Why it matters

Do paid lunch breaks relieve an employer of paying overtime for work performed prior to and after a worker’s shift? No, the Third Circuit Court of Appeals ruled in a case involving a group of employees who filed a Fair Labor Standards Act suit against DuPont. The workers sought overtime compensation for the time they spent donning and doffing their uniforms and protective gear as well as “shift relief” before and after their regularly scheduled shifts. DuPont moved for summary judgment, arguing that, because the company provided paid meal breaks during the shift, it was not required to pay for the overtime. A federal district court agreed the offset was legal but the federal appellate panel reversed. “Compensation included in, and used in calculating, the regular rate of pay is reflective of the first forty hours worked,” the court said. “[A]llowing employers to then credit that compensation against overtime would necessarily shortchange employees.”

Detailed discussion

Three employees of E.I. DuPont filed a Fair Labor Standards Act (FLSA) collective action against their employer, seeking overtime compensation for the time they spent donning and doffing their uniforms and protective gear and preforming “shift relief” before and after their regularly-scheduled shifts at a Pennsylvania manufacturing plant.

The time spent donning, doffing and providing shift relief—which involved employees from the outgoing shift sharing information about the status of work with incoming shift employees—ranged from 30 to 60 minutes per day.

As part of the employees’ regular wages, DuPont chose to pay for meal breaks during their shifts. The policy was set forth in the employee handbook, which stated: “Employees working in areas requiring 24 hours per day staffing and [who] are required to make shift relief will be paid for their lunch time as part of their scheduled work shift.” The plaintiffs, who worked 12-hour, four-shift schedules, were entitled to one 30-minute paid lunch break per shift in addition to two non-consecutive 30-minute breaks. The paid break time always exceeded the amount of time the plaintiffs spent donning, doffing and providing shift relief, the parties agreed.

Based on its compensation plan, DuPont moved for summary judgment, arguing that the FLSA allowed the employer to use paid non-work time to offset the required overtime. A federal district court judge agreed but the Third Circuit Court of Appeals reversed.

Reviewing the history of the federal statute, the panel emphasized that one of the “bedrock principles of the FLSA is the requirement that employers pay employees for all hours worked,” at a rate based upon the total remuneration divided by the total number of hours actually worked. Only explicit statutory exclusions can impact this regular rate of pay, the court said.

The FLSA does permit an employer to use certain compensation already given to an employee as a credit against its overtime liability owed to the worker but only in three categories of compensation that are characterized as “extra compensation provided by a premium rate,” such as not less than one and one-half times the regular rate for Saturdays, Sundays and holidays, for example, or pursuant to a collective bargaining agreement.

“[T]he three categories of excludable compensation that qualify for the offsetting provision … are paid at a premium rate,” the panel said, adding that the regulations also support limiting employers’ ability to offset overtime liability.

“Nothing in the FLSA authorizes the type of offsetting DuPont advances here, where an employer seeks to credit compensation that it included in calculating an employee’s regular rate of pay against its overtime liability,” the Third Circuit wrote. “Rather, the statute only provides for an offset of an employer’s overtime liability using other compensation excluded from the regular rate … and paid to an employee at a premium rate.”

Essentially, where a credit is allowed, the statute says so, the court explained, and at the point at which compensation is included in the regular rate, an employer may not use that compensation to offset other compensation owed under the FLSA.

“It is undisputed that the compensation paid for meal breaks was included in plaintiffs’ regular rate of pay, and thus could not qualify as ‘extra compensation,’” the panel wrote, not persuaded by DuPont’s contention that the statute did not expressly prohibit the offsetting it used.

“We disagree with DuPont’s notion that the FLSA’s silence indicates permission. While it is true that the statute does not explicitly set forth this prohibition, the policy rationales underlying the FLSA do not permit crediting compensation used in calculating an employee’s regular rate of pay because it would allow employers to double-count the compensation,” the court said, citing an amicus brief filed by the Department of Labor (DOL) in the case.

“Compensation included in, and used for calculating, the regular rate of pay is reflective of the first forty hours worked,” the panel said. “We agree with the reasoning of the DOL that allowing employers to then credit that compensation against overtime would necessarily shortchange employees.”

The statutory scheme permits just three exclusions for offsetting compensation, which “makes sense,” the Third Circuit said. “Here, permitting DuPont to use pay given for straight time – and included in the regular rate of pay – as an offset against overtime pay is precisely the type of ‘creative bookkeeping’ … the FLSA sought to eradicate.”

To read the opinion in Smiley v. E.I. DuPont de Nemours, click here.

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