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Md.: Employers May Be Liable for Treble Damages for Misclassification Claims

By Joseph Harkins and Steven Kaplan, © Littler  8/20/2014

On Aug. 13, 2014, the Maryland Court of Appeals held in Peters v. Early Healthcare Giver Inc. that employers can be held liable under the Maryland Wage Payment and Collection Law (MWPCL) for all overtime violations, including allegations of misclassification under the Fair Labor Standards Act (FLSA) and the Maryland Wage and Hour Law (MW&HL).

This holding by the state's highest court is a clear departure from current law. Accordingly, this decision has significant ramifications for Maryland businesses because: 1) it increases potential liability in that the law allows employees to receive up to treble damages, assuming no "bona fide dispute" exists; and 2) the court held that the burden of proving a "bona fide dispute" falls on the employer, and not the employee. On the other hand, the court held also that an award of up to treble damages does not mean an aggrieved employee receives the principal unpaid wages plus three times that amount, and that a fact-finder is not required to award enhanced damages, even in the absence of good faith.


In Peters, the plaintiff worked as a certified nursing assistant for Early Healthcare Giver Inc. (EHG) and consistently worked approximately 60 hours per week. The plaintiff provided in-home care for an elderly patient from April 2008 to April 2009. EHG paid her $12 per hour for all hours she worked, but did not pay her time-and-a-half.

At trial, the president of the company explained that she did not pay the plaintiff overtime pay because she exercised during her work hours. In addition, the president testified that the plaintiff was paid under a federal program through which Medicaid reimbursed the company no more than $16 per hour.

At trial, EHG's counsel argued that the plaintiff was exempt from receiving overtime pay under the FLSA's "companionship services" exemption. Ultimately, the trial court held that federal law preempted Maryland law, and, thus, exempted EHG from paying overtime. 

The plaintiff appealed the trial court's holding and the Court of Special Appeals reversed, concluding that federal law does not preempt state wage laws. In addition, the intermediate appellate court held that the FLSA exemption did not apply and remanded for the trial court to consider whether the plaintiff was entitled to overtime pay under the FLSA and MW&HL. The company apparently went defunct shortly after the trial and ceased defending itself in this case.

On remand, the trial court awarded the plaintiff $6,201 in unpaid overtime wages under the MW&HL, but denied her request for additional damages under the Wage Payment Law. The plaintiff appealed again and principally argued that the trial court abused its discretion by failing to award her enhanced damages under the Wage Payment Law. The Maryland Court of Appeals agreed to hear her appeal.

Court's Analysis

First, the court did not spend much time analyzing whether and to what extent an employee may recover overtime pay under an "entitlement" theory, such as allegations of misclassification, because EHG did not participate in the proceeding and no other party presented an argument to the contrary. But, the court made it clear that it hoped to put an end to the scope controversy, stating: "We echo, hopefully for the final time, that both the [MW&HL] and the [MWPCL] are vehicles for recovering overtime wages."

Second, the plaintiff argued that EHG did not withhold the overtime as a result of a bona fide dispute and that she is entitled to treble damages under the statute. In this regard, the statute's private right of action provision states that if: "a court finds that an employer withheld the wage of an employee in violation of this subtitle and not as a result of a bona fide dispute, the court may award the employee an amount not exceeding 3 times the wage, and reasonable counsel fees and other costs."

Before reaching the evidentiary issue of whether EHG withheld the overtime pay "as a result of a bona fide dispute," the court held that the burden is on the employer, and not the employee, to establish it has withheld payment based on a "bona fide dispute." It reasoned that "the employer, as the party withholding the wages, is uniquely qualified to offer evidence about its reasons for doing so." 

The court further explained that a "bona fide dispute" is a "legitimate dispute over the validity of the claim or the amount that is owing." The inquiry is concerned with the employer's "actual, subjective belief that the party's position is objectively and reasonably justified." For example, the court mentioned in a footnote that "an incorrect legal belief, such as federal preemption, may form the basis of a legitimate bona fide dispute." Turning to the evidence presented, the appellate court found that EHG advanced only one argument at trial; that is, it withheld overtime pay because the plaintiff exercised during work hours.

Although EHG's counsel argued the case was preempted by federal law and the "companionship exemption," no one from EHG testified that it did not pay the employee for these reasons. Without this evidence, there was no evidence of a bona fide dispute.

Third, the court considered the plaintiff's request for treble damages. The plaintiff urged the court to hold that once a fact-finder finds the absence of a bona fide dispute, an award for enhanced damages should be "liberally" granted. Significantly, the appellate court disagreed, holding it "was not persuaded . . . that there should be a presumption in favor of granting enhanced damages." Put another way, the appellate court held, "notwithstanding a finding that there was no bona fide dispute," a "trier of fact has the discretion to decline any award of enhanced damages."

Lastly, the court held that the total damages for a private right of action are limited to three times the unpaid wage.  

Lessons Learned

There are several key takeaways from this decision. First, an employer defending a wage payment case in state court should not necessarily abandon or waive the "entitlement" defense or other arguments that the Wage Payment Law is not the proper vehicle for all overtime pay claims because neither the Maryland Court of Special Appeals nor the Court of Appeals has been squarely presented with an appellate brief and argument outlining the reasons why misclassification cases, for example, may not be actionable under the Wage Payment Law.  

Second, an employer must be prepared to explain to a fact finder why it made the decision to withhold payment. The reasons could be factual, legal, or a combination thereof. For example, in this case, EHG may have met its burden to show a good faith basis by explaining it withheld overtime pay because the Medicaid payments were not enough to cover overtime pay, unless it paid the employee significantly less money, and/or it believed the Medicaid program preempted state law. Similarly, in misclassification cases, an employer should be able to satisfy its burden by articulating its rationale for the decision, even if the classification turns out to be incorrect.          

Third, in a jury trial, an employer should consider a jury instruction that states that, assuming the jury finds a bona fide dispute, it still has discretion to find that the employer is not liable for enhanced damages.

Fourth, employers in Maryland should periodically audit positions they classify as exempt from overtime under federal and state law.

Joseph Harkins is a shareholder, and Steven Kaplan is an associate, in Littler’s Washington, D.C. office.  Republished with permission. © 2014 Littler. All rights reserved.


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