United States: Fourth Circuit Follows "Half-Time" Methodology in Calculating Overtime in FLSA Misclassification Case

Most employees and employers are familiar with the general rule that if an hourly employee works over forty hours in a work week, then he or she is entitled to "time-and-a-half" for all overtime worked. The overtime calculation is a little trickier, however, when dealing with a salaried non-exempt employee (remember that just because someone is salaried does not automatically mean that he or she is not entitled to overtime under the FLSA). In Desmond v. PNGI Charles Town Gaming, L.L.C., 2011 U.S. App. LEXIS 702 (4th Cir. Jan. 14, 2011), a recent case decided by the United States Court of Appeals for the Fourth Circuit (which covers Maryland, Virginia, West Virginia, North Carolina, and South Carolina), the Court addressed this issue. Desmond was a FLSA misclassification case where the plaintiffs, all non-exempt employees, were paid a salary for all hours they worked. The Fourth Circuit joined several other courts, as well as the U.S. Department of Labor (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)), which have addressed this issue and held that the plaintiffs were only entitled to overtime using the "half-time" methodology. This is a significant case for employers because potentially it will limit back pay to plaintiffs in FLSA cases.

The three plaintiffs in Desmond were former racing officials at a horse track, and, initially, they were paid a per diem rate and treated as exempt employees by their employer. Over the years, the race track changed the pay system for racing officials and began paying them a fixed weekly salary that the officials and the race track intended to cover all hours worked. The race track erroneously believed that the racing officials were exempt pursuant to the administrative exemption set forth in the FLSA. Consequently, the racing officials were not paid overtime. All three of the former racing officials often worked more than forty hours in a work week and contended that they were due overtime at a rate of one-and-one-half-times their regular rate of payment (the regular rate is calculated by dividing the salary earned by the employee by the number of hours worked in each work week). The employer argued that the plaintiffs were only entitled to one-half of their regular rate for all hours worked over forty in a work week.

In reviewing the issue before the Court, the Fourth Circuit noted that the four other Courts of Appeals that had addressed the issue had determined that a:

The Court then sided with the employer and held that the 50% overtime premium was the correct methodology in calculating the overtime due to the former racing officials.

This case is significant for employers who are facing wage and hour litigation from current and former employees, and provides an argument for reducing the potential damages for employers in cases where salaried employees seek overtime. Notably, the Fourth Circuit seemed to sidestep altogether the "fluctuating work week" method of computing overtime pay that is set forth at 29 C.F.R. §778.114, and instead found additional support for its holding in "traditional principles of compensatory damages," which allow for recovery "sufficient in amount to indemnify the injured person for the loss suffered."

While the issue officially remains unsettled—the plaintiffs in a case decided by the Seventh Circuit Court of Appeals are seeking review of an opinion issued in 2010 which also adopted the half-time calculation from the Supreme Court of the United States—the Fourth Circuit's holding in Desmond suggests the trend in the courts and Department of Labor supporting the half-time methodology will continue to control this issue.

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