Fifth Circuit clarifies overtime liability: Employer knowledge is still required

The U.S. Court of Appeals for the Fifth Circuit recently reaffirmed that employers are not liable for unpaid overtime under the Fair Labor Standards Act unless they have actual or constructive knowledge that an employee worked overtime hours.

Merritt v. Texas Farm Bureau

Jerry Merritt, an Agency Manager for the Texas Farm Bureau, was classified as an independent contractor. He set his own schedule, worked autonomously, did not track his hours, and was paid solely on commission. During the relevant period of the lawsuit, Mr. Merritt earned between $552,000 and $627,000 a year.

In 2019, Mr. Merritt sued the Farm Bureau for alleged FLSA violations, claiming he had been misclassified and was entitled to unpaid overtime. The Farm Bureau moved for summary judgment, but the district court found that Mr. Merritt should have been treated as an employee instead of an independent contractor and found he had worked more than 800 hours of overtime. The only issue left for trial was whether the Farm Bureau had actual or constructive knowledge of those overtime hours.

(The Farm Bureau was unable to obtain dismissal of the lawsuit on the additional ground that Mr. Merritt was exempt from the overtime provisions of the FLSA. The court’s rationale with respect to that issue was not available from the public record.)

A jury found in favor of the Farm Bureau on the “knowledge” issue, and the district court denied Mr. Merritt’s post-trial motions. He then appealed to the Fifth Circuit.

The Fifth Circuit affirms

The Fifth Circuit affirmed the verdict in favor of the Farm Bureau, emphasizing longstanding precedent that requires proof of employer knowledge in overtime cases.

First, the court rejected Mr. Merritt’s argument that the Farm Bureau automatically “suffered or permitted” overtime work by allowing him to set his own schedule. The court explained that permitting an employee to work a flexible schedule does not eliminate the requirement that the employer know, or have reason to know, that overtime is being worked.

Second, the court rejected the claim that the Farm Bureau had constructive knowledge simply because it did not maintain a timekeeping system. Constructive knowledge exists only when an employer, through reasonable diligence, would have discovered the overtime. The court noted that it has found constructive knowledge in cases where employers discouraged reporting or altered time records, but not where an employee worked autonomously, off-site, and without direct daily supervision.

Finally, the court upheld the lower court’s jury instruction stating that employees have a duty to notify their employer when working overtime because the instruction tracked Fifth Circuit pattern jury instructions and accurately reflected the law.

What this means for employers

The Fifth Circuit decision reinforces that misclassification alone does not establish overtime liability. Employees must also show that their employer had actual or constructive knowledge of the overtime work. The ruling is especially relevant for employers with commission-based or highly autonomous workers, who are not subject to conventional time tracking systems.

However, employers should ensure that employees understand how and when to report hours worked, that managers understand that they must not discourage employees from reporting overtime, and that the employers remain attentive to work patterns and data that could signal unreported overtime.

And employers should certainly be very careful when making the initial decision about whether to classify a worker as an employee or an independent contractor.

If you have a question about a wage and hour matter, please contact any member of Constangy’s Wage and Hour Compliance & Litigation Practice Group. For FMLA-related guidance, please contact any of our employment law attorneys.