The Employer’s Wage and Hour Advisor

Diverging from the majority of courts since the Second Circuit’s 1960 decision in United States v. Klinghoffer Bros. Realty Corp., which established the workweek benchmark, the U.S. District Court for the District of Rhode Island recently ruled that employees can advance FLSA minimum wage claims if they plead and prove that uncompensated time was associated with “covered work that the employment contract did not contemplate.”  Under this novel “contract” standard, Klinghoffer’s workweek measuring rod for minimum wage claims would only apply to hours associated with previously agreed-upon employee responsibilities.  When the employer assigns additional work, that could constitute a new “contract,” and the court reasoned that the minimum wage laws must separately apply to that time.   While clearly an outlier decision, the court’s holding in D’Arezzo v. The Providence Center lends support to plaintiffs looking to advance “gap-time” claims based on uncompensated hours during a 40-hour workweek and provides a cautionary note to employers to review their policies on calculating hourly employee compensation. 

Specifically, in D’Arezzo, the District of Rhode Island considered FLSA and state-law claims by a putative class of fee-for-service therapists, who alleged that their compensation did not account for hours worked during a standard 40-hour workweek, often called “straight time,” as well as overtime hours.  The defendants moved to dismiss the case, in part on the grounds that when the plaintiffs’ compensation was averaged out across a 40-hour workweek, they earned more than the minimum wage and therefore could not bring claims under the FLSA for non-overtime pay. 

In short, D’Arezzo presented a classic example of what is called a “gap-time” claim.  Courts (including several federal Circuit Courts of Appeals) have repeatedly held that the FLSA only provides employees with a basis to sue for wages if either (1) the employee is being paid below minimum wage, or (2) the employee is not being paid for overtime hours in excess of 40 hours per week.  When an employee alleges that he or she is not being paid for work hours under the 40-hour cut-off (say, for example, hours 35 to 39 out of 40), but he or she is still earning on average more than minimum wage, the claim is neither for unpaid minimum wages nor for unpaid overtime, but for “gap-time” wages, which most courts reject as cognizable wage claim.  

Bucking the clear weight of authority, the court in D’Arezzo began its analysis by recognizing the widespread popularity of the Second Circuit’s Klinghoffer opinion, but then quickly concluded it was not determinative.  The court then proceeded to conclude that averaging compensation across a 40-hour workweek was not mandated by the text of the FLSA, and was inconsistent with the legislative purpose behind the Act and Department of Labor regulations.  Notably, the court held that the FLSA’s minimum wage provision was intended not only to guarantee a certain level of compensation, but also to prevent a certain type of employment agreement – the use of unequal bargaining power to compel employees to perform more duties for less compensation.  The court further held that Department of Labor regulations supported a flexible standard that looked to the specific employment relationship at issue rather than a one-size-fits-all 40-hour workweek.  Specifically, the court determined that because minimum wage regulations refer to using employer-specific time records in a minimum wage analysis, such requirements would make little sense if the only calculation to be performed was weekly compensation divided by hours worked.  Regulations on covered work further support that conclusion, reasoned the court, because they call for all work performed in a given week to be treated as covered by the FLSA even if a portion of the hours worked are not covered, and place the burden on the employer to prove lack of coverage for the uncovered portion. 

The D’Arezzo court therefore proposed a modification to Klinghoffer: the “contract” measuring rod rather than the 40-hour measuring rod.  Rather than viewing uncompensated work within the 40-hour period as automatically included in the calculation for determining a minimum wage violation, the D’Arezzo court’s standard would take into account whether the uncompensated time was for additional duties or labor not part of the original “contract” between the employer and the employee.  Because the plaintiffs had not alleged that the uncompensated straight time reflected different tasks than those contemplated in their agreements with the defendants, the district court dismissed their claims without prejudice and granted them leave to replead their “gap-time” claims under the contract approach to the minimum wage calculation.  

The significance of the D’Arezzo decision is yet to be determined.  In addition to a possible appeal, which could reverse the district court, the decision may be applied only in cases where compensation was set on a fee-for-service basis.  Furthermore, this is only the third instance since Klinghoffer was decided more than 50 years ago in which a federal court has adopted a standard for minimum wage calculations other than the 40-hour workweek.  Klinghoffer is explicitly followed by five federal Circuit Courts of Appeals and is routinely cited without controversy by district courts throughout the country.   The only other decision on this issue within the past 15 years that disagrees with Klinghoffer came from the District of Massachusetts in 2011, in Norceide v. Cambridge Health Alliance.  That case proposed an “hour-by-hour” analysis of minimum wage claims, an approach that’s been criticized by courts outside of the First Circuit as administratively impractical and inflexible.  The court in D’Arezzo described its decision as a “middle course” between the approaches in Klinghoffer and Norceide.  Courts may find D’Arezzo more persuasive than Norceide because it does not claim to discard Klinghoffer’s standard in its entirety, but to supplement it. 

Although D’Arezzo is an outlier, employers may well find D’Arezzo cited in support of gap-time claims in jurisdictions beyond Rhode Island. The opinion provides further reason for employers to reexamine their compensation structures to avoid claims of uncompensated time.