Earlier this week, the Third Circuit in Stone, et al. v. Troy Construction, LLC, No. 18-1825 (3rd. Cir. March 12, 2019) vacated and remanded a District Court ruling and instead found that the District Court applied an overly burdensome standard for showing willfulness under the Fair Labor Standards Act (“FLSA”). The Third Circuit said that if the District Court would have applied the correct standard, it would have found that genuine disputes of material fact did exist as to the defendant’s willfulness in leaving out of the base wage rate for local employees the per diems they were paid. Id.
Troy is in the business of building and maintaining oil and gas pipelines and compressor stations across the county. Id. Many of Troy’s non-local employees have to travel long distances from their homes to the worksites. Id. Troy maintained that they also employed local employees who did not have to travel far. Id. Because some employees had to travel long distances, Troy paid them a per diem to cover the travel costs. Id. A corporate representative of Troy said that per diem meant “reimbursable – it’s a payment to an employee for a reimbursable expense.” Id. The intent of the per diem was to reimburse out-of-pocket expenses related to traveling to the job, lodging, and meals. Id. This per diem was paid to non-local and local employees.
The plaintiff, Linda Stone, sued Troy Construction, LLC (“Troy”) alleging a willful violation of the FLSA. Id. She claimed that Troy paid local employees per diem compensation, which should have been classified as wages and included in the regular rate of pay, which would have affected the overtime pay calculations. Id. The regular rate of pay was supposed to be calculated to include all remuneration for employment paid to, or on behalf of, the employee, but it does not include reasonable payments for traveling expenses or other expenses incurred by the employee in furtherance of the employer’s interests. Id. The defendant filed a motion for summary judgment, which was granted by the District Court holding that, as a matter of law, there had been no willful violation. Id.
However, the per diem was considered taxable income to the local employees. This accounting change did not include per diem payments to local employees in its calculation of those employees’ regular rate of pay when determining overtime. Id. Troy stated that a travel per diem paid to a local employee would not be a reimbursement, but for overtime purposes, the company treated all per diems, whether paid to local or non-local employees, the same way. Id. Mrs. Stone sought to recover her unpaid compensation that she said would have been paid for overtime work if her base wage rate had correctly reflected the per diem payments she received. Id.
In McLaughlin v. Richland Shoe Co., 486 U.S. 128 (1988), the Supreme Court addressed “the meaning of the word ‘willful’ as used in the statute of limitations applicable to civil actions to enforce the FLSA.” Id. at 129. It noted that “[t]he [FLSA] provides that such actions must be commenced within two years ‘except that a cause of action arising out of a willful violation may be commenced within three years after the cause of action accrued.’” Id. The Court concluded that a violation of the FLSA was willful if, at minimum, the employer “showed reckless disregard for the matter of whether its conduct was prohibited by the [FLSA.]” Id. at 132-33.
The District Court here in Stone required a showing of conduct worse than the recklessness identified in McLaughlin. It reasoned that “[t]he sole evidence that the plaintiffs point to is a 2014 policy change at Troy that determined that per diems paid to employees that permanently resided less than 50 miles from their Troy worksite were to be considered wages for tax purposes.” Stone, et al. v. Troy Construction, LLC, No. 18-1825 (3rd. Cir. 2019). The Court recognized that Troy “appear[ed] to agree that excluding per diem[s] when calculating overtime rates for [out-of-state] employees is acceptable under the statute.” Id. Thus, Troy knew that per diems for non-local employees were implicated and permissible under the FLSA, but Troy’s ignorance about the implications of the same per diems paid to local employees did not trouble the Court. Id. The District Court was evidently looking for something egregious. Id. But any requirement for a degree of egregious behavior conflicts directly with another Supreme Court precedent. In Hazen Paper Co. v. Biggins, 507 U.S. 604 (1993), the Supreme Court made clear that an “employee need not additionally demonstrate that the employer’s conduct was outrageous,” to demonstrate willfulness. Id. at 617.
The Third Circuit found this troubling, as the District Court tried to justify a willful standard with an egregious standard. In Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018), the Third Circuit held that “the overall egregiousness of [the defendant’s] conduct … [was] not required to establish willfulness[.]” Id. Referencing the Supreme Court’s decision in Safeco Insurance Company of America v. Burr, 551 U.S. 47, 57 (2007), the court noted that, “where ‘willfulness’ is an element of civil liability, ‘we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well.’” Id. at 152. Accordingly, willfulness under the FLSA is established where “the employer either knew or showed reckless disregard for the matter of whether its conduct was prohibited by the [FLSA.]” McLaughlin, 486 U.S. at 133. It does not require a showing of egregiousness. Hazen, 507 U.S. at 617.
When the appropriate standard is applied, summary judgment should not have been granted because there were genuine disputes of material fact showing Troy’s willfulness. Stone, et al. v. Troy Construction, LLC, No. 18-1825 (3rd. Cir. 2019). Based on the testimony of Troy’s corporate representative mentioned above, a reasonable fact-finder could say that Troy had been at least reckless in its accounting treatment of per diems and thus was willful in violating the FLSA. Id. Troy was aware that a per diem was reimbursable “and that the reimbursement in question was for employee expenses related to traveling to the worksite, like travel, lodging, and food. Id. A per diem paid to a local employee with no such expenses was mis-categorized as a reimbursement. There is simply nothing of significance to reimburse. Since the per diems paid to local employees did not reimburse travel expenses, it would be reasonable to conclude that Troy knew those payments were actually wages.” Id.
Lastly, to evaluate whether all