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CCH® PAYROLL — 07/14/10

Pay scheme to evade overtime liability was willful FLSA violation

An employer could not circumvent its overtime pay obligations by calling the substantial part of an employee's hourly rate "per diem" pay and excluding that pay from the regular rate when calculating overtime, the Fifth Circuit held, soundly rejecting the employer's insistence that it had not engaged in a "deliberate scheme to evade FLSA's overtime requirements."

The employee, a skilled, experienced craftsman, having prepped and painted the exterior and interior of aircrafts for many years, signed a contract to perform this work for $5.50 an hour --an hourly rate not even "remotely close" to the standard pay for aircraft painters in the area --and $20.00 per hour for overtime. The contract also, however, provided for a "per diem" of $12.50 for each hour worked, up to forty hours per week, or $500. After a year, the employee was given a $1 dollar per hour "raise in pay." The raise was factored into his per diem rate instead of his hourly pay rate, however, even though there was no evidence in the record that the increase in the per diem rate was based on any "reasonably approximated increase" in the employee's expenses.

The employee eventually filed suit alleging, among other claims, that the employer's pay scheme violated the FLSA. The district court held the per diem allowance was part of the employee's regular rate of pay; it declined to consider the employer's counterclaims. The employer appealed the lower court's finding that it violated the FLSA. The Act only requires that employees be paid overtime at a rate of time and a half, it argued, while it had paid overtime at more than three times the employee's base pay. It further claimed its per diem was a reasonable approximation of the employee's reimburseable expenses—not a "ploy to avoid paying" overtime. The appeals court disagreed.

The court found it hard to believe a skilled craftsman would accept a $5.50 pay rate given that the prevailing rate for such workers was about three times the minimum wage rate. It was "similarly troubled" that the combined "straight time" and "per diem" rates just about matched that prevailing rate. Adding to its suspicion was the fact that the pay raise had been applied to the alleged per diem instead of the hourly pay. "Finally, we can conceive of no reason why a legitimate per diem would vary by the hour and be capped at the forty-hour mark, which not-so-coincidentally corresponds to the point at which regular wages stop and the overtime rate applies." (Gagnon v United Technisource, 5thCir, 159 LC ¶35,761.)

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