Unpaid Overtime Under the Fair Labor Standards Act: A Litigation Explosion

 By Eric C. Scroggins

Over the last three years, public employers, especially public school systems, have paid tens of millions of dollars to settle lawsuits seeking unpaid overtime under the Fair Labor Standards Act (FLSA). Over 40 percent of all FLSA lawsuits filed in 2002 involved public school systems. In Mississippi alone, 105 of the state’s 152 school systems were sued for unpaid overtime under the FLSA and, as a result, are expected to pay in excess of $15 million dollars to settle the cases.

The Culprit

A good portion of this litigation arises from the practice of allowing nonexempt employees to volunteer. Normally, all time a nonexempt employee spends “volunteering” for a private employer must be counted as time worked for purposes of calculating overtime. However, a special exception is offered to public employers that allows them to avoid overtime liability for time a nonexempt employee spends volunteering. See 29 C.F.R. § 553.100–106. This exception allows schools, parks departments, public hospitals, and health departments to offer valuable services they might not otherwise be able to provide because of budget constraints. Typically, public employers provide employees who volunteer their personal time with a small fee or stipend to show their appreciation for the service.

Many public employers are caught by surprise when they find that this exemption is available only if the employee performing the volunteer services meets the definition of a bona fide volunteer. To meet the definition of a bona fide volunteer, the employee must, among other things, volunteer without the promise, expectation, or receipt of compensation. While payment of a stipend might appear to destroy the bona fide volunteer status, a volunteer may receive (1) payment for expenses, (2) reasonable benefits, (3) a nominal fee, or (4) any combination thereof. Thus, so long as a stipend or other type of payment falls within the definition of a nominal fee, the volunteer exception to overtime may be available. But, if a stipend is characterized as nothing more than a substitute for compensation, then the bona fide volunteer status is destroyed and overtime may be due. The problem arises here.

Historically, there has not been any meaningful guidance as to when a permissible nominal fee crosses the line and becomes impermissible compensation. If too large, the Department of Labor (DOL) and plaintiffs’ attorneys have characterized the fee as nothing more than a substitute for compensation and demanded overtime for time spent volunteering.

Few Alternatives

Without guidance, the question of whether a $1,000 coaching stipend meets the definition of a nominal fee has remained a mystery left exclusively for the courts to decide. Consequently, when public employers have been faced with litigation on the issue of whether their stipend falls within the definition of a nominal fee, they have tended to settle out of court rather than incur expensive legal fees and risk an adverse decision. Many public employers have chosen to abandon the practice of allowing nonexempt employees to volunteer at all because of overtime liability concerns. Public schools are hardest hit as they commonly fill many of their coaching and extra-curricular advising needs with volunteers.

The New Guidance

In November, the DOL issued an opinion letter (FLSA 2005–51) examining the question of whether a nonexempt employee of a public school can volunteer as a coach or advisor, and if so, whether the payment of a stipend destroys the volunteer status. In answer to the first question, the DOL indicated that employees may volunteer to coach or serve as an advisor if the arrangement is structured in a way that meets the definition of a bona fide volunteer.

The 20% Rule

In answer to the second question, the DOL provided a bright-line test that can be used to determine whether a stipend falls within the definition of a permissible nominal fee. Under this new guidance, the DOL will presume that a coaching stipend is nominal when it does not exceed 20% of the prevailing wage that the employer would pay to hire a full-time coach. The DOL suggests that employers use some form of local, regional, or national market data to determine the market rate for a particular job.

This guidance is good news for public employers—especially public schools that have long allowed nonexempt employees to volunteer as coaches and advisors for extracurricular activities. Public employers now have some assurance that they will not incur overtime liability for nonexempt employees who volunteer so long as any stipend that is paid falls within the 20% rule and the relationship otherwise meets the definition of a bona fide volunteer.

With this new guidance in hand, this is an opportune time to ensure that a public employer’s volunteers meet the definition of a bona fide volunteer under the regulations. Any volunteer agreement should specify that :

1.the arrangement is not employment;

2.the volunteer will not receive and does not expect compensation;

3. the volunteer is volunteering by his or her own free will; and

4. the volunteer understands that volunteering will not affect any future decision the employer may make with regard to the volunteer’s employment.

With regard to any stipend that is provided to volunteers, the agreement should specify that:

1.the volunteer will likely incur out-of-pocket expenses while volunteering (e.g., food, travel/mileage, and clothing), which are to be paid from the stipend;

2. any remainder represents a nominal fee provided in appreciation for volunteer services; and

3. the amount of the stipend will not change regardless of the number of hours actually invested by the volunteer, a win/loss record, post-season play, or student participation.