Minnesota State Law Prohibits Split-Day Overtime Payments (and More?)

The Minnesota Supreme Court just issued a decision finding that under Minnesota state law, all hours worked over 48 hours in a week must be compensated at time and a half, regardless of how the employee was compensated during the first 48 hours.

Some of you may be scratching your heads and saying “wait a second, I thought we had to pay overtime on all hours over 40?” You do – the federal Fair Labor Standards Act requires overtime after 40 hours in a work week.  But Minnesota has its own overtime statute which requires any employee working longer than 48 hours in a work week to receive “a rate of at least 1 ½ times the regular rate at which the employee is employed.”  Minnesota regulations state that the regular rate is determined “by dividing the employee’s remuneration in any workweek by the total hours worked.”

Typically, the Minnesota overtime law is interpreted the same as the federal law, so why is this new case (In re Minnesota Living Assistance, Inc.) such a big deal?

The Decision

From 2012 to 2014, Baywood Home Care paid its employees using a split-day plan; for the first 5.5 hours of each 16-hour workday, employees were paid at one rate of pay, and for the remaining 10.5 scheduled hours, they were paid at 1.5 times that rate.

These split-pay plans stem from the passage of the federal Fair Labor Standards Act (FLSA) and the desire of some employers to avoid the increased wage costs brought about by the new legal requirement to pay overtime.  The employer would arbitrarily divide the day into two parts for the purpose of calculating overtime—they would receive lower “regular” pay for the first portion of the day, and then an “overtime” rate for the balance of the day, resulting in an average hourly wage being no higher than it was before the passage of the FLSA.

Against this backdrop, the Minnesota Department of Labor and Industry (DOLI) began investigating Baywood, and ultimately the Commissioner issued an order for Baywood to pay approximately $550,000 in unpaid wages and another $550,000 in liquidated damages.  Baywood petitioned the Minnesota Court of Appeals, which reversed the Commissioner’s conclusion.  The case then went to the Minnesota Supreme Court.

The Supreme Court reversed again and, siding with DOLI, ruled that employers are required to pay at least time and a half wages for all hours worked after the first 48 hours of a workweek, regardless of whether the employee received time and a half compensation during the first 48 hours of the week. In so ruling, the Court agreed with DOLI that the Minnesota statute prohibits split-day plans because the law requires overtime for all hours in excess of 48.

The Minnesota Supreme Court concluded that “the effect of Baywood’s interpretation would be that employees would not receive time and a half compensation for the first 5.5 hours of every shift worked after they worked 48 hours.”  In other words, the payments for hours 5.5-16 in a day are not compensation for work that occurs after the first 48 hours; they are payments for work that occurs before reaching 48 hours and are thus part of their regular compensation.  Baywood’s failure to pay the additional overtime after hour 48 violated the statute

What About Overtime Payments Properly Excluded under Federal Law?

While “split-day” plans are fairly unique, many employers pay nonexempt employees a daily overtime right after working a certain number of hours.  Employers then use these daily overtime payments as an offset against weekly overtime that is due to the employee after working 40 hours.

Under the federal FLSA, employers are permitted to exclude from the employee’s regular rate “extra compensation provided by a premium rate paid for certain hours worked by the employee in any day or workweek because such hours are hours worked in excess of eight in a day or in excess of the maximum workweek.”   The key is that the payments must be for hours worked “in excess of 8 in a day or in excess of the maximum workweek.”

In a footnote, the Court did note the unique circumstances of this case (the employer paid overtime for 5.5 – 8 hours worked each day) and acknowledged that overtime premiums properly excluded under the federal FLSA are likely excludable under the state MFLSA:

It may be possible (indeed, the Department concedes) that “overtime work” also includes “[b]ona fide overtime premiums paid to employees in accordance with the FLSA.”

This is a hopeful sign that the import of this case is limited to premium payments not otherwise allowed as credits under the federal FLSA.  However, there is nothing in the Minnesota regulation defining “regular rate of pay” that explicitly allows this exclusion and reliance is upon it is based on the DOLI’s current interpretation.  Nothing would prevent DOLI from later changing its position or a private plaintiff bringing a lawsuit to challenge it.

Bottom Line

While the direct effect of the case is to invalidate split-day payment plans under Minnesota state law, the effect of the court’s decision may be much broader.  Employers paying “overtime” before 48 hours should ensure that their payments comply with federal law so that they can argue, under the footnote in this latest decision, that they are permitted to properly offset the payments under Minnesota state law.