New Public Sector FLSA Decision Addresses Overtime Pay Calculations

In an almost complete victory for the City of Albuquerque, the Tenth Circuit in Chavez v. City of Albuquerque, Nos. 09-2274 and 09-2288, issued an opinion affirming almost all of the City of Albuquerque’s methods of calculating over time pay, but clarifying that sick leave sale back proceeds must be included in the regular rate calculation for overtime purposes.

The Decision

Plaintiffs, current and former non-exempt City employees, filed suit on behalf of themselves and all other City employees who they alleged had been improperly paid overtime, arguing that the City’s calculation method violated the Fair Labor Standards Act (“FLSA”). With one limited exception the Tenth Circuit found in favor of the City.

First, plaintiffs claimed that the City improperly calculated their overtime payments by dividing by the total number of hours worked in regular workweek, rather than by 40, and by using a one-half multiplier rather than a one-and-one half multiplier to calculate the overtime premium. Both the district court and Tenth Circuit on appeal denied this claim, however, following the Department of Labor’s (“DOL”) interpretation and well-established precedent. In so holding, both Courts rejected Plaintiffs’ argument that the divisor should be only 40 hours because dividing by a larger number lowers the regular rate.

Second, Plaintiffs argued that the City’s “dual calculation method” was improper. Under the dual calculation method, the City calculated the minimum amount of overtime due to an employee under the FLSA, then made a separate and distinct calculation under the applicable collective bargaining agreement (“CBA”). The City then compared the two amounts and paid employees the larger amount. This ensured that employees were always paid at least as much as they were entitled to under the FLSA, if not more. Plaintiffs argued that this dual calculation was improper, since the City was using overtime required to be paid pursuant to the contract (e.g., payments for certain hours not actually worked, something not required under the FLSA) to offset overtime obligations it had independently under the FLSA. According to Plaintiffs, the City should, instead, somehow have combined requirements of the CBAs with requirements of the FLSA so that the plaintiffs would receive the benefits of the CBAs and of the FLSA even where contractual overtime was more than sufficient to cover minimum FLSA overtime requirements.

The District Court rejected this claim, and the Tenth Circuit agreed on appeal. As the Tenth Circuit explained, “The FLSA is not a statutory enhancement of negotiated compensation, and the regular rate does not necessarily include all compensation provided for in the CBAs.” Further, it explained, the “FLSA guarantees minimum overtime compensation…. It is not a supplement to contractual compensation [and i]f an employee’s contractual pay exceeds what the FLSA would require, an employer has no additional FLSA liability.” Both the District Court and the Tenth Circuit approved the use of credits by the City for contractual premium payments.

Third, Plaintiffs claimed the City improperly calculated their regular rate of pay by failing to include certain add-ons and bonuses in the calculation. In particular, Plaintiffs claimed that the City should have counted annual sick leave and vacation buy back as part of the regular rate of pay (actual pay plus additional sums received), thus increasing an employee’s overtime rate of pay beyond what it would appear from his actual stated hourly rate of pay. Given the City only paid overtime based on an employee’s actual hourly rate of pay and add-ons and bonuses that it was required to include in the regular rate calculation, without taking into account sick and vacation buy backs, Plaintiffs claimed they were underpaid overtime.

On this one limited issue, the District Court ruled for Plaintiffs, claiming that the City improperly failed to include the proceeds of vacation and sick leave buy back. On appeal, the Tenth Circuit reversed in part. Following a DOL Wage & Hour Division Opinion Letter, the Tenth Circuit ruled that sick leave sale back proceeds must be included in the regular rate calculation for overtime purposes, while vacation day sale back proceeds need not be.

Under the FLSA, all pay for hours worked is includable in the regular rate calculation. The Tenth Circuit, therefore, considered whether the sale back proceeds are more analogous to payments for periods when no work is performed (not includable), or whether they are more like attendance bonuses (which are payment for hours worked and are, therefore, includable). It reasoned that although both vacation and sick leave buy backs reward attendance in a sense, because they reward employees for not taking days off, the “key difference lies in the way each type of day off operates.” An employee has a duty not to abuse sick days, which are usually not scheduled in advance, and buying back sick days, therefore, rewards an employee for consistent and as-scheduled attendance, which provides additional value to the employer. They are, therefore, analogous to attendance bonuses, which are includable payments for time worked.

In contrast, vacation days are usually scheduled in advance and thus, do not burden the employer. They are analogous to holiday work premiums or bonuses for working particularly undesirable days. They are, therefore, not considered payment for time worked and are not includable in the regular rate calculation.

Until this decision, only two other Courts of Appeal had ruled on the issue of the inclusion of sick leave sale (or buy) back proceeds in the regular rate calculation. The Eighth Circuit in Acton v. City of Columbia, 436 F.3d 969 (8th Cir. 2006), held that sick leave buy back must be included in the regular rate calculation; while the Sixth Circuit in Featsent v. City of Youngstown, 70 F.3d 900 (6th Cir. 1995), ruled the opposite way.

The City was defended by Seyfarth Shaw.

Impact on Public Sector Employers

This decision gives public employers guidance on important wage and hour issues. First, the “recognition of the dual calculation method” further supports prior precedent allowing employers to utilize overtime paid pursuant to contractual provisions that are above and beyond the FLSA against minimum FLSA requirements. It solidifies the common sense principle that, if an employee’s entitlement under a CBA is greater than that under the FLSA, the employer need not pay the employee even more overtime pay.

Second, while the Circuits are still split, and employers in the Eighth and Sixth Circuits are bound by those respective decisions, the Tenth Circuit’s compromise approach on sick leave and vacation buy back, which follows DOL Wage & Hour guidance, is important precedent in this seldom litigated area. Perhaps the Supreme Court will resolve the split, but for now, the Tenth Circuit’s decision is the most recent and, perhaps, the most thoroughly reasoned authority in this area. Given that many employers permit employees to sell back vacation time and often are required to pay back accrued vacation time upon termination, City of Albuquerque clarifies that such pay need not be counted as part of an employee’s regular rate of pay.

The litigation itself is a further reminder that public employers are at risk of wage and hour litigation over overtime, even when in arguable compliance with their collective bargaining agreements. When overtime must be paid and how to calculate the regular rate of pay for overtime purposes -- especially when employees receive additional pay in the form of bonuses and accrued time buy-backs -- are fertile grounds for litigation. Public employers should regularly audit their pay practices to limit their potential liability.

Feel free to contact your Seyfarth Public Sector or Wage and Hour attorney should you have any questions regarding this or any other wage and hour matter.