Minnesota Supreme Court Outlaws Split-Day Compensation Plans

By Heather R. Bredeson

September 19, 2019

On September 18, 2019, the Minnesota Supreme Court determined that split-day payment plans violate Minn. Stat. § 177.25, subd. 1 of the Minnesota Fair Labor Standards Act (“MNFLSA”).  Matter of Minnesota Living Assistance, Inc., ---N.W.2d ---, No. A17-1821, 2019 WL 4456081, *3 (Minn. 2019).  The Court also determined that “premium payments for overtime work” that are excluded from the calculation of an employee’s regular rate of pay for overtime purposes only include compensation for work that is (a) outside the employee’s regular working time, or (b) compensation for work in excess of the 48-hour limit.
   
This case arose when the Minnesota Department of Labor and Industry (“DOLI”) investigated Minnesota Living Assistance, and determined it owed over $1,000,000 for failure to pay overtime to home health aides who it paid on a split-day plan. The split-day plan entailed paying employees one rate of pay for the first 5.5 hours of the regularly scheduled 16-hour work day, and at 1 ½ times that rate for the remaining 10.5 scheduled hours.  The employer used this plan even after an employee had worked 48 hours in a workweek (the overtime threshold under Minnesota law).

After the employer challenged DOLI’s interpretation administratively and through the court system, the supreme court upheld the overtime penalty.  The court reasoned that the MNFLSA requires employers to pay their employees at least time-and-a-half wages for all hours worked after the first 48 hours of a given workweek, regardless of whether the employee received time-and-a-half compensation during the first 48 hours of employment that workweek.  Additionally, the court interpreted a DOLI rule to mean that time-and-a-half payments for regularly scheduled work that occurs before an employee has reached the overtime threshold for the workweek may not be excluded from an employee’s pay to calculate the employee’s regular rate.
 
The employer argued that nothing in the statute prohibits it from paying employees time-and-a-half before an employee has worked more than 48 hours and then crediting those payments toward the payments it would otherwise be required to pay.  However, the court held that all wages, including the higher rate paid for the remaining 10.5 hours of the split day, must be included in calculating an employee’s regular rate of pay for overtime purposes.  Regardless of what the employer called the 10.5 hours paid at the time-and-a-half rate, it was not considered “overtime” under the rule, because, as the court ruled, “overtime” means “hours worked beyond the regular fixed ours.”

The employer argued that split-day plans had never been explicitly outlawed by either a statute or DOLI regulation, and that it was unfair for DOLI to assert such a position against the employer without notice and comment rulemaking.  The supreme court decided that although DOLI had not properly published this definition of “overtime work,” the court was still free to rule on the issue and to interpret the statute.

In light of the holding in Minnesota Living Assistance, employers are encouraged to evaluate their payment plans to determine whether any payments are being made to employees that would inadvertently increase the employees’ regular rate of pay for overtime purposes.  Minnesota employers should also determine whether their overtime or premium payment policies accurately reflect the court’s new definition of “overtime work.”