Authored by Richard Alfred

Last week, the Fourth Circuit (comprising Maryland, Virginia, West Virginia, North and South Carolina), joined the other five Circuit Courts that have adopted the “half-time” approach to misclassification damages.  In Desmond v. PNGI Charles Town Gaming, L.L.C. Case Nos. 09-2189, 09-2190, 09-2192 and 09-2254 (4th Cir. Jan. 14, 2011) the Court ruled in a mistaken exemption classification case that successful plaintiffs in misclassification cases are only entitled to 50% of their regular hourly rate of pay–and not 150% (time-and-one-half)–for each hour worked in excess of 40 during a work week.

The U.S. Department of Labor has consistently taken the position as far back as the 1940s that, where the employer and misclassified employees have a “clear mutual understanding” that their weekly salary compensated them for all hours worked, they are only entitled to “overtime” damages calculated at one-half their pro-rated regular hourly pay rate.  In a 2009 opinion letter, the DOL ruled that the “clear mutual understanding” requirement does not need to be expressed in writing but is satisfied when an employee continues to work and accept payment of a salary for all hours of work.”  This application of the so-called “fluctuating work week” method of computing overtime pay, expressed in DOL Regulation, 29 C.F.R. §778.114, has been accepted by the First, Fifth, Sixth and Tenth Circuits.  Last year, in Urnikis-Negro v. Am. Family Property Services, 616 F.3d 665 (7th Cir. 2010), cert. pending, Case No. 10-745 (December 2, 2010), the Seventh Circuit adopted the “half-time” approach to overtime damages but relied on the Supreme Court’s rational in Overnight Motor Transport v. Missel, 316 U.S. 572 (1942), rather than on the “Fluctuating Hours” regulation.  In Desmond, the Fourth Circuit followed the Seventh in relying on Overnight Motor Transport.  The Fourth Circuit found additional support for its ruling on “[t]raditional principles of compensatory damages,” which allow only for recovery of “[d]amages sufficient in amount to indemnify the injured person for the loss suffered.”

While plaintiffs’ counsel continue to argue that time-and-one-half damages should apply in misclassification cases, the clear and strong trend in the courts and the DOL is to the contrary.  Every Circuit Court that has addressed this issue has adopted the “half-time” approach.  The Second, Third, Eighth, Ninth and D.C. Circuits have yet to address it.  State laws and court rulings may also differ from federal law.  The calculation of back overtime damages and the Seventh Circuit’s Urnikis-Negro decision are discussed further on this blog in an article by Seyfarth Shaw’s Richard Alfred and Rebecca Bromet, “Calculating Back Overtime Wages in Misclassification Cases.”