An interesting decision just issued involving an employer who attempted to use a blended compensation system to pay employees overtime. A federal appellate court ruled, however, that this system did not comply with the Fair Labor Standards Act and allowed a million dollar judgment obtained by the USDOL to stand. The case is entitled U.S. Department of Labor v. Fire & Safety Investigation Consulting Services LLC, and issued from the Court of Appeals for the Fourth Circuit. The compensation system “mixed and matched” the employees’ regular hourly pay rate with their overtime rate. Thus, the workers were basically paid a single uniform hourly rate for all hours worked and therefore their OT rate was not calculated properly.
As the Court aptly stated, “the FLSA shields employees from precisely the type of payment scheme utilized by Fire & Safety — one that appears to compensate employees for both non-overtime and overtime but in reality, uses a single rate for all hours worked, regardless of whether they are non-overtime or overtime hours. Upholding such a scheme and accepting Fire & Safety’s retroactive justifications would undercut one of the fundamental purposes of the FLSA: ensuring that employees are adequately paid for all overtime hours.”
These workers, who investigated fires and provided security for oil-and-gas companies worked shifts of twelve hours for fourteen consecutive days, followed by fourteen days off. The pay system involved the workers receiving a fixed amount for the entire 168 hours. That supposedly included both the regular pay rate for the first eighty (80) hours worked and (allegedly) time-and-a-half for the additional eighty-eight (88) hours. If the workers, however, did not work the full schedule, the Company then used the blended rate. The Company did this by dividing the total number using a pre-set formula that was based on the compensation they would have earned if they worked the full 168 hours.
The Court provided a hypothetical example of this illegal system in operation: Any person who earned $10 an hour would receive $2,120 in regular pay/overtime for the fourteen days. If the person was short of the 168 hours, the Company divided the full pay of $2,120 by 168 and multiplied that figure by the actual number of hours worked. There was a complaint and the agency found it was illegal; the Company corrected the practice but would not pay back pay.
The Fourth Circuit affirmed the lower court and used an actual example from the Company’s records. The Court stated that “this series of calculations demonstrates that … Fire & Safety’s blended rate in fact served as the regular rate. Otherwise, when consultants like those above worked less than a full hitch, their wages would have properly accounted for their non-overtime and overtime hours using their purported regular hourly rates, instead of their blended rates.”
Interesting approach but ultimately doomed to failure. There are very few ways to pay overtime when non-exempt people work more than forty hours. If the overtime can (somehow) be built into the agreed-upon compensation, that would work but threading that needle can be tricky.
Tricky, but doable…