In some situations, developing a creative approach toward overtime pay can cost the employer more than if it had simply paid time and one-half overtime in the first place. On February 8, the Fourth Circuit Court of Appeals (which includes North Carolina and South Carolina) affirmed a $1.63 million verdict for a class of consultants paid under an impermissible blended hourly rate plan.

In USDOL v. Fire & Safety Investigation Consulting Services., LLC, the employees in question worked 14 consecutive 12-hour shifts, then took two weeks off. The employer paid these employees under a so-called “hitch rate” plan under which an employee who worked less than 168 hours in the 14-day period was paid using a blended hourly rate determined by deriving an hourly rate based on the regular plus overtime hours worked in a full two-week period. This method reduced the actual overtime rate paid to employees who did not work the full 168 hours. The employer contended that its plan was comparable to those approved by DOL in which a fixed salary is paid along with a half-time overtime premium.

The Fourth Circuit relied on a 1947 Supreme Court decision to declare the hitch rate plan illegal under the FLSA. The court noted that such blended rates cannot be paid in situations where the employee does not work overtime in a given workweek. In this case, the employees were paid the blended rate whether or not they worked overtime. A contrary decision would allow employers to reduce FLSA overtime obligations by manipulating the applicable rate of pay.

Blended rates are difficult to implement in a legal manner. If employers do not want to pay traditional time and one-half overtime, the better alternative is to use a fixed salary plan, such as fluctuating workweek. These plans do not eliminate overtime pay, but if used properly, can substantially reduce the obligation.