Overtime Per Diem Update

Slick maneuvers by employers to artificially lower the hourly wage for straight time and thereby avoid overtime are being regularly rejected in court.

The 5^th Circuit Court of Appeals recently ruled that virtually every payment made to an employee during the first 40 hours of work must be figured into the employee’s “regular hourly rate” for overtime. When a worker puts in more than 40 hours in the payroll week, he or she must be paid 1.5 times the “regular hourly rate.”

Recent court rulings show that state and federal agencies are getting tough with employers on wage and hour issues, including misclassifying employees as independent contractors, exempt status and now overtime.

In the most recent case, when United Technisource Inc. or UTI hired Timothy Gagnon, a highly skilled aircraft painter, the prevailing wage for that job was $18.00 per hour. Yet, UTI offered Gagnon just $5.50 per hour, with a $12.50 per hour per diem, up to $500 total. The per diem caps out at exactly 40 hours in the payroll week. UTI further offered Mr. Gagnon $20 per hour for hours in excess of 40 hours per week.

When Gagnon eventually filed a wage complaint for unpaid overtime, the company argued that the law required only $5.50 x 1.5 = $8.25 per hour overtime, and Gagnon was being paid almost three times that amount. A lower court found for the company.

However, the court of appeals disagreed. The judges found that if Mr. Gagnon worked 40 hours per week, his wages were $220 +$500 per diem = $720, or $18 per hour. Therefore, he was entitled to 1.5 times  the “regular hourly rate” of $18, or $27 per hour for overtime.

In a similar suit in 2006, the court ruled that commissions and sales bonuses must be included in the “regular hourly rate” for Wal-Mart employees, resulting in a multi-million-dollar award.

In Gagnon v. United Technisource Inc, the judges ruled that, “The regular rate by its very nature must reflect all payments which the parties have agreed shall be received regularly during the workweek, exclusive of overtime payments. The ‘regular rate’ becomes a mathematical computation once the parties have decided on the amount of wages and the mode of payment, which is unaffected by any designation to the contrary in the wage contract.”

The court was especially suspicious of this pay arrangement because the per diem rate was capped.

Employers should note that Mr. Gagnon agreed to this compensation arrangement and worked under it for more than a year, before filing suit. An employee cannot bargain away or waive rights to minimum wage or overtime under the FLSA.

The court followed the U.S. Department of Labor regulations, which require any per diem rate to be included in the “regular hourly rate” to calculate overtime.

This case also underscores just how expensive even a relatively minor overtime miscalculation can be for an employer. The court awarded Mr. Gagnon $9,500 in unpaid overtime plus damages, and more than $55,000 in attorney’s fees, meaning the company paid almost $65,000 for its illegal attempt to avoid about $8,000 in overtime payments.