Workers paid a “day rate” instead of by the hour, calculating their overtime compensation, and the Maryland Wage and Hour Law and the FLSA
How should an employer compute overtime pay for a worker paid by the day instead of the hour? In an opinion authored by Judge Kevin Arthur, Maryland’s Court of Special Appeals addressed that question in Poe v. ISEI Md. Corp., 243 Md. App. 243 (2019). Leonard Poe worked in the trash-hauling business, where he was paid a “day rate.” That form of “compensation is common in the trash-hauling industry, because it motivates employees to work quickly and efficiently: the sooner the employees finish the job, the greater their rate of pay.” Id. at 245. If Poe worked over forty hours in a week, both the Maryland Wage and Hour Law and the federal Fair Labor Standards Act entitled him to receive overtime. When that happened, his employer, IESI, relied on a federal regulation in calculating how much overtime it owed Poe. He disagreed with that mode of calculation, however, and sued IESI, “claiming that the federal regulation was inconsistent with the Maryland Wage and Hour Law and that, in relying on the federal regulation, IESI had understated the amount of overtime compensation he was due under State law.” Id. The trial court ruled for IESI, granting its motion for summary judgment, and the Court of Special Appeals affirmed that decision. In reaching that conclusion, the Court of Special Appeals examined the pertinent federal and state statutes and regulations, and held that the employer and the trial court had properly relied on the federal regulation and that IESI had paid Poe the right amount of overtime.
The Fair Labor Standards Act provides that an employee may not work more than forty hours in a week, “unless such employee receives compensation for his employment in excess of the hours above specified at a rate not less than one and one-half times the regular rate at which he is employed.” 29 U.S.C. §207(a)(2)(C). The statute does not define “regular rate,” nor does it contain a rule for how that rate should be determined. See Poe, 243 Md. App. at 247 (citing Bay Ridge Operating Co. v. Aaron, 334 U.S. 446, 460 (1948)). Similarly, Maryland’s two governing statutes “generally require employers to pay an overtime wage equal to ‘at least 1.5 times the usual hourly wage’ for ‘each hour over 40 hours that an employee works’ in a workweek.” Poe, 243 Md. App. at 247 (citing Md. Code Ann., Lab. & Empl. §§3-415(a), 3-420(a)). Much like the federal statute, however, the Maryland statutes do not define “usual hourly rate” and do not specify how it should be determined.
Maryland does have two regulations that the Court of Special Appeals found relevant. “First, COMAR 09.12.41.19.A defines the ‘[r]egular hourly rate’ to mean ‘the usual hourly rate,’ a terms similar to ‘the usual hourly rate’ in” the Maryland statute. Id. Plus, COMAR 09.12.41.19.B provides that an employee’s “regular hourly rate is determined by dividing the total compensation for employment in any workweek by the total number of hours worked in that workweek,” and it further states that compensation “for hours worked in excess of 40 hours per workweek is computed at 1-1/2 times the regular hourly rate at which the employee is employed.” Id. at 247-48 (internal quotation marks omitted).
The Court acknowledged that the Maryland “and federal statutes are easy to apply to a conventional employment agreement, in which an employee is paid a fixed hourly rate.” Id. at 248. But what about the situation where an employee is paid by the day, week, or month? In that instance, the employee’s “regular rate may vary from week to week. The employee’s hours may be regular or irregular. From all such wages the regular hourly rate must be extracted.” Id. (quoting Bay Ridge Operating Co. v. Aaron, 334 U.S. at 460-61). That’s where the federal regulation at the heart of this dispute came into play.
Many years ago, “the United States Department of Labor adopted a regulation interpreting how an employer must calculate overtime compensation, under the Fair Labor Standards Act, for employees who are paid a fixed sum of money for a day’s work, regardless of how many hours it takes them to do that work.” Id. Thus, 29 C.F.R. §778.112 provides:
If the employee is paid a flat sum for a day’s work or for doing a particular job, without regard to the number of hours worked in the day or at the job, and if he receives no other form of compensation for his services, his regular rate is determined by totaling all the sums received at such day rates or job rates in the workweek and dividing by the total hours actually worked. He is then entitled to extra half-time pay at this rate for all hours worked in excess of 40 in the workweek.
(emphasis added). That last sentence is crucial.
The Court used an example to illustrate the regulation’s application. Suppose an employee receives a day rate of $200, which amounts to $1000 during a five-day workweek. And suppose he works fifty hours in that week. That employee is entitled to overtime pay, but how much is he owed? Applying the federal regulation, the employer would divide $1000 (“all the sums received at such day rates or job rates in the workweek”) by 50 (“the total hours actually worked”) and arrive at a “regular rate” of $20 per hour. The Court explained:
The employee would then be entitled to an additional $10 per hour (“extra half-time pay” of half the “regular rate” of $20), or $100 in total, for the 10 hours that he or she worked “in excess of 40.” In total, therefore, the employee would be entitled to $1100, or $100 over and above what he or she would receive through the day rate alone.
Poe, 243 Md. App. at 249.
The Court pondered how that regulation satisfied the federal statutory requirement that overtime compensation not be less than one and one-half times the employee’s regular rate, asking, “[i]f the employee’s ‘regular rate’ is $20 per hour and if the employee worked 10 hours of overtime, why isn’t the employer liable for $300 in overtime compensation ($20 x 1.5 x 10) on top of the $1000 in day-rate pay?” Id. (emphasis in original). The Court answered its own question, explaining “that, when employees have been paid a day rate, they have already been compensated at their full ‘regular rate’ for the hours that they have worked in excess of 40.” Id. (citations omitted). In other words, “[i]n economic terms, the employee receives $20 per hour (or $800) for the first 40 hours and $30 per hour (or $300) for the 10 hours in excess of 40, for a total of $1100).” Id. The Court observed that, using the method adopted in that federal regulation, “the greater number of hours an employee works, the lower his regular rate will be and the less he will receive per overtime hour,” noting that “is in the nature of any arrangement in which the rate of compensation rises or fall as a function of the amount of time that it takes to do the job.” Id. at 250 (citations omitted).
The Court remarked that Maryland lacks “a statute or regulation that, like 29 C.F.R. §778.112, expressly instructs employers how to compute overtime compensation for day-rate employees.” Id. The Court asked whether that means “that Maryland law forbids employers from using the federal regulation in computing overtime compensation for employees who are paid a day rate and that employers must use some other formula, more advantageous to employees,” or can that federal regulation serve as “persuasive authority as to how employers must compute overtime compensation under the related provisions of Maryland law?” Id.
The Court noted that Maryland court have labelled the Maryland Wage and Hour Law as the “State parallel” to the federal Fair Labor Standards Act, and that “[f]ederal courts, applying Maryland law, have also recognized the similarity between the State and federal statutes.” Id. at 250, 251 (internal quotation marks omitted) (citations omitted). The Court concluded that, in the case before it, “the relevant provisions are substantially similar under both State and federal law.” Id. at 252. The Court saw “no reason to conclude that ‘the regular rate’ in the federal statute means something different from the ‘usual hourly wage’ in the Maryland statute or the ‘regular’ or ‘usual’ ‘hourly rate’ in the COMAR regulations.” Id. Rejecting Poe’s arguments to the contrary, the Court found “no basis in the language of the Maryland statutes or regulations to conclude that Maryland law prohibits employers from relying on the federal regulation to compute overtime compensation for employees who are paid a day rate.” Id. at 253.
Moreover, the Court was skeptical about Poe’s “alternative method for computing overtime compensation and about how it comports with Maryland statutes and regulations.” Id. at 256. For example, Poe “inflates his ‘total compensation’ by including the disputed amount of overtime compensation that the employer already paid. In so doing, he awards himself overtime on overtime, a concept that the General Assembly could not have intended.” Id. at 256 (citation omitted). Similarly, Poe’s “computation of 150 percent of the usual hourly rate ignores the fact that the day rate has already compensated him for 100 percent of the usual hourly rate for all of the hours worked, including the hours in excess of 40,” thus overstating “the amount of the overtime compensation to which he is entitled under Maryland law.” Id. at 256-57.
By affirming the circuit court’s judgment in IESI’s favor, the Court of Special Appeals gave valuable guidance to Maryland employers who pay employees by a day rate instead of an hourly rate. In addition, the Court reminded the bar of the parallels between the Maryland Wage and Hour Law and the federal Fair Labor Standards Act. In doing so, the Court also reminded employers and the bar that provisions, decisions, and regulations arising from the FLSA can help inform employer’s judgments concerning compliance with the Maryland Act.