Did Employer Correctly Pay Salaried, Nonexempt Employee?

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By Caitlin Reilly

“You misclassified me as exempt from overtime,” said Tracey, an employee at a company selling industrial equipment. “You owe me time-and-half pay for the overtime I worked.”

“We reclassified you when we realized our mistake,” said her boss, Anthony. “We offer half-pay to make up for the extra time you worked because you agreed to a flat salary even when hours varied week to week.”

FACTS: An employee of an industrial equipment supplier was misclassified as exempt from overtime under the Fair Labor Standards Act. The employer changed the classification to nonexempt after the mistake was found, and offered half-time pay for hours worked in excess of 40 hours a week for the two previous years.

The employee said that she was owed time and one-half for unpaid overtime and that the period should cover three years instead of two in a lawsuit brought against the employer. She was paid a flat salary that did not change based on the number of hours worked a week. She often worked more than 40 hours in a week, but did not expect extra pay.

She claimed she was incorrectly classified as exempt from overtime from 1996 to 2016. She started her career classified as nonexempt from overtime in 1977 working for the employer's predecessor.

A compensation manager noticed the discrepancy between the employee's duties and her classification. The compensation manager confirmed the employee's duties with her supervisor and then contacted the employer's in-house legal counsel.

ISSUE: Did the employer offer the correct compensation for unpaid overtime?

DECISION: The employer correctly calculated the amount of overtime owed to the employee, a district court said.

The employer used a method outlined in a 1968 Labor Department interpretive rule, the court said.

Under the rule, an employer may calculate overtime for an employee with a fluctuating workweek by dividing total pay by total hours worked in a week to find the regular rate of pay. The employer should pay half the regular rate of pay for overtime hours to satisfy pay requirements. The salary compensates the employee at the regular rate of pay for hours in excess of 40, which totals time-and-a-half pay when combined with the half-time pay.

Under the department's method, the employee's regular rate of pay may change from week to week, depending on the number of hours worked, the court said. To use this method, the employee's regular rate of pay must be higher than the federal minimum wage, the employee must understand that the salary covers however many hours the job requires, and the employer must pay the full salary even if the employee works less than a full schedule of hours, the court said.

An employment agreement may be considered proof that the employee understands that the salary is not tied to hours worked, the court said. The equipment supplier met these requirements, the district court said.

The employer also was correct to offer overtime pay for time worked in the previous two years instead of three, the court said. Under the FLSA, the statute of limitations for violations is two years, unless the employer knowingly disregarded the law's requirements, the court said.

The employee claimed that the statute of limitations should be three years because the employer learned of the misclassification in November 2015 and did not reclassify her until January 2016. The delay was not proof of a willful violation, the court said ( Burris v. Dresser-Rand Co., D. Okla., 16-CV-0198, 11/18/16 ).

POINTERS: Generally, salaried employees' regular rates vary depending on whether the employer uses a salary system for a fixed workweek or fluctuating workweek.

Under the fixed-workweek approach, the employer pays a salary intended to cover only a specified number of hours a week. Under the fluctuating workweek approach, the employer pays a salary intended to compensate employees for the entire workweek, regardless of the number of hours actually worked. Whether the salary payments are made on the basis of a fixed or fluctuating workweek can have a substantial effect on an employee's regular rate.

The district court considered two calculation methods in addition to the one used by the employer that would have been permissible to calculate the employee's back wages.

The traditional time-and-a-half method under the FLSA also would be acceptable for calculating the overtime pay for a salaried employee, the court said.

The employer also could have used the method outlined in a 1942 Supreme Court case, the court said ( Overnight Motor Transp. Co. v. Missel, 316 U.S. 572, 62 S. Ct. 1216 , 86 L. Ed. 1682, 1942 ). Under the ruling, regular rate of pay is calculated by dividing the total hours worked in a week by the weekly salary. The overtime premium is one and one-half times the regular rate of pay. A 1968 Labor Department rule allowed employers to calculate regular rate of pay using this method, and pay half that rate for overtime hours worked.

For more information, see the Payroll Administration Guide's chapter on “Regular Rate Determination.”

By Caitlin Reilly

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This analysis illustrates how courts resolve pay-related disputes. The names and dialogue are fictitious.

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