The Fair Labor Standards Act (“FLSA”) is a federal law that requires, among other things, that employers compensate employees at a rate of 1.5 times the employee’s regular pay rate for all overtime work performed (generally, all hours beyond 40 hours of work in a workweek). This requirement applies to all compensable overtime hours unless the employee is exempt (for example as an administrative or executive employee). Compensable hours are all those hours worked in performance of compensable activities that the employer “suffers or permits” the employee to perform.
Scheduled work hours that are permitted and known to the employer are clearly compensable. However, work performed during “off-hours”, such as before the scheduled start, after the scheduled finish, or during meal breaks, may be compensable or may not be depending on the circumstances.
A recent decision of the Seventh Circuit Court of Appeals, which governs Wisconsin (Illinois and Indiana) seeks to clarify the circumstances in which an employer is required to compensate an employee for off-hours work the employee performs and, by contrast, when such compensation is not required.
Principal Activities versus Incidental Activities
In Meadows v. NCR Corp., 83 F.4th 649 (7th Cir., 2023) the Court addressed circumstances in which work activities may be considered “incidental” and are not paid time or time included towards overtime eligibility. Under Section 254 of the FLSA [29 U.S.C. § 254(a)] preliminary and postliminary activities that are incidental to principal activities of the job are not compensable. This includes, for example, travelling to and from a regular worksite or other such activities that relate to but are not integral to the performance of the job duties.
Non-compensable incidental activities may become compensable if the employer has either an express agreement to compensate certain incidental work or has an established custom or practice to compensate employees for such work. See 29 U.S.C. § 254(b). The policy at issue in this case was a strict policy prohibiting overtime. Such a policy established the scheduled hours of work as the principal job responsibilities and additional hours, or overtime, as incidental work. At issue in the Meadows case was the employee’s decision to work overtime contrary to the employer’s understood no overtime policy.
The employer manufactures, sells, and supports ATM machines. The employee worked as a “customer engineer” or CE, which is by nature a position that is off-sight and performed independently. The employee performed duties that related to his job, but did so outside of the established work schedule and incurred overtime hours.
Compensable Time Performing Incidental Activities
An employer is not obligated to pay for incidental work unless there is contract, custom, or practice of doing so. In the Meadows case, the employer’s policy provided that CE’s would be compensated for overtime hours worked if they recorded the hours in the time management system where compensable hours were recorded. It is undisputed in the case that the time worked was incidental overtime, that the employee failed to record the time in the time management system, and that he was not paid for the overtime worked. It was also undisputed that the work was work within the nature of the position, e.g., responding to work emails, mapping out routes, returning phone calls, etc.
The employee’s wage claim went to a jury trial and the jury found in favor of the employee, concluding that the evidence established that the employer had “constructive knowledge” of the employee’s work. Although the work was not permitted by policy, the employer had a practice of paying for overtime when recorded. The evidence established that the employer has constructive knowledge that the work had been performed, which was sufficient to support an obligation to pay the overtime wages.
Court of Appeals Explains the Exception
The Court of Appeals reversed the jury’s verdict finding that the trial court too narrowly defined what constitutes an exception to an otherwise clear rule against compensating incidental work.
The trial court asserted that incidental work payable subject to a practice of doing so occurs where the employer knows or reasonably should know that the work has been performed. Therefore, the jury’s verdict that the employer had “constructive knowledge” of the work having been performed, established that the employer must pay the overtime wages.
The Seventh Circuit Court of Appeals clarified that the practice by which otherwise unauthorized overtime, or incidental work, is payable must consider the entirety of the practice of paying for such work. In the Meadows case, the trial court erred, according to the Seventh Circuit, because it ignored that part of the employer’s practice that stated that the otherwise unauthorized overtime would be paid only if the work time was recorded properly. The Court pointed out that it is undisputed that the employee did not record the time worked. Therefore, the case should have been dismissed because the practice was not satisfied and therefore no compensation was due.
Takeaway for Employers
This decision serves as a reminder for employers to be as specific and explicit as possible when establishing remote work policies governing compensable activities outside of the normal work schedule. A policy that simply prohibits overtime work may not shield an employer from a claim like the one in this case if the employer is aware of the work or should be aware of the work and has any practice of compensating overtime when worked even if not authorized. Also, consistent handling of circumstances that do arise is also beneficial. In the Meadows case, the Court noted that the record showed that the employee had been paid overtime previously when he recorded it properly. He was therefore aware of the practice in its entirety and was not to be rewarded when he only partially complied.
In addition, this case must be discussed with a word of caution not to read too much into the import of the holding. While well-crafted policy is valuable and ultimately won the day in this case, the road to get to that vindication was extensive, involving nearly four years of litigation and undoubtedly significant expense and disruption. It remains the wiser course of action to address nonperformance issues (i.e., failure to report time worked or performing duties during off-schedule time contrary to policy) with employee corrective action rather than treating the time automatically as non-compensable time.
With remote working continuing to be part of the contemporary business reality, employers need to be explicit regarding the structure, the schedule, and the requirements for additional work performance, such as overtime.
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