The Second Circuit released an important decision today that sets forth some new groundrules for employers and particularly placement agencies to be aware of in paying employees overtime. In doing so, the court has distinguished the long-standing Supreme Court case of Tennessee Coal Co. v. Muscoda Local No. 123 (321 U.S. 590) (1944) and, according to the Court’s own reasoning, has created a split in the circuits.
The short issue of the case is whether employees must be paid overtime wages for work that their employer has prohibited and does not desire. The Court indicates that this is a matter of first impression and answers the question in the affirmative.
The case, Chao v. Gotham Registry, Inc. (available here) is ostensibly about a decision denying a contempt order against an employer. While the Court upholds the decision denying the contempt order, it does by finding that the employer was dealing with a novel question and that it should not be punished for coming to a wrong conclusion.
The Court’s analysis is lengthy but it has summarized the facts and its decision here:
A typical Gotham [employer] placement begins when one of its client hospitals requests a nurse to fill a temporary vacancy or to support hospital personnel during a peak period. Gotham then offers the assignment to a nurse on its register, and the nurse who accepts the position reports directly to the hospital. The nurse is required to sign in and out on daily time sheets, which are compiled and reviewed by the hospital and forwarded to Gotham each week. Gotham is not permitted to go on hospital premises to verify the nurse’s hours or otherwise supervise his or her performance. The hospital pays Gotham an hourly fee multiplied by the number of hours worked by the nurse and Gotham pays most of this money to the nurse.
Until the early 1990s, Gotham did not pay its nurses overtime wages for hours worked in excess of 40 hours in any workweek because it viewed the nurses as independent contractors. After the Department of Labor commenced an enforcement action in 1992 against the staffing agency asserting that its practice of paying nurses straight-time wages for overtime hours violated the Act, Gotham consented to treat the nurses on its register as employees for purposes of the Act. …
As Gotham’s clients do not pay Gotham a premium for overtime hours in all cases, Gotham’s promise to abide by the Act quickly proved expensive. After seeking advice of counsel, the staffing agency adopted a policy designed to check unauthorized overtime or, failing that, insulate itself from claims for time and one-half compensation for unauthorized hours. Gotham’s overtime policy is printed on the time sheets completed by its nurses and reads: "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."
In the course of their assignments at client hospitals, Gotham nurses are sometimes asked to work overtime by hospital staff. Nurses who agree to work an unscheduled shift will on occasion contact Gotham first to request approval in compliance with Gotham’s rule. If Gotham authorizes an assignment, the nurse is guaranteed premium wages for any resulting overtime. But three out of four approval requests are denied. At other times, nurses accept unscheduled shifts without obtaining the staffing agency’s approval. When these nurses report their overtime for the preceding week, Gotham attempts to negotiate with the hospital to procure an enhanced fee for the overtime hours already worked. If Gotham succeeds — as it does ten percent of the time — it pays the nurse time and one-half wages for the unauthorized overtime hours. Otherwise, the nurse receives straight-time wages for the extra hours worked.
It is this scenario that gives rise to the Secretary’s contention that Gotham’s overtime practices violate 29 U.S.C. § 207(a) and, by extension, the 1994 consent judgment….
The Secretary challenges that portion of the district court’s March 20, 2006 judgment that denies her petition for 8 civil contempt against Gotham. That court believed the unauthorized hours did not constitute work under the Act or, if these were working hours, the legal question was too much in doubt to warrant civil contempt. On this appeal the Secretary presents us with two questions: first, whether Gotham’s overtime practices violate the Act; and second, if so, whether the violation provides an adequate basis for civil contempt. We think the trial court erred in labeling the nurses’ overtime hours as anything other than work and answer the first question in the affirmative. But because we believe Gotham acted on a reasonable interpretation of then unsettled law, we answer the second question in the negative, and affirm the district court’s judgment on the alternative ground that the Secretary did not meet her burden to prove contempt.
There is also a thoughtful concurrence by Chief Judge Jacobs as well. He chides the majority for its reasoning:
I cannot sign the majority opinion because it holds that Gotham’s practice violates the FLSA–though Gotham could not be expected to know this until so advised by the majority’s ambitious, consequential and dubious rulings.
As this case is analyzed, I’m sure much will be written about this in the upcoming days. For now, the key takeaway from the case is that for placement agencies in particular that may not pay overtime based on a similar policy to Gotham, those agencies should review those policies and practices and get legal advice.
I’ll post more later in the week as the analysis comes in.
UPDATE: The Second Circuit Blog has another summary of the case available here.