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4th Circuit Approves Method Of Calculating Unpaid Overtime In Misclassification Cases

Published by on January 31, 2011

In Desmond v. PNGI Charles Town Gaming, LLC, the United States Court of Appeals for the Fourth Circuit affirmed the district court’s method of calculating unpaid overtime compensation in a misclassification case under the Fair Labor Standards Act (“FLSA”).  This case demonstrates the importance to employers of confirming in writing that the employee’s salary is […]

In Desmond v. PNGI Charles Town Gaming, LLC, the United States Court of Appeals for the Fourth Circuit affirmed the district court’s method of calculating unpaid overtime compensation in a misclassification case under the Fair Labor Standards Act (“FLSA”).  This case demonstrates the importance to employers of confirming in writing that the employee’s salary is intended to compensate the employee for all hours worked during each pay period, even if the hours an employee works fluctuate each week.  More after the break.

Plaintiffs, former racing officials, filed suit against their former employer, alleging that they were improperly classified by defendants as exempt and defendants failed to properly pay overtime compensation in violation of the FLSA.  At summary judgment, the district court held that plaintiffs did not qualify for the administrative exemption, and therefore, plaintiffs were entitled to recover unpaid overtime wages.  Defendants conceded the number of hours for which overtime was owed.  Plaintiffs argued that they should received 150% of their regular rate of pay for all hours worked over 40 hours in a workweek, while defendants argued that plaintiffs were entitled to only 50% of their regular rate of pay for working hours over 40 hours per week.  The district court calculated the unpaid compensation owed to plaintiffs by applying an overtime premium of 50%, rather than 150%, of the regular rate for all hours worked over 40 hours per week.

The Fourth Circuit affirmed the district court’s application of an overtime premium of 50% of the regular rate of pay.  The Court of Appeals based its reasoning on Overnight Motor Transportation Co. v. Missel, a 1942 Supreme Court decision, which 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.  The Court of Appeals reasoned that Overnight Motor’s regular-rate determination implied that the weekly salary covers the base compensation for all hours worked and an award of 50% of the regular rate provided the employees with their unpaid overtime compensation.  For example, assume that an employee earns a weekly salary of $2,000 and works 50 hours during some weeks.  Under Overnight Motor, the regular rate of pay is $2,000 divided by 50 − the actual number of hours worked rather than 40 (the trigger point for overtime)− which is $40.  Plaintiffs argued that damages for the week are calculated by multiplying 1.5 by $40 for the 10 overtime hours- which is $600.  Defendants argued that because the employees have already been paid their regular hourly rate for each of the 50 hours they worked, the overtime owed is calculated by multiplying 0.5 (not 1.5) by $40 for the 10 overtime hours- which is $200. 

In rejecting the plaintiffs’ position, the Fourth Circuit stated that it was joining the Department of Labor and the First, Fifth, Seventh and Tenth Circuits in holding that a 50% overtime premium is appropriate in calculating unpaid overtime compensation in misclassification 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.     

This case demonstrates the importance to employers of committing to writing early in the employment relationship, such as in an offer letter, that the employee’s salary is intended to compensate the employee for all hours worked during each pay period, even if the hours an employee works fluctuate each week.  Such language may greatly undermine an argument by the employee that the salary was intended to compensate the employee for only 40 hours a week. 

To read the Fourth Circuit’s opinion, click here.

Blog posts about the Fourth Circuit’s opinion and the Seventh Circuit’s opinion on the same topic can be found here and here.

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