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  • December 30, 2015

    Cash Fringes, Overtime Pay, and the Fair Labor Standards Act

    Do employers who discount cash fringes in calculating overtime pay violate the Fair Labor Standards Act?

    Yingtao Ho

    On each Wisconsin prevailing wage project, the Department of Workforce Development (DWD) issues a prevailing wage determination for each trade that works on the project. The determination always contains a base wage rate and fringe benefit rate for each classification. If the employer pays no fringe benefits to its employees, or pays fringe benefits to employees at a rate lower than the rate set by the prevailing wage determination, then the employer is required by law to pay the difference in cash. DWD §290.04(1).

    For example, if the prevailing wage determination says that the base wage for a classification is $30, and the fringe benefit rate is $10, an employer who pays no fringe benefits to its employees must pay its employees $40 per hour in cash, while an employer who pays fringe benefits worth $5 per hour must pay its employees $35 per hour in cash.

    DWD section 290.05 defines the employer’s obligation to pay overtime wages to its employees. It provides that the overtime wage must equal at a minimum 1.5 times the base wage rate shown on the prevailing wage determination, and that:

    Nor can the rate upon which the overtime premium is calculated be less than the straight time cash payment made to the laborer, worker, mechanic, or truck driver, or be less than the employee's normal hourly basic rate of pay, if it is higher.

    The DWD has taken the position that when an employer pays less fringe benefits than the amount listed in the determination, and makes up the difference in cash, the cash payment is a “cash fringe” that can be excluded from the overtime pay calculation. In the above example, an employer paying no fringe benefits is only required to pay 1.5 times the base wage rate of $30 (or $45) for each overtime hour worked, even though the employee received $40 per hour for his non-overtime hours worked on the same project. Many employers across the State have followed the DWD’s recommended method for calculating overtime pay on prevailing wage projects.

    For those employers with sufficient involvement in interstate commerce and annual volume of business to be subject to the coverage of the Fair Labor Standards Act (FLSA), following the DWD’s advice may expose them to liability under federal labor law. The numerous exemptions from the maximum hour requirements of the FLSA, found at 29 U.S.C. §213(b), does not include an exemption for hours worked on projects covered by state prevailing wage laws. Courts have similarly explicitly held that hours worked on prevailing wage projects are subject to coverage by the overtime provisions of the FLSA. Grochowski v. Phoenix Constr., 318 F. 3d 80, 87 (2nd Cir. 2003).

    Yingtao Ho Yingtao Ho (Michigan 2002) practices in the areas of labor relations law and labor law litigation at The Previant Law Firm S.C. in Milwaukee.

    The FLSA permits two systems for calculating overtime pay: As either 1.5 times the regular rate at which he is employed (i.e., the average wage rate that he earned during the workweek); or at 1.5 times the rate for the specific work performed during overtime hours, provided that the employee is performing two or more kinds of work for which different hourly or piece rates have been established. See 29 U.S.C. §207(g)(2). Paying the employee at a rate of $45 for overtime hours worked when the straight time rate was $40 does not comply with either permissible system of overtime compensation.

    One of the main purposes for the overtime provision of the FLSA is to spread work and decrease unemployment by requiring the employer to pay a financial penalty when it chooses to use fewer employees to perform the same work. Mechmet v. Four Seasons Hotels, 825 F. 2d 1173, 1176 (7th Cir. 1987). The work spreading rationale would be undermined if the cash fringe can be excluded from the overtime calculation, so that employees receive little more money for their overtime hours worked than their non-overtime hours worked.

    Excluding the cash fringe from the overtime calculation also appears inconsistent with DWD section 290.05, which provides that the rate used to calculate prevailing wage overtime pay cannot be lower than the straight time cash payment made to the employee. Cash fringes, which do not meet any of the requirements for bona fide fringe benefits outlined in DWD section 290.01(10), likely cannot be excluded from the straight time cash payment that must be used to calculate the overtime pay rate. Since the Wisconsin administrative code is approved by the Wisconsin legislature and has the force of law, the DWD lacks authority to adopt an enforcement position that is inconsistent with section 290.05.

    Contractors and their attorneys should be aware of these issues before deciding to save overtime costs by following DWD’s policy of excluding so called cash fringe payments from the overtime pay calculation. Violating the FLSA and Wisconsin prevailing wage laws can expose contractors to double damages, along with paying the prevailing employee’s attorney’s fees and costs.

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    Labor & Employment Law Section Blog is published by the State Bar of Wisconsin; blog posts are written by section members. To contribute to this blog, contact Andrea Farrell and review Author Submission Guidelines. Learn more about the Labor & Employment Law Section or become a member.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

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