Most large collective action Fair Labor Standards Act claims seeking unpaid overtime are based on allegations that the employer misclassified employees entitled to overtime pay as exempt from these requirements. Earlier this month, the Fourth Circuit Court of Appeals (which includes North Carolina and South Carolina) adopted a measure of damages that substantially reduces financial exposure for many employers found to have misclassified employees.

In Desmond v. PNGI Charles Town Gaming, L.L.C., the employer misclassified a number of employees. The plaintiffs contended that the unpaid overtime should be 150% of the employees' regular rate, determined by dividing their weekly salary by 40. The employer countered that because the employees were paid a guaranteed weekly salary regardless of hours worked, unpaid overtime should be calculated using the "fluctuating workweek" method.

Under fluctuating workweek, the employer divides the salary by the number of hours actually worked in each week. The employer then pays a half-time overtime premium based on each week's separate regular rate. This results in overtime liability that is one-third or less than the method advocated by the plaintiffs.

The Fourth Circuit agreed with the employer, and applied the fluctuating workweek method for damages calculations. The court stated that because the salary was guaranteed, and no deductions were taken for missed hours, the employer had met all prerequisites for use of the half-time overtime premium system. The Fourth Circuit joins four other federal appellate courts and the Department of Labor in using this method for calculating unpaid overtime liability in misclassification cases.

This decision should provide employers with significant negotiating leverage when faced with employee misclassification claims. Even if successful in their claims, plaintiffs are entitled to significantly reduced damages than would be the case if full time and one-half overtime is used as the measuring stick.