Failure To Properly Calculate Overtime May Invite A Lawsuit For Your Agency

The plaintiff’s bar recently began to target public agencies for failing to include certain categories of additional pay in determining employees’ so-called regular rate of pay, which forms the basis for overtime calculations under the Fair Labor Standards Act (FLSA).  An employer’s systemic failure to include such payments in overtime calculations can affect many employees, and FLSA liability can extend back two or three years.  Such a mistake can be very costly for agencies.  Rather than wait to become the next target for a lawsuit, public employers should proactively review whether they are properly including additional pay in their overtime calculations.

The basic formula for calculating overtime pay for employees has not changed in the two decades the FLSA has applied to public employers.  Under this formula, employees must be compensated for overtime hours at a rate of at least one and one-half times an employee’s “regular rate” of pay.  This regular rate of pay has always included not only the employee’s base rate of pay but also “all remuneration for employment paid to, or on behalf of, the employee” except for payments specifically excluded under the Act.  (29 U.S.C. § 207(e).)

For instance, any pay for work actually performed or given as a reward for productivity or efficiency, shift differential pay, retroactive pay adjustments, educational or other incentive pay, stand-by time pay, bilingual pay, special assignment pay or shooting pay are all considered “remuneration for employment” that must be included in the regular rate of pay.  Only specifically excluded pay categories—such as paid time not worked, minimum call back time, certain retirement, life, or health insurance payments, discretionary bonuses, and premium payments (e.g., overtime pay for hours over 8 in a day or for working holidays or regular days off)—are not counted in the regular rate. 

While the regulatory framework relating to the calculation of the regular rate of pay has not changed in 20 years, the plaintiff’s bar recently honed in aggressively on proper treatment of additional forms of pay under the FLSA. 

California’s liberal public record laws make it relatively easy for plaintiffs to discover all the kinds of pay that public employers use to compensate their employees and to analyze whether these employers are properly including this compensation in their overtime calculations. 

For example, there have been recent challenges regarding both holiday pay and cafeteria plan benefits (since many employers offer employees a cash option as part of the plan) and whether they must be included in the regular rate.  The Department of Labor has issued opinions on both of these items.

More specifically, CA employees should be aware of conflicting rulings by the Federal Courts of Appeals relating to cash outs of employees’ unused, accrued sick leave.  The Sixth Circuit held that cash outs could be excluded from the regular rate of pay, as money paid under a sick leave buy-back program did not constitute compensation for work.  (Featsent v. City of Youngstown [6th Cir. 1995] 70 F.3d 900.)  However, the Eighth Circuit recently reached the opposite conclusion, explaining that sick leave buy-back programs effectively induce employees to work rather than using sick leave; cash outs thus constitute remuneration for employment that must be included in the regular rate.  (Acton v. City of Columbia, Mo. [8th Cir. 2006] 436 F.3d 969.)  While neither decision directly binds CA employers, the Acton decision will embolden plaintiffs to bring lawsuits against local public employers for failing to include sick leave, or other, pay outs in their FLSA calculations.

Public employers who provide any form of “additional pay” to their employees are vulnerable to potentially costly lawsuits.  Such employers should carefully audit their compensation policies, including a review of all personnel rules and collective bargaining agreements, to ascertain if they in fact provide their employees with any forms of extra pay that must be included in FLSA overtime calculations.  They should then consult with legal counsel to decide if specific prospective or retroactive action is warranted to correct the way the entity calculates overtime.

Liebert Cassidy Whitmore specializes in representing public agencies and the defense of FLSA claims, and assists agencies in auditing their FLSA compliance.  For more information, see www.FLSAaudit.com.