FLSA Does Not Recognize Overtime ‘Gap Time’ Claims, 3rd Circuit Says

Quick Hits

• The Third Circuit ruled that the FLSA does not recognize claims for “gap time,” which refers to unpaid hours that do not exceed overtime limits. 
• The court declined to rely on the DOL’s guidance suggesting gap time claims are cognizable, finding the FLSA to be unambiguous and the DOL’s guidance otherwise unpersuasive. 
• This decision eliminates certain gap time claims in the Third Circuit, an area of aggressive DOL enforcement.

The Third Circuit ruling in Secretary of United States Department of Labor v. Comprehensive Healthcare Management Services LLC is a significant win for employers in finding that claims for gap time—or uncompensated time worked that does not exceed the overtime limit—are not cognizable under the FLSA.

The appellate court further handed the employer a partial win in finding that the district court applied improper standards in determining that certain employees were nonexempt, remanding that issue to the district court for proper analysis. However, the appellate court found that the district court had applied the proper burden of proof and did not err in certain disputed factual findings related to the employer’s recordkeeping practices that were based on testimony from employees.  

Background

The case stems from the DOL’s investigation of Comprehensive Healthcare Management Services, which owns and operates fifteen residential nursing, rehabilitation, and assisted living facilities across Pennsylvania. The investigation began in 2017 and resulted in the DOL filing suit in 2018 on behalf of nearly 6,000 employees, alleging multiple FLSA violations. After a bench trial in January 2024, the district court found in favor of the DOL and awarded $35,804,438.20 in damages.

The district court ruled against the employer on several FLSA violations, including failures to maintain accurate time and pay records, paying employees based on scheduled hours rather than hours actually worked, failing to compensate employees for working through meal breaks, miscalculating overtime rates by excluding shift differentials and bonuses from the regular rate, and misclassifying certain employees as exempt from overtime.

Overtime Gap Time Claims Are Not Cognizable Under the FLSA

A panel for the Third Circuit ruled 2–1 that the claims for gap time are not cognizable under the FLSA. Gap time refers to uncompensated time that does not exceed the overtime limit, where the employee’s pay rate is sufficiently above the minimum so that the employee is still paid a minimum wage when averaged across all time worked in the period.

In the majority opinion, Chief Judge Michael Chagares recognized that while the circuit has previously rejected claims for “pure” gap time, meaning unpaid work during pay periods without overtime, this case presented the issue of “overtime” gap time, which involves compensation for nonovertime hours worked during pay periods when the employee did work overtime. For example, a situation in which an employee works forty-three hours in a week, but the employer only pays the employee for thirty-eight hours of work and three hours of overtime work.

The majority held that the FLSA’s text is clear. Employers must pay a minimum wage under Section 206 and overtime pay under Section 207, but the statute “does not contemplate overtime gap time.” In reaching this conclusion, the majority rejected the DOL’s argument that since the FLSA requires the overtime calculation be based on an employee’s “regular rate” of pay, employees must be paid at their “regular rate” for all hours worked before overtime. The majority said that “the statutory text simply does not support that inferential leap.”

The majority also declined to defer to the DOL’s longstanding interpretive guidance that overtime compensation has not been paid unless all straight-time compensation has been paid first. The majority found the FLSA to be unambiguous and, as such, found no need to look to agency guidance. The majority opinion further noted that even under so-called Skidmore agency deference (which finds that “an agency’s interpretation is ‘entitled to respect …, but only to the extent that it has the power to persuade.’”), the DOL’s guidance was unpersuasive.

“While the Department’s reading may better serve the policy objective of the FLSA overtime provision by ensuring employers do not mitigate or skirt the financial pressures of working their employees above the forty-hour threshold, that does not allow us to read into the FLSA a remedy that Congress did not create,” the majority opinion stated.

The Partial Dissent Finds FLSA ‘Regular Rate’ Ambiguous

Judge Jane Roth concurred in part but dissented from the majority on the overtime gap time issue. Judge Roth argued that the term “regular rate” is ambiguous because it is unclear whether it refers to the rate at which the employer contracted with the employee or the rate the employer actually paid, and that the only way to resolve that ambiguity is to require employers to pay all forty hours of straight time before calculating overtime. She also would have given Skidmore deference to the DOL’s longstanding guidance.

The majority addressed this argument in a footnote, acknowledging that they “agree that these rates should be the same” but that the question before it was “what happens when, due to the employer’s errors, they are not [the same]—and, more specifically, does the FLSA provide a remedy for that error.” The majority said they “do not believe that it does.”

Other Holdings

Proper Burden-Shifting

The Third Circuit found no reversible error in how the district court applied the burden-shifting framework to the DOL’s claims. The court concluded that the damages for the disputed claims—pay-by-scheduled work versus hours worked and incorrect regular rate calculations—were based on the employer’s own records and were not determined by the burden-shifting framework applied when an employer has inadequate recordkeeping.

Factual Findings—No Clear Error

The appellate court further found no clear error on the three challenged factual findings of the district court: (1) that the pay-by-schedule practices had continued past 2018; (2) that the regular-rate miscalculations had continued past July 2019; and (3) the conclusion that employees worked through unpaid meal periods; finding that these conclusions were backed by DOL witness testimony, including the testimony of fourteen employees. While the employer argued that the DOL’s evidence was “quantitatively insufficient because only a small number of witnesses testified on behalf of the nearly 6,000 employees on whose behalf the Secretary brought claims,” the appellate court stated that it “often endorsed the practice of using ‘representative employees to prove violations with respect to all employee,’” and that “’there is no brightline test establishing the percentage of employees necessary to achieve a representative sample.’” 

Exempt Status Findings Remanded

The employer partially prevailed on its challenge to the district court’s findings that certain employees were nonexempt, despite the DOL’s arguments to the contrary. The court found the district court had applied outdated standards that exemptions are to be “construed narrowly against the employer” and that an employer must “demonstrate that an employee ‘plainly and unmistakably’ falls within an exemption.” The Third Circuit explained that, in accordance with rulings by the Supreme Court of the United States, FLSA exemptions “must be given a fair reading,” not construed narrowly against the employer, and that “an employer bears the burden of proving an employee’s exempt status by a preponderance of the evidence, not plainly and unmistakably.” The appellate court remanded the issue to the district court to apply the correct standards.

Key Takeaways

This decision is a significant development for employers in the Third Circuit. The rejection of overtime gap-time claims narrows potential FLSA liability and eliminates a category of damages that the DOL has aggressively pursued. The decision also makes clear the burden of proof employers must meet to establish an employee’s exempt status is less burdensome than previously applied. The decision also underscores that courts may credit the testimony of a small number of employees to find systemic FLSA violations for a much larger class of employees. 

Ogletree Deakins’ Morristown office will continue to monitor developments and will provide updates on the Employment Law, Healthcare, and Wage and Hour blogs as additional information becomes available.

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