 50% multiplier would create an incentive for employers to pay a fixed weekly salary, never to pay overtime, and then simply pay a 50% premium on the regular rate if the employers ever get caught misclassifying non-exempt employees. The Fourth Circuit said that Plaintiffs ignored the teaching of Overnight Motor, which specifically provides the formula to compute the overtime due an employee paid a fixed weekly salary intended to cover all hours worked.
Finally, the Fourth Circuit highlighted the fact that traditional principles of compensatory damages support the use of a 50% multiplier in calculating the damages for unpaid overtime compensation. Noting that Black’s Law Dictionary defines “compensatory damages” as “[d]amages sufficient in amount to indemnify the injured person for the loss suffered,” the Fourth Circuit said that Plaintiffs agreed to receive straight time pay for all hours worked in a given workweek and had already received such pay. Therefore, the “loss suffered” is the 50% premium for their overtime hours.
In a time when the Department of Labor has increased its enforcement efforts against misclassified employees, the Fourth Circuit’s decision provides additional clarification for the proper method of calculating damages for employees misclassified as non-exempt. Where the parties have a mutual understanding that the fixed weekly salary was intended to cover all hours worked in a given workweek, the correct measure of damages is 50% of the regular rate. This calculation provides the employees with their unpaid overtime compensation since they already received their base salary to cover all hours worked. Moreover, the Fourth Circuit emphasized the logic of Overnight Motor rather than the guidance in the FLSA regulations. In advising clients on potential damages in misclassification situations, there is now clear and significant support that the 50% multiplier is correct.