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.



Background



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 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.