Third Circuit Court of Appeals Defines Standard for Finding “Willful” Violations of the Fair Labor Standards Act

Willful Violations Under The Fair Labor Standards Act

The Federal Fair Labor Standards Act establishes rates of minimum wage and overtime pay which employers must pay to their employees.  Employees successfully suing their employers for violations of these requirements can recover their lost wages, and their employers will be required to pay their attorneys fees and litigation costs.  The Fair Labor Standards Act provides that willful violations of these requirements will result in double damages – ie., the employer will be required pay the employee twice the amount of wages or overtime it did not pay.  A willful violation also extends the statute of limitations for suing from two years to three.

 

Willfulness: The Question Facing the Third Circuit

In the case of Linda Stone v. Troy Construction, LLC, the Untied States Court of Appeals for the Third Circuit faced the question of how to determine “willfulness” in a case where a company wrongfully paid “per diem” rather than increasing the employees’ salaries, thus decreasing the rate used to calculate their overtime pay.  While the case arose out of Pennsylvania, the Third Circuit’s rulings are binding on federal cases in New Jersey, and are persuasive authority in state cases under New Jersey’s Wage and Hour Law.

 

Factual Background

Troy Construction, LLC, operates nationally, building and maintaining oil and gas pipelines and compressor stations.  Much of its work was in Pennsylvania.  The employees it used there were a mix of workers from other areas who had to travel great distances, and many who lived close to the worksites.  Troy paid the non-local employees per diem to cover their travel expenses.  However, Troy also paid local employees per diem even though their travel expenses were insignificant, far below the per diem amount paid.  In fact, the per diem payments often constituted a major portion of their pay, sometimes more than half.  Troy’s executives testified that the purpose of all the per diem was to reimburse employees for their out of pocket travel expenses.

In 2014, Troy ceased paying local employees per diem on the advice of their accountants, and started treating these payment as taxable income.  However, despite treating these payments as taxable income, rather than reimbursement of expenses, Troy did not include these payments in the calculation of overtime rates.  The effect can be readily seen; for an employee making $10 per hour whose “per diem” was half their pay, the per diem would total another pro rata $10 dollars per hour, for a total of $20 per hour in pay of all types.  Thus, if the “per diem was not included in the calculation, the employee’s overtime rate would be $15 per hour –$10 per hour at “time and a half.”  If the “per diem” was included in the calculation, the employee’s overtime rate would be $30 per hour –$20 per hour at “time and a half.”

 

Stone’s Suit in Federal District Court

More than two years after her last day of work, but less than three years, Stone filed a collective action under the Fair Labor Standards Act suing Troy on behalf of herself and other similarly situated employees of Stone for the unpaid overtime compensation the employees would have received had Troy included the “per diem” in their overtime rates.  The trial court dismissed the suit on summary judgment, claiming that there was insufficient evidence of a willful violation, and thus Stone had filed her lawsuit too late.  Stone appealed.

 

The Third Circuit’s Decision Defining “Willful” Violations Under the Fair Labor Standards Act

The Third Circuit reversed.  It found the trial court applied the wrong standard to determine willfulness – which will determine the eligibility for double damages as well as the proper statute of limitations – and thus significant questions remained its the case to be determined by a jury.

According to the Third Circuit, the trial court erred in placing the burden on the employee to show that the employer’s actions were “purposeful.”  Rather, the standard for finding a willful violation of the Fair Labor Standards Act is that “the employer showed reckless disregard for the matter of whether its conduct was prohibited by the FLSA.”  Here, the change in accounting showed that Troy knew its payment method of paying local employees per diem was incorrect, and that it had to be paid as taxable income.  Troy therefore had all the facts it needed to know that it was required to include the “per diem” payments in calculation of the employees’ overtime rate.  Egregiousness and willfulness are evidence of a “willful” violation, but are not required.  Reckless disregard of those requirements will suffice.

As the court explained, “In sum, willfulness under the Fair Labor Standards Act is established where the employer either knew or showed reckless disregard for the matter of whether its conduct was prohibited by the [Fair Labor Standards Act].”

 

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