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3d Cir.: Paid Meal Breaks Included as Hours Worked Are Not an Offset to Unpaid Overtime

Smiley v. E.I. Dupont De Nemours and Co., et al.

This case was before the Third Circuit on the plaintiffs-employees’ appeal of the district court’s order granting the defendants-employers summary judgment.  Plaintiffs sought unpaid overtime wages for time they spent donning and doffing their uniforms and protective gear and performing “shift relief” before and after their regularly-scheduled shifts. Defendant contended that it could offset compensation it gave Plaintiffs for meal breaks during their shift—for which defendant was not required to provide compensation under the FLSA—against such required overtime. The District Court agreed with defendant and granted defendant summary judgment. On appeal the Third Circuit concluded that the FLSA compelled the opposite result and reversed the district court’s order granting summary judgment.

The Third Circuit summarized the relevant facts as follows:

Appellants worked twelve-hour shifts at DuPont’s manufacturing plant in Towanda, Pennsylvania.  In addition to working their twelve-hour shifts, Plaintiffs had to be on-site before and after their shifts to “don and doff” uniforms and protective gear. DuPont also required them to participate in “shift relief,” which involved employees from the outgoing shift sharing information about the status of work with incoming shift employees. The time spent donning, doffing, and providing shift relief varied, but ranged from approximately thirty to sixty minutes a day.

DuPont chose to compensate Plaintiffs for meal breaks—despite no FLSA requirement to do so—during their twelve-hour shifts. The employee handbook set forth DuPont’s company policy for compensating meal breaks, stating that “[e]mployees working in areas requiring 24 hour per day staffing and [who] are required to make shift relief will be paid for their lunch time as part of their scheduled work shift.” Employees who worked twelve-hour, four-shift schedules, as did Plaintiffs in this case, were entitled to one thirty minute paid lunch break per shift, in addition to two non-consecutive thirty minute breaks. The paid break time always exceeded the amount of time Plaintiffs spent donning and doffing and providing shift relief.

The court then began its analysis of the issue at bar, with an analysis of why the paid breaks constituted “hours worked” under the FLSA and explained:

“Hours worked” includes all hours worked “under [an employee’s] contract (express or implied) or under any applicable statute.” 29 C.F.R. § 778.315. In general, “hours worked” includes time when an employee is required to be on duty, but it is not limited to “active productive labor” and may include circumstances that are not productive work time. See 29 C.F.R. § 778.223. Employers have a measure of flexibility in determining whether otherwise non-productive work time will be considered “hours worked” under the FLSA. For instance, meal periods—while not necessarily productive work time—may nevertheless be considered “hours worked” under the Act. Id. (“Some of the hours spent by employees … in meal periods … are regarded as working time and some are not. … To the extent that those hours are regarded as working time, payment made as compensation for these hours obviously cannot be characterized as ‘payments not for hours worked.’ ”). The decision to treat otherwise non-productive work time as “hours worked” is fact dependent. Relevant here, the regulations provide that “[p]reliminary and postliminary activities and time spent in eating meals between working hours fall into this category [of work that an employer may compensate his employees for even though he is not obligated to do so under the FLSA.] The agreement of the parties to provide compensation for such hours may or may not convert them into hours worked, depending on whether or not it appears from all the pertinent facts that the parties have agreed to treat such time as hours worked.” 29 C.F.R. § 778.320.

Thus, if the time at issue is considered hours worked under the Act, the corresponding compensation is included in the regular rate of pay. 29 C.F.R. § 778.223. Whether or not the time is considered hours worked under the Act, however, if the time is regarded by the parties as working time, “the payment is nevertheless included in the regular rate of pay unless it qualifies for exclusion from the regular rate as one of a type of ‘payments made for occasional periods when no work is performed due to failure of the employer to provide sufficient work, or other similar cause’ as discussed in § 778.218 or is excludable on some other basis under section 7(e)(2).” Id.

After discussing the limits on permissible overtime offsets contained within 207(h), the court held that the paid breaks were not such a permissible offset under its own prior jurisprudence or otherwise:

Nothing in the FLSA authorizes the type of offsetting DuPont advances here, where an employer seeks to credit compensation that it included in calculating an employee’s regular rate of pay against its overtime liability. Rather, the statute only provides for an offset of an employer’s overtime liability using other compensation excluded from the regular rate pursuant to sections 207(e)(5)-(7) and paid to an employee at a premium rate.

In Wheeler, as here, the employer, Hampton Township, had voluntarily included non-work pay—which did not need to be included in the regular rate under the Act—in the regular rate calculation. It sought to offset compensation it was required to include in the regular rate, but did not, with compensation it voluntarily chose to include in the regular rate. Wheeler, 399 F.3d at 243. We held that this was not permitted. We could not find any “textual reason to ‘credit’ the Township for including such pay in its regular rate.” Id. at 244. We explained that “while § 207(e) protects the Township from having to include non-work pay in the regular rate, it does not authorize the Township now to require such augments to be stripped out, or to take a credit for including such augments.” Id. In essence, at the point at which compensation is included in the regular rate (regardless of whether the Act required it be included), an employer may not use that compensation to offset other compensation owed under the Act. We determined that “[w]here a credit is allowed, the statute says so.” Id. at 245. The Township was not entitled to a credit under the explicit offset contemplated by section 207(h), so we concluded that the FLSA did not permit the offset. Id. (“The Township seeks a credit for allegedly including non-work pay—presumably at a non-premium rate—in the CBA’s basic annual salary. The FLSA does not provide for such an offset.”).

We based our conclusion that offsetting was limited to the type addressed by section 207(h) on our recognition that Section 207(h) offsetting pertained only to “extra compensation,” which is distinct from regular straight time pay. Wheeler, 399 F.3d at 245. Indeed, “such ‘extra compensation’ is a kind of overtime compensation, and thus need not be added to the regular rate. Likewise, such compensation may be credited against the Act’s required overtime pay.” Id. Courts have widely recognized that an employer may offset its overtime liability with accumulated premium pay given to employees under sections 207(e)(5)-(7). See, e.g., Singer v. City of Waco, 324 F.3d 813, 828 (5th Cir. 2003); Kohlheim v. Glynn Cty, 915 F.2d 1473, 1481 (11th Cir. 1990). The offset created by section 207(h) is logical because it authorizes employers to apply one type of premium pay to offset another, both of which are excluded from the regular rate. See 29 U.S.C. § 207(e). It is undisputed that the compensation paid for meal breaks was included in plaintiffs’ regular rate of pay, and thus could not qualify as “extra compensation.” Accordingly, DuPont may not avail itself of the offset provisions explicitly allowed by § 207(h)(2).

Addressing/rejecting the defendant’s argument that regular rate compensation may be used as an offset to overtime compensation under the FLSA, the court explained:

DuPont argues that the FLSA’s failure to expressly prohibit offsetting where the compensation used to offset is included in the regular rate indicates that offsetting is allowed. We disagree with DuPont’s notion that the FLSA’s silence indicates permission. While it is true that the statute does not explicitly set forth this prohibition, the policy rationales underlying the FLSA do not permit crediting compensation used in calculating an employee’s regular rate of pay because it would allow employers to double-count the compensation. The DOL convincingly urges this viewpoint. It observes that “[t]here is no authority for the proposition that compensation already paid for hours of work can be used as an offset and thereby be counted a second time as statutorily required compensation for other hours of work.” DOL Letter Br. 6. Further, “there is no reason to distinguish between compensation for productive work time and compensation for bona fide meal breaks.” Id. Compensation included in, and used in calculating, the regular rate of pay is reflective of the first forty hours worked. We agree with the reasoning of the DOL that allowing employers to then credit that compensation against overtime would necessarily shortchange employees.

The statutory scheme that limits crediting to the three types of “extra compensation” excluded from the regular rate against overtime obligations makes sense. “To permit overtime premium to enter into the computation of the regular rate would be to allow overtime premium on overtime premium—a pyramiding that Congress could not have intended.” Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, 464 (1948). Excludable premium compensation may offset other excludable premium compensation. To allow compensation included in the regular rate to offset premium-rate pay, however, would facilitate a “pyramiding” in the opposite direction by allowing employers to pay straight time and overtime together. This approach fundamentally conflicts with the FLSA’s concern that employees be compensated for all hours worked. As the Ninth Circuit observed in Ballaris, “it would undermine the purpose of the FLSA if an employer could use agreed-upon compensation for non-work time (or work time) as a credit so as to avoid paying compensation required by the FLSA.” Ballaris, 370 F.3d at 914.

While Ballaris is distinguishable because the employer in that case excluded meal break compensation when calculating the employee’s regular rate and the parties agreed that the meal break period was excluded from each employee’s hours worked, its reasoning nonetheless applies here. The Ninth Circuit concluded that “[c]rediting money already due an employee for some other reason against the wage he is owed is not paying that employee the compensation to which he is entitled by statute. It is, instead, false and deceptive ‘creative’ bookkeeping that, if tolerated, would frustrate the goals and purposes of the FLSA.” 370 F.3d at 914 (internal footnote omitted). Here, permitting DuPont to use pay given for straight time—and included in the regular rate of pay—as an offset against overtime pay is precisely the type of “creative bookkeeping” that the Ninth Circuit cautioned against and the FLSA sought to eradicate.

The court concluded that the district court had not properly applied these concepts, and that the district court erred by concluding that regular rate compensation may be used as an offset to unpaid overtime compensation:

While the District Court cited Wheeler in passing, it did not apply our holding but, instead, looked at the two circumstances that the statute expressly states preclude offsetting by an employer:

First, employers cannot use paid non-work time to offset unpaid work time when the paid non-work time is excluded from the regular rate of pay. Second, if the parties agree to treat paid non-work time as “hours worked,” and this time is included in the regular rate of pay, the employer cannot offset.

App. 12. The District Court concluded that because neither of these circumstances was present in this case, the FLSA does not expressly prohibit an offset. It recited the prohibition set forth in 29 U.S.C. § 207(h)(1), which generally bars employers from offsetting incurred overtime liability with sums excluded from the regular rate of pay. The District Court observed that “defendants cannot offset if the FLSA expressly excludes plaintiffs meal periods—non-work time—from plaintiffs’ regular rate of pay.” App. 12-13. After reviewing section 207(e)’s list of mandatory exclusions from the regular rate of pay, it concluded that the one category of exclusions that was arguably implicated by the facts, 29 U.S.C. § 207(e)(2), was not applicable because the meal periods were not the type of absences covered by the exclusion. “Accordingly, section 207(e)(2) does not prohibit defendants from including plaintiffs’ meal period time in their regular rate of pay, rendering section 207(h)’s prohibition against an offset inapplicable.” App. 14. Thus, like DuPont, the District Court focused on the lack of express prohibition. In light of our holding in Wheeler that offsetting is limited to circumstances where an employer is paying “extra compensation” at a premium rate, we reject the District Court’s reasoning that the absence of a direct prohibition controls the analysis of the offset issue.

Moreover, we do not accept the significance that the District Court and DuPont place on two lingering issues: first, whether the parties had an agreement to treat the breaks in question as hours worked, and second, whether the FLSA required DuPont to compensate the employees for the breaks in question. With respect to the former, both the Ninth Circuit in Ballaris and the FLSA’s implementing regulations advance the notion that employers may not offset if there is an agreement to treat otherwise uncompensable time as “hours worked,” and the compensation at issue is included in the regular rate. But inclusion in the regular rate is sufficient for our purposes, as noted above, so the existence of an agreement is beside the point.8 As to the latter, 29 C.F.R § 785.19 simply states that employers are not required by the FLSA to treat meal breaks as hours worked, but it does not prohibit them from doing so. Indeed, section 778.320 expressly contemplates that an employer may agree to treat non-work time, including meal breaks, as compensable hours worked.

The District Court relied on the Seventh Circuit’s opinion in Barefield v. Village of Winnetka, 81 F.3d 704 (7th Cir. 1996), and the Eleventh Circuit’s opinion in Avery v. City of Talladega, 24 F.3d 1337 (11th Cir. 1994), in concluding that DuPont could offset using meal break compensation. The two opinions did not analyze the offset issue in detail, but instead focused on compensability. The courts in both Barefield and Avery presumed an offset was permissible and focused on the fact that the FLSA did not require employers to compensate employees for the bona fide meal break periods at issue. Notably, neither opinion addresses the most relevant provision in the FLSA on the issue of offsetting—29 U.S.C. 207(h). Given our holding in Wheeler, limiting offsetting to “extra compensation” not included in the regular rate, it is irrelevant whether the breaks were compensable.

Thus, the Third Circuit reversed.

Click Smiley v. E.I. Dupont De Nemours and Co., et al. to read the entire Opinion.

 

D.Mass.: Personal Day Buy-Back, Yearly Sick Day Incentive Pay, Yearly Sick Leave Buy-Back Pay And Sick Leave Buy-Back Upon Separation Must Be Included In Officers’ “Regular Rate” Under The FLSA

Lemieux v. City of Holyoke

This case was before the Court on several cross-motions regarding a variety of issues arising from the application of various principles of the FLSA.  As discussed here, the Court determined that several types of incentive and “buy-back” pay necessarily had to be included in the plaintiffs’ “regular rate” of pay (and resulting overtime rates).

Discussing the issue of whether such pay need be included in the plaintiff-employees regular rate of pay under the FLSA, the Court held:

“Because the FLSA requires overtime compensation to be paid at “a rate not less than one and one-half times the regular rate at which [an employee] is employed,” 29 U.S.C. § 207(a), “[c]alculation of the correct ‘regular rate’ is the linchpin of the FLSA overtime requirement.” O’Brien, 350 F.3d at 294. Under the terms of the CBA, Holyoke firefighters, in certain circumstances, are entitled to receive augments to their base salary. At issue is whether the FLSA requires Defendants to include eight of these contractual remunerations-yearly personal day buy-back; yearly sick day incentive pay; yearly sick leave buy-back pay; sick leave buy-back upon retirement, resignation, or death; vacation buy-back upon retirement; yearly holiday pay; detail pay; and Student Awareness of Fire Education (“SAFE”) pay-in Plaintiffs’ “regular rate” for the purpose of calculating overtime compensation. Plaintiffs argue that the statute requires this; Defendants argue that it does not.

The FLSA defines “regular rate” to include “all remuneration for employment paid to, or on behalf of, the employee” unless it falls under one of the eight expressly provided exclusions listed in paragraphs (1) through (8) of subsection (e) of the FLSA. 29 U.S.C. § 207(e)(1)-(8). This “list of exceptions is exhaustive, the exceptions are to be interpreted narrowly against the employer, and the employer bears the burden of showing that an exception applies.” O’Brien, 350 F.3d at 294 (citations omitted).

For the reasons that follow, the court holds that Defendants are obligated to include yearly personal day buy-back, yearly sick day incentive pay, yearly sick leave buy-back pay, and sick leave buy-back upon retirement, resignation, or death in the officers’ “regular rate” under the FLSA.

a. Buy-Back Provisions.

The CBA entitles Holyoke firefighters, subject to certain conditions, to sell back to the city sick leave time, vacation time, personal time, and holiday time that they have accrued but not used. Plaintiffs argue that the city is required to include the value of these “buy-backs” in the “regular rate” because they are renumeration not falling under any of the exceptions listed in 207(e)(1)-(8). Defendants contend that none of these buy-backs are paid as compensation for Holyoke firefighters’ hours of employment, and that they are all, therefore, excludable under section 207(e)(2).

Section 207(e)(2) provides that “payments made for occasional periods when no work is performed due to vacation, holiday, illness, … or other similar cause; … [or] other similar payments to an employee which are not made as compensation for his hours of employment” are excludable from the “regular rate.” 29 U.S.C. § 207(e)(2). It is plain that the value of the accrued time in dispute, if utilized by the firefighters for its intended purpose, would be excluded under 207(e)(2). The question before the court is whether a lump sum payment, keyed to time accrued for the causes listed in section 207(e)(2), although paid later under a buy-back program, is also excludable under that section.

i. Holiday and vacation time buy-back.

As to payments for accrued holiday and vacation time, the law is clear that these payments are excludable under section 207(e)(2) regardless of whether they are paid contemporaneously for days missed or are deferred and paid in a lump sum. Department of Labor Regulations explicitly provide that the 207(e)(2) exclusion applies even when an employee foregoes a day off but still receives the pay. 29 C.F.R. § 778.219(a). Accordingly, holiday and vacation buy-back payments are excluded under section 207(e)(2) and need not be included in the regular rate under the FLSA.

ii. Personal time buy-back.

Similarly, buy-back payments for personal time are excludable from the regular rate under the FLSA. Personal time, like holiday and vacation time, is paid idle time which, subject to scheduling restrictions, may be used by firefighters at their discretion as a matter of right. Therefore, personal time buy-back payments are excludable under section 207(e)(2). 29 C.F.R. § 778.219(a).

However, one wrinkle remains. Under the terms of the CBA, unused personal time is cashed in at one hundred and ten percent (110%) of that year’s rate. (CBA ¶ 33.0(D)). It appears that this ten percent premium represents an incentive bonus for employees who forego taking personal days. Because the express terms of CBA make this ten percent bonus non-discretionary, see id. (“[t]he payout shall occur in January of the following year”), it must be included in the “regular rate” under the FLSA. 29 U.S.C. § 7(e)(3)(a); 29 C.F.R. 778.211(c). See also Walling v. Harnischfeger Corp., 325 U.S. 427, 431 (U.S.1945) (noting that employees “who receive incentive bonuses in addition to their guaranteed base pay clearly receive a greater regular rate than the minimum base rate”).

iii. Sick leave buy-back.

The slightly more difficult question concerns whether remuneration in the form of buy-back payments for unused sick leave time is includable in the “regular rate” under the FLSA. Article 11 of the CBA provides Holyoke firefighters with three opportunities to sell accrued but unused sick leave time back to the city. Unlike vacation and holiday time, the Department of Labor regulations do not address whether section 207(e)(2) excludes the value of deferred sick leave time from the FLSA’s regular rate. See 29 C.F.R. § 778.219(a) (discussing only vacation and holiday pay).

In a closely analogous case, however, the Eighth Circuit has held that “sick leave buy-back monies constitute remuneration for employment” because “in contrast to § 207(e)(2) payments, [they] are awarded to employees for coming to work consistently, not for work that was never performed.” Acton v. City of Columbia, 436 F.3d 969, 977 (8th Cir.2006). In so holding, the Acton court reasoned that “the primary effect of the buy-back program is to encourage firefighters to come to work regularly over a significant period of their employment tenure” and concluded that the buy-back payments awarded to employees for not using accrued sick leave were akin to non-discretionary bonuses that compensated them for fulfilling their general attendance duties. Id. at 979.

This interpretation has not been adopted by all courts. The Sixth Circuit, in a case cited by Defendants, has come to the opposite conclusion, holding simply that “awards for nonuse of sick leave are similar to payments made when no work is performed due to illness, which may be excluded from the regular rate [under 29 U.S.C. § 207(e)(2) ].” Featsent v. City of Youngstown, 70 F.3d 900, 905 (6th Cir.1995). The First Circuit, for its part, has yet to weigh in on the issue.

Having considered all of the available authority, the court finds the reasoning of Acton persuasive. Here, as in Acton, firefighters must have worked for a period of time sufficient to accumulate a certain amount of leave in order to qualify for buy-back pay. Moreover, by its own terms, the CBA refers to its various sick leave buy-back provisions as “incentive days” and “sick leave buy back bonuses.” These facts militate toward the conclusion that sick leave buy-back payments provided for in the CBA are more akin to non-discretionary incentive bonuses includable under 29 C.F.R. 778.211(c) than remuneration for work that was never performed and therefore excludable under 207(e)(2). See 29 C.F.R. 778.211 (expressly including “[a]ttendance bonuses” in the regular rate of pay). It is also pertinent that this position has been adopted by the Department of Labor in a 2009 wage and hour opinion letter, 2009 DOLWH LEXIS 23 (DOLWH 2009). Finally, the court finds this position to be the most consistent with the First Circuit’s gloss on section 207(e), that its “exceptions are to be interpreted narrowly against the employer….” O’Brien, 350 F.3d at 294.

For these reasons, the court finds that sick leave buy-back pay is remuneration that must be included in the calculation of the FLSA regular rate of pay.

b. Off Duty/Detail pay.

In addition to their regular duties, some Plaintiffs perform additional outside work-referred to as “details” or “off-duty work”-that is assigned to them on a voluntary basis when they are not regularly scheduled to be on duty. The FLSA is clear that “special detail” compensation for hours worked on behalf of “separate and independent” employers is excludable from the calculation of FLSA overtime. 29 U.S.C. § 207(p). Department of Labor regulations specify that the hours worked for another entity will be exempt under § 207(p)(1)‘s special detail work exemption so long as (1) the special detail assignment is undertaken and performed solely at the employee’s option, and (2) the two employers are “in fact separate and independent.” 29 C.F.R. § 553.227(b). See also Nolan v. City of Chicago, 125 F.Supp.2d 324, 336 (N.D.Ill.2000).

Plaintiffs do not dispute that a Holyoke firefighter’s decision to perform off-duty detail work is purely voluntary. Their sole contention is that the outside vendors for whom they perform duty work are not, in fact, separate and independent because: (1) when firefighters perform duty work, they receive payment via their regular payroll check; (2) the amount of pay received by firefighters for detail work is non-negotiable (except by the Union during collective bargaining); (3) firefighters do not receive insurance benefits or retirement benefits, or worker’s compensation from the third-party vendors; and (4) firefighters are required to wear their uniforms while working detail or off duty.

Each of these assertions, however, is contrary to the applicable Department of Labor regulations which provide:

The primary employer may facilitate the employment or affect the conditions of employment of such employees. For example, a police department may maintain a roster of officers who wish to perform such work. The department may also select the officers for special details from a list of those wishing to participate, negotiate their pay, and retain a fee for administrative expenses. The department may require that the separate and independent employer pay the fee for such services directly to the department, and establish procedures for the officers to receive their pay for the special details through the agency’s payroll system. Finally, the department may require that the officers observe their normal standards of conduct during such details and take disciplinary action against those who fail to do so.  29 C.F.R. § 553.227(d) (emphasis added).

Accordingly, the FLSA does not require that Plaintiffs’ “detail” work be included in the calculation of the regular rate of pay.

c. Student Awareness of Fire Education (“SAFE”) Pay.

Some Holyoke firefighters receive pay for fire prevention and education duties performed under the grant-funded Student Awareness of Fire Education (“SAFE”) program. SAFE work performed while a firefighter is on regularly scheduled duty is compensated at the standard contractual rate of pay, while SAFE work performed outside of a firefighter’s regular duty cycle is compensated as overtime at one and one half times the contractual rate of pay. (Dkt. No. 157, Ex. D, LaFond Dep. 37: 8-18.

Here, to the degree that SAFE payments represent additional remuneration at all (i.e., to the degree that they are not already included in Plaintiffs’ regular pay), they are excludable from the regular rate under sections 207(e)(5) and (7) of the FLSA. Each of these provisions permits employers to exclude properly compensated overtime payments from the “regular rate” of pay under the FLSA. See 29 U.S.C. § 207(e)(5) (excluding “extra compensation provided by a premium rate paid for certain hours … in excess of the employee’s normal working hours or regular working hours”); 29 U.S.C. § 207(e)(7) (excluding time and a half compensation “for work outside of the hours established in good faith by the contract or agreement as the basic, normal, or regular workday”). See also 29 C.F.R. 778.202. Because, as the record demonstrates, SAFE work performed outside of a firefighter’s regular duty cycle is already compensated as overtime, the FLSA does not require that Defendants include such time in the calculation of the FLSA’s regular rate of pay.”

Although the Court addressed issues that rarely come up in the context of FLSA litigation, its reliance on the general principle that any type of compensation not specifically excluded from calculating an employee’s regular rate under the FLSA must necessarily be included is instructive to employers who use any type of incentive or bonus pay.

Click Lemieux v. City of Holyoke to read the entire opinion.