In Desmond v. PNGI Charles Town Gaming, L.L.C., (4th Cir. Jan. 14, 2011), the Fourth Circuit joined the list of circuit courts that have held that back pay for overtime hours worked by employees mistakenly classified as exempt should be calculated at 50% of the employee’s regular rate of pay. The First, Fifth, Seventh, and Tenth Circuits had previously determined that a 50% overtime premium was appropriate in calculating unpaid over-time compensation due to misclassified employees.
The Fair Labor Standards Act (“FLSA”) generally requires that employees be paid 150% of their regular rate for any hours worked in excess of 40 during a single workweek. Certain categories of employees, however, are exempted from the overtime provisions of the FLSA. The plaintiffs in Desmond were racing officials with Charles Town Gaming. Charles Town Gaming classified these employees as exempt pursuant to the FLSA’s administrative employee exemption and paid them a fixed weekly salary. The fixed salary was paid regardless of the number of hours worked, which often exceeded 40 per week. The plaintiffs were terminated when they unanimously declared the wrong horse to have won a horse race.
The plaintiffs sued Charles Town Gaming, asserting that they were misclassified as exempt employees and should have received overtime compensation for hours worked over 40 in a workweek. The district court and, in a previous appeal, the Fourth Circuit agreed and granted summary judgment to the plaintiffs on liability. The district court then calculated the unpaid overtime compensation owed to each plaintiff by multiplying the number of hours worked in excess of 40 for each workweek times 50% of the plaintiff’s regular rate for the week. The plaintiffs appealed to the Fourth Circuit, arguing that they should be paid 150% of their regular rate for each overtime hour.
Noting that the weekly salary paid to the plaintiffs was meant to cover all hours worked during the week and looking to previous court decisions and a Department of Labor opinion letter, the Fourth Circuit agreed with Charles Town Gaming that overtime should be calcu-lated at 50% of the regular rate. The Fourth Circuit also took the opportunity to reiterate the standard for willfulness under the FLSA, which affects the statute of limitations and thus the period for which back pay can be recovered. The default statute of limitations under the FLSA is two years. However, the limitations period is expanded to 3 years for willful violations. The Fourth Circuit reiterated that for an employer to have willfully violated the FLSA, the employer must have known or showed reckless disregard for whether its conduct violated the FLSA.
Employer misclassification collective and class action suits under the FLSA and state law are increasingly common and expensive for employers. The Fourth Circuit’s decision in Desmond and those like it help to limit the back pay that an employer may have to pay if it mistakenly classifies certain categories of employees as exempt under the FLSA, especially since the liquidated damages recoverable under the FLSA for successful plaintiffs is calculated based on the amount of back pay awarded. To increase the likelihood that it will only be assessed overtime back pay at 50% of regular rate rather than 150% of regular rate in a misclassification suit, an employer should ensure that the fixed salary paid to exempt employees is high enough to meet the minimum wage requirements of the FLSA and state law for all hours worked by those employees and that there is a clear mutual understanding with the employee that the fixed salary is meant to cover all hours worked during the pay period. This is often accomplished by having an employee sign an offer letter with a statement to this effect. Employers should also be sure to check applicable state law wage-and-hour requirements, which can vary from the FLSA, in classifying employees.