United States: Fifth Circuit: Burden Of Proof On Employees To Show Bonuses Should Be Included In Overtime Rates

Highlights

• The U.S. Court of Appeals for the Fifth Circuit, in an issue of first impression, has answered a critical question in Fair Labor Standards Act (FLSA) overtime disputes: "Who has the burden of proof on whether bonuses are discretionary and therefore excluded from the regular rate under § 207(e)(3)?"
• In Joshua Edwards, et al. v. 4JLJ, L.L.C., et al., the Fifth Circuit held that the burden falls on the employees. It then reversed a jury verdict in favor of the employer, an oilfield service company, stating that the employees clearly proved their quarterly performance bonuses should have been included in their rate for overtime pay calculations.
• The court found that the performance bonus agreement, which was memorialized in a written contract given to employees upon hiring, provided a concrete pay scale and there was a "complete absence of any evidence contradicting the universal applicability of the agreement[.]" Accordingly, "the performance bonuses were nondiscretionary under the FLSA, and 4JLJ ought to have included them in the regular rate."

The U.S. Court of Appeals for the Fifth Circuit, in an issue of first impression, has answered a critical question in Fair Labor Standards Act (FLSA) overtime disputes: "Who has the burden of proof on whether bonuses are discretionary and therefore excluded from the regular rate under § 207(e)(3)?" See Joshua Edwards, et al. v. 4JLJ, L.L.C., et al., Case No. 19-40553, 2020 WL 5229686, at *7 (5th Cir. Sept. 2, 2020). In Edwards, the Fifth Circuit reversed a jury verdict in favor of the employer, stating that the employees clearly proved their performance bonuses should have been included in their rate for overtime pay calculations.

By way of background, the FLSA requires employers "to pay non-exempt employees who work more than 40 hours a week overtime of one and one-half times the employees' 'regular rate' of pay." Gagnon v. United Technisource, Inc., 607 F.3d 1036, 1041 (5th Cir. 2010); 29 U.S.C. § 207(a)(1). To determine the employees' "regular rate," the employer must look at the hourly rate actually paid for "all remuneration for employment." Id. Under § 207(e)(3), remuneration is not included in the regular rate if:

Therefore, according to the Fifth Circuit, "[f]or a bonus to be excepted from the regular rate under § 207(e), the employer must maintain discretion over whether to give the bonus and the amount given."

Fifth Circuit Decision

To determine whether § 207(e)(3) is an exemption from the overtime provisions in § 207(a), the Fifth Circuit analyzed whether "§ 207(e)(3) [is] 'of a piece with compliance with § 207(a)' 1 or [if it is] more like the exemptions listed in § 213—a mechanism for exempting oneself from compliance with § 207(a)?" If the Court treated § 207(e)(3) as "of a piece with compliance with § 207(a)," then the burden would remain with the plaintiffs to prove all elements of their claims under the FLSA. Samson v. Apollo Resources, Inc., 242 F.3d 629, 636 (5th Cir. 2001). However, if the Court treated § 207(e)(3) as an exemption from complying with § 207(a), the burden would fall on the employer. Id.

The Fifth Circuit concluded that the burden remained with the employees. In so finding, the court found that "[b]ecause § 207(e)(3) is merely a definitional element of the regular rate—and therefore merely a definitional element of the Employees' claim—it was their burden to show that bonuses were not discretionary according to the statute's terms." 2

In this case, 4JLJ, an oilfield service company, provided two types of bonuses to their employees—a "stage bonus" and a quarterly "performance bonus" — neither were included in the calculation of the "regular rate" for overtime wages. The "stage bonus" was offered for each identifiable stage completed in the fracking of wells; however, the "stage bonus" was not memorialized in writing. On the other hand, the "performance bonus" was memorialized in a written contract given to employees upon hiring. The contract said, in all capital letters and in a large typeface: "THIS BONUS IS NOT TO BE EXPECTED, IT IS TO BE EARNED ... IF YOU ARE HERE JUST TO GET A PAYCHECK, AND GET BY WITH AS LITTLE WORK AS POSSIBLE, DON'T EXPECT TO GET A PERFORMANCE BONUS." In addition, the contract provided the criteria by which the employees would be evaluated for performance bonus consideration.

While the employees argued that the two bonuses were nondiscretionary as a matter of law, they struggled to locate factual support for this argument in the record. As for the stage bonus, the employees failed to show evidence in the record that explained "how employees came to expect stage bonuses, who determined the amount, when the amount was determined, whether all employees typically received such bonuses, or whether the amount ever varied." Since it was the employees' burden to show that the bonuses were nondiscretionary, the court held that because the employees "simply didn't present enough evidence at trial to conclusively show a lack of discretion in 4JLJ's allocation of stage bonuses," the court declined to "disturb the jury's reasoned judgment on such a flimsy record."

Turning to the performance bonus, the Edwards court highlighted an important factor, stating that "for a bonus to be excluded from the regular-rate calculation, the employer must retain discretion over the fact of payment and the amount." The court determined that while it was reasonable for the jury to conclude that 4JLJ retained discretion on whether to give performance bonuses, it was not reasonable for the jury to conclude that 4JLJ retained discretion over the amount of payment. The court found that the performance bonus agreement provided a concrete pay scale and there was a "complete absence of any evidence contradicting the universal applicability of the agreement[.]" Accordingly, "the performance bonuses were nondiscretionary under the FLSA, and 4JLJ ought to have included them in the regular rate."

Conclusion

The court's opinion provides employers guidance when determining whether to include a bonus in their employees' overtime pay calculations, giving an example of each type.

Footnotes

1 Carley v. Crest Pumping Technologies, 890 F.3d 575, 580 (5th Cir. 2018).

2 See, however, Newman v. Advanced Tech, 749 F.3d 33, 36 (1st Cir. 2014) (noting that the provisions at § 207(e)(1)-(8)"are to be interpreted narrowly against the employer, and the employer bears the burden of showing that an exception applies") (quoting O'Brian v. Town of Agawam, 350 F.3d 279, 294 (1st Cir. 2003)); Madison v. Resources for Human Dev., Inc., 233 F.3d 175, 187 (3d Cir. 2000) ("The burden is on the employer to establish that the remuneration in question falls under an exemption.")