By Richard Morgan

It’s becoming a familiar scenario in employment cases that are appealed to the U.S. 4th Circuit Court of Appeals (which covers Maryland, North Carolina, South Carolina, Virginia, and West Virginia): A three-judge panel, this time in a Fair Labor Standards Act (FLSA) case, disagrees with a federal district court’s grant of summary judgment (dismissal without a trial) in favor of an employer and sends the case back for further proceedings. Read on for the 4th Circuit’s analysis.

Factual Background

Eden Park Guest House is a small family-owned bed-and-breakfast located in Takoma Park, Maryland. In July 2015, Eden Park hired Maryam Balbed to serve as its innkeeper. The parties entered into a written agreement under which Eden Park paid Balbed $800 a month and provided her a room in the inn, laundry services, utilities, and daily breakfast.

In exchange, Balbed agreed to answer phones, make reservations, reply to e-mails, check guests in and out, serve breakfast, clean public areas and guest rooms, and manage Eden Park’s social media presence.

The agreement set forth a daily schedule that divided Balbed’s time into three categories:

1. Serve breakfast to guests daily (for a total of 7 hours per week);
2. Clean the guest rooms and common spaces 5 days a week (for a total of 22 hours per week); and
3. Check guests in as needed between 4:00 p.m. and 9:30 p.m., and close the bed-and-breakfast at 10:00 p.m. “unless otherwise specified.”

The contract provided that Balbed would spend 29 hours a week performing the tasks in first two categories, but it didn’t specify the amount of time she would spend on the duties in the third category— checking guests in and out as needed—or on her duties that didn’t fall into any of the three categories (i.e., answering phones, making reservations, replying to e-mails, and managing Eden Park’s social media presence).

Balbed quit in January 2016 and sued Eden Park under the FLSA for failing to compensate her for all the hours she worked. Eden Park contended throughout the case that the contract required Balbed to work 29 hours per week, entitling her to $1,107.80 a month, based on Maryland’s minimum wage of $9.55 an hour.

The inn maintained that her total compensation amounted to more than $1,107.80 a month because it paid her a monthly salary of $800 and provided lodging it estimated was worth between $850 and $1,800 a month. That meant she was compensated between $1,620 and $2,600 a month, depending on the value of the lodging. Balbed challenged Eden Park’s assessment of the lodging’s value and claimed that, despite the terms of the contract, she worked more than 100 hours nearly every week without a day off.

Trial Court’s Ruling

Balbed asked the court to rule in her favor on some of the claims without a trial, arguing that Eden Park shouldn’t receive any credit for her room and board because it didn’t maintain records of the cost of that benefit. She also contended that Eden Park didn’t pay her minimum wage because her salary didn’t compensate her for all the hours she worked.

Eden Park also requested summary judgment, maintaining the written contract constituted a “reasonable agreement” under the FLSA’s hours worked regulations, which exempted it from all other requirements under the Act.

The trial court agreed with Eden Park, concluding the hours worked regulations carve out an exception to the other FLSA regulatory requirements for record keeping and calculation of in-kind wages. Because the trial court found the contract constituted a reasonable agreement within the meaning of the FLSA, it granted summary judgment to Eden Park. Balbed appealed.

4th Circuit’s Analysis

The 4th Circuit began its analysis, not with a description of what the FLSA says, but by noting that the case involved the interaction of several regulations promulgated by the U.S. Department of Labor (DOL) pursuant to its authority under the statute.

The 4th Circuit observed that the FLSA requires employers to pay their employees an hourly minimum wage at either the federal rate or the applicable state or local rate, whichever is higher, and entitles nonexempt employees to overtime pay at 1½ times their regular rate of pay for all hours they work over 40 per week.

The FLSA provides that “wages” include cash and, under certain circumstances, “the reasonable cost . . . to the employer of furnishing [the] employee with board, lodging, or other facilities.” Under the Act’s regulatory scheme, the criteria to be assessed include whether:

1. The lodging is regularly provided by the employer or similar employers;
2. The employee voluntarily accepts the lodging;
3. The lodging is furnished in compliance with applicable federal, state, or local law;
4. The lodging is provided primarily for the benefit of the employee rather than the employer; and
5. The employer maintains accurate records of the costs incurred in furnishing the lodging.

In its assessment of the FLSA’s application when an employee lives on the employer’s premises, the 4th Circuit looked at another regulation that states in pertinent part:

An employee who resides on his employer’s premises on a permanent basis or for extended periods of time is not considered as working all the time he is on the premises. Ordinarily, he may engage in normal private pursuits and thus have enough time for eating, sleeping, entertaining, and other periods of complete freedom from all duties when he may leave the premises for purposes of his own. It is, of course, difficult to determine the exact hours worked under these circumstances and any reasonable agreement of the parties which takes into consideration all of the pertinent facts will be accepted.

The 4th Circuit rejected Eden Park’s argument that the district court found the contract reasonable, deeming the trial court’s findings suspect. Concluding that Eden Park had included its profit in the valuation of the lodging, the court of appeals rejected the inn’s numbers under the “reasonable cost” prong of the regulatory test.

The court similarly rejected the inn’s numbers under the “fair value” prong of the regulatory test because it couldn’t determine whether the amount credited toward wages was equal to or lower than the amount Eden Park actually paid for the housing.

The 4th Circuit relied on regulations that address wage deductions for lodging rather than lodging being provided as part of an employee’s wages. The appellate court suggested that if Eden Park can provide a reconstruction of records that the district court deems reasonable, the reconstructed records can be used to assess Balbed’s appropriate wages.

The 4th Circuit then stated that after Eden Park offers the necessary evidence, the district court should make a determination on the reasonable cost of the lodging and other in-kind benefits the inn provided Balbed, including whether the lodging complied with state code on proper permitting.

The 4th Circuit also instructed the trial court to look at the hours Balbed purportedly worked based on its view of whether the time spent waiting to check people in was performing tasks for the benefit of the employer or waiting to perform such tasks (i.e., being “engaged to wait” or “waiting to be engaged”). If the district court concludes that Balbed waited to be engaged, those hours shouldn’t be considered working time. But if the court concludes that she was engaged to wait during the check-in hours, Eden Park is obligated to compensate her for those hours.

Moreover, the 4th Circuit directed the trial court to address Balbed’s contention that the employment agreement provided for an unreasonably short amount of time to perform the assigned tasks. In other words, the lower court must revisit the reasonableness of the agreement. With those instructions, the 4th Circuit sent the case back to the trial court for additional proceedings.

Lessons for Employers

The 4th Circuit appears to have sent another signal that employers won’t find a receptive ear when their cases come before it. The trial court arrived at conclusions based on the FLSA and the evidence before it and found that the case shouldn’t go forward. The 4th Circuit then reversed the lower court’s ruling based on regulatory language that doesn’t seem to be applicable. The trial court addressed additions to, not deductions from, wages. The 4th Circuit co-opted the deduction language to craft a key part of its decision to send the case back to the trial court.

We’ve noted several times recently that the 4th Circuit is issuing decisions that don’t favor businesses even after a trial court finds there’s no triable issue that should go forward. While our courts at the trial level aren’t always correct, there have been enough decisions now to indicate that the 4th Circuit isn’t a good place for employers at this time. If you’re faced with an employment dispute, you and your counsel should closely assess, at the earliest stages of the case, the risks and benefits of trying or settling it.

Richard J. Morgan, an editor of South Carolina Employment Law Letter, may be reached at rmorgan@mcnair.net.