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Appeals Court Says Company Policy Restricting Overtime Does Not Trump Compensation Obligations

A federal appeals court in New York has ruled that the Fair Labor Standards Act ("FLSA") requires employers to pay one-and-a-half times the regular rate of pay as compensation to employees who perform overtime work even though the work was not authorized and was in violation of company policy. The case, Chao v. Gotham Registry, Inc., No. 06-2432-cv (2d Cir. Jan. 24, 2008), dates back to 1992 when the Secretary of Labor sued Gotham Registry, Inc. ("Gotham"), a staffing agency, for not paying overtime wages to the nurses it employed.

Gotham matches nurses with hospitals that have temporary vacancies or need additional nursing staff during peak periods. Gotham has little to do with the relationship after making the match except to pay the nurses from compensation it receives from the hospitals. Prior to 1992, hospitals paid Gotham straight-time wages for the nurses' overtime hours. Gotham, accordingly, did not pay its nurses overtime compensation. This ended in 1994 when Gotham entered into a consent decree with the Secretary of Labor, agreeing to pay appropriate overtime compensation. Gotham soon learned, however, that this arrangement was unprofitable because the hospitals still paid only straight-time wages for all hours.

After consulting with outside attorneys, Gotham printed the following on nurses' time sheets: "You must notify GOTHAM in advance and receive authorization from GOTHAM for any shift or partial shift that will bring your total hours to more than 40 hours in any given week. If you fail to do so, you will not be paid overtime rates for those hours." Even though many of the nurses did not seek pre-authorization, Gotham tried to negotiate larger fees with the hospitals to compensate appropriately those nurses who worked overtime. If it succeeded, Gotham passed on the overtime wage premiums to the nurses. Nine times out of ten, the hospitals did not agree to pay a higher rate.

Unhappy with Gotham's new practice, the current Secretary of Labor filed a petition in the federal district court in New York to hold Gotham in civil contempt of the 1994 consent order. The district court, explaining that the unapproved hours were not "work" under the FLSA, refused. The Secretary of Labor appealed to the Second Circuit Court of Appeals.

Judge Richard J. Cardamone, writing for the majority, set out to determine not only if the court should hold Gotham in contempt, but also if overtime work an employer has "prohibited and does not desire" is subject to the FLSA. Noting that the FLSA does not define "work," the court looked to Supreme Court precedent and explained, "work is an exertion or loss of an employee's time that is (1) controlled or required by an employer, (2) pursued necessarily and primarily for the employer's benefit, and (3) if performed outside the scheduled work time, an integral and indispensable part of the employee's principal activities." Under the FLSA, "employ" means "to suffer or permit to work," Judge Cardamone added.

Along with Judge Sonia Sotomayor, Judge Cardamone rejected Gotham's argument that it did not control the nurses' work. If the nurses' work within the 40 hour week is "work", the majority reasoned, so too are the overtime hours. "Work is work, after all."

The court was not persuaded by Gotham's argument that it did not benefit from the nurses' work. The FLSA's overtime provisions were intended not only to raise wages, but also to limit the number of hours employees work by putting financial pressure on employers, the court explained. In other words, overtime is not necessarily supposed to be profitable for employers. Under Gotham's reasoning, said Judge Cardamone, "an employer would be permitted to avoid the Act whenever the overtime provisions threatened success in achieving Congress' goal of curtailing overtime by bringing its cost above its benefit to the employer."

The court turned next to the FLSA's "suffer or permit" requirement, which requires that an employer must knowingly allow work to be conducted in order to be responsible for compliance with the Act's requirements. The court explained that "an employer's actual or imputed knowledge that an employee is working is a necessary condition to finding the employer suffers or permits work." However, Judge Cardamone said, this does not mean that the employer's knowledge must arise at the same time the employee performs overtime.

So, did Gotham "permit" work? Identifying this question as an issue of first impression in the Circuit, Judge Cardamone looked to a Department of Labor ("DOL") regulation, stating, "The mere promulgation of a rule against such work is not enough." Favoring the DOL regulation and following the approach taken by the Tenth and Eleventh Circuits, the court agreed that Gotham did not do enough to prevent overtime work. It could have disciplined nurses who violated company policy or just refused to pay the nurses altogether for any time over 40 hours. Or it could have contracted in advance to have the hospital pay a higher fee for the overtime, the court said. In contrast, the Ninth Circuit had ruled that employers need not pay overtime rates when employees know that overtime work is not expected, are not pressured to work overtime, and can complete their work during normal working hours.

Although the Second Circuit held that Gotham was required to pay overtime wage premiums even when company policy restricted overtime work, it did not find Gotham to be in civil contempt. The question of whether an employer must pay overtime to employees who perform work that the employer has "prohibited and does not desire, was not the subject of an obvious answer," explained Judge Cardamone. Chief Judge Jacobs concurred in the decision, agreeing that Gotham should not be held in civil contempt. Unlike the majority, Judge Jacobs asserted that Gotham did not violate the FLSA.

Because of the conflict in the circuits on this issue, the Supreme Court may one day be called upon to settle the conflict. In the meantime, employers would be wise to strictly enforce restrictions on overtime work. Once an employee performs overtime work, there is a strong argument that he or she should be compensated at overtime wage rates—even if the employer did not want the work performed in the first place.