No Playing Around with Pay Rates to Avoid Overtime Liability!

Employers may explore creative ways to reduce staffing costs; however, changing an employee’s pay rate to avoid overtime liability is not a legal one, as the U.S. Court of Appeals for the Eleventh Circuit recently emphasized.

As most employers know, the Fair Labor Standards Act imposes an overtime requirement for non-exempt employees, meaning that any hours worked over 40 in a workweek must be paid at 1½ times the employee’s regular hourly rate. In Thompson v. Regions Security Services, Inc., a security guard typically worked 40 hours a week. However, after the employer started scheduling him to work overtime, it reduced his hourly rate from $13.00 to $11.15. The result of this was that his effective hourly rate for all hours worked, including overtime, ended up being the same – around $13.00 – as his prior, higher hourly rate. About a year later, the company stopped scheduling the guard for overtime work and restored his hourly pay rate to $13.00. The guard sued, alleging that the employer had adjusted his pay to avoid paying the required overtime rate on his actual rate of pay.

While employers can reduce an employee’s pay rate for legitimate business-related reasons, like a loss of business or a downturn in the economy, they cannot do so simply to avoid paying the overtime premium. In fact, the FLSA regulations contain a provision stating that an employee’s regular rate cannot” vary from week to week inversely with the length of the workweek.” The Eleventh Circuit noted that this provision “prevents an employer from playing with an employee’s hours and rates to effectively avoid paying time-and-a-half for an employee’s overtime hours. Otherwise an employer could use ‘simple arithmetic’ to lower an employee’s rate and increase his hours so that he could never earn time-and-a-half pay – ‘no matter how many hours he worked.’”