A Ray of Sanity in the FLSA Collective Action Morass: Half-pay in Misclassification Cases

Given the overwhelming number of FLSA collective actions that continue to be filed, it is hard to find very much encouraging news, but one ray of sanity is the 4th Circuit's opinion in Desmond v. PNGI Charles Town Gaming, (4th Cir. 1/18/11) [pdf].

The issue was the not inconsequential question of how do you calculate damages in a misclassification case. Here, the employees were thought to be exempt under the administrative exemption, but the court held otherwise.

Plaintiffs of course seek a 150% premium (time and one-half) of the newly computed hourly rate, while defendants argue that overtime has already been calculated in. and so the premium should only be 50% or half-pay. The counter by the plaintiffs is that it gives the defendants the benefits of a fluctuating work week calculation, without having to comply with the regulations.

Noting that it was joining four other circuits and the DOL itself, the Court found the correct way of calculating damages in such cases to be set out by the Supreme Court in Overnight Motor Transportation Co. v. Missel (1942), one of the Court's early FLSA decisions. 

According to the court

The First, Fifth, Seventh, and Tenth Circuits all have determined that a 50% overtime premium was appropriate in calculating unpaid overtime compensation under 29 U.S.C. § 216(b) in mistaken exemption classification cases, so long as the employer and employee had a mutual understanding that the fixed weekly salary was compensation for all hours worked each workweek and the salary  provided compensation at a rate not less than the minimum wage for every hour worked.

Although there may be examples of where individuals were badly served by misclassification, in most cases, it is a case of individuals paid higher than most employees,who clearly understood that they were not receiving any pay for overtime, and were willing to work under those terms. Thus in many respects, any  recovery under the FLSA really is a windfall for them.

The 4th Circuit decision does not eliminate the penalty for misclassification, but it does at least rein it in, so that it is more appropriate.

One other lesson to be learned from this case is how it started.  It has been a highly contested (and no doubt expensive) case. Yesterday's decision is the second time it has been in the 4th Circuit and the second time it has been sent back to the district court for additional action.

Its genesis was when three racing officals were discharged because they unaminously declared the wrong horse to have won a race.  It certainly was not the first, nor will it be the last, case where an employee unhappy with his discharge, which may be perfectly legal makes it to counsel who can not help with the "presenting problem," but can help in other ways.