A recent Minnesota Supreme Court opinion demonstrates why employers should proceed with caution if they are considering whether to implement “split-day plans” or any other complicated pay practices that are seemingly authorized by the federal wage and hour laws. See In re Minnesota Living Assistance, Inc. d/b/a Baywood Home Care, Case No. A17-1821, 2019 WL 4456081 (Minn. 2019). Specifically, the Minnesota Supreme Court concluded that the employer was liable for $1.1 million dollars in back pay and liquidated damages because it violated the Minnesota Fair Labor Standards Act (“MFLSA”) by failing to pay employees overtime following implementation of a split-day plan.

Since the inception of wage and hour laws, employers have tried to find creative ways to lawfully limit the total amount of overtime compensation they are obligated to pay. One method, which is particularly popular in the home care industry due to high hour demands for individual workers, is to implement a pay practice known as “split-day plans.” Under a split-day plan, an employee receives an artificially low hourly rate for a set number of hours worked in a day, followed by a higher “premium” hourly rate for any remaining hours worked that same day. Such plans are implemented in an effort to claim an employee has already been paid at “overtime” rates on a daily basis, thus allowing an employer to theoretically avoid paying additional overtime for hours worked in excess of the weekly maximum.

Under very narrow circumstances, certain split-day arrangements may be lawful under the FLSA. However, Baywood Home Care (a home agency based in Minnesota) learned the hard way that such arrangements are not permitted under Minnesota law. Id. at *3–8.

Baywood Home Care implemented a “split-day” pay arrangement whereby it paid its home health aides one rate for the first 5.5 hours of a shift and at 1.5 times that original rate as a “daily premium” for the next 10.5 hours of the shift. For example, employees might receive $10/hour for the first 5.5 hours (or $55), followed by $15/hour for the remaining 10.5 hours (or $157.50), for a total daily pay of $212.50. Baywood then claimed that an employee’s “regular rate of pay” for purposes of calculating overtime was the lower $10/hour rate, and that it was not obligated to pay additional overtime for hours worked in excess of the weekly maximum (which is 48 hours under Minnesota law, as compared to 40 hours under the FLSA), because the employees had already received time-and-a-half overtime on a daily basis because they received that $5/hour “premium” pay for hours 5.5 to 16 of each shift.

Sound confusing? It is. But this complicated practice purportedly saved Baywood Home Care over $550,000 in overtime wages over a two-year period. Unfortunately for Baywood, the Minnesota Supreme Court held that the $5/hour daily “premium” could not be excluded from the calculation of the employees’ regular rate of pay for purposes of determining weekly overtime. Thus, employees were entitled to a significantly higher overtime rate for all hours worked in excess of 48 each week than what Baywood Home Care had actually paid.

To illustrate, under the example split-pay model, an employee who worked four 16.5 hour shifts in a week (or 66 hours) was paid a total of $850.00. In contrast, based on the Minnesota Supreme Court’s holding, that employee should have been paid at least $922.76. While that difference may seem small when applied to one employee for one week’s work, it grows exponentially when applied to hundreds of employees over the course of several years.

Key Takeaways

  1. Employers must ensure that their pay practices comply with state and local laws as well as federal laws.
  1. Split-day plans are not necessarily lawful and require close legal scrutiny.
  1. Employers in industries with lengthy work weeks may be tempted to implement split-day plans or other complex pay practices to reduce labor costs, but they should do so with caution and consider consulting with legal counsel prior to implementing such pay practices.