A federal appeals court just rejected a long-standing theory of wage liability. Employment attorney Burt Garland breaks down what changed – and what still puts employers at risk.
If you run payroll for hourly workers, a new federal appeals court decision just changed what employees can — and can’t — recover when their paid hours don’t match the hours they actually worked. On June 3, 2026, the Third Circuit Court of Appeals ruled that the Fair Labor Standards Act (FLSA) does not cover “overtime gap time,” rejecting a theory the U.S. Department of Labor had relied on for years to expand wage claims. The decision trimmed millions off a single judgment and gives employers in Pennsylvania, New Jersey, Delaware, and the Virgin Islands some welcome clarity. But the same case is also a helpful reminder of everything that still creates wage-and-hour risk — and that’s where we’ll spend most of our time.
To make sense of the decision, Phil Brandt sat down with Burt Garland, an employment attorney with Ogletree Deakins and a regular voice on This Week at Work, for a practical read on what the ruling changes and what it deliberately leaves in place.
Here’s the decision in plain English. When an hourly employee works some hours off the clock, federal wage law only steps in if those hours either drop the person’s pay below minimum wage or push them past 40 hours into overtime. If neither happens, the FLSA no longer gives the employee a way to sue for that unpaid “gap” — at least in the Third Circuit. That’s the core of the ruling. Everything else is context for why it landed that way and what it leaves untouched.
The case behind it, Secretary of Labor v. Comprehensive Healthcare Management Services LLC, started the way a lot of wage-and-hour problems do: with records that didn’t match reality. The DOL sued a Pennsylvania operator of 15 nursing and assisted-living facilities on behalf of nearly 6,000 employees, alleging the company paid people for their scheduled hours instead of the hours they actually worked, deducted meal breaks automatically, and miscalculated overtime. After a 2024 bench trial, a district court awarded more than $35.8 million. Part of that award compensated employees for “overtime gap time” — and that’s the piece the Third Circuit reversed.
To put numbers on it: picture an employee paid for 38 hours who actually worked 43. Two of those unpaid hours fall under the 40-hour line. The question the court answered was whether the FLSA lets a worker sue for those non-overtime hours in a week when overtime also happened.
The court’s answer was no. Writing for the majority, Chief Judge Michael Chagares held that the FLSA’s text covers two things — a minimum wage and overtime — and nothing in it creates a remedy for unpaid straight-time hours on top of that. The DOL had long argued employees must be paid their full “regular rate” for every hour before overtime can be considered properly paid. The court called that an “inferential leap” the statute doesn’t support, and declined to defer to the DOL’s longstanding guidance. (Burt’s firm has published its own breakdown of the ruling.)
There’s a larger pattern behind the decision: courts are increasingly reading a statute’s text for themselves rather than deferring to how an agency interprets the laws it enforces. That’s a big part of why a position the DOL had held for years didn’t carry the day here.
The win is real, but it’s smaller than it first looks. One broad theory of wage liability is now off the table in the Third Circuit, and the court added two other points that favor employers along the way. It said FLSA exemptions should get a “fair reading” rather than be “construed narrowly against the employer,” and confirmed that employers only need to prove an exemption is more likely than not — a preponderance of the evidence, not some higher bar. On that basis, it sent the misclassification findings back to the lower court.
It’s worth being clear about what the ruling did not do, though. It didn’t erase the $35.8 million — it narrowed it. The problems that generated the case were the employer’s own: inaccurate timekeeping, paying by schedule instead of actual hours, automatic meal-break deductions, and a regular rate that left out shift differentials and bonuses. The gap-time reversal closes one avenue of recovery; it doesn’t touch the recordkeeping and pay-calculation failures that put the company in court in the first place.
“Winning one legal argument doesn’t erase risk created by poor practices, weak documentation, inaccurate records, or misclassification decisions.”
Burt Garland, Employment Attorney, Ogletree Deakins
The relief is also regional. The Third Circuit now lines up with the Second Circuit in rejecting these claims, while the Fourth Circuit still allows them — a split the Supreme Court has so far declined to resolve. If you operate across state lines, you’re managing different rules in different places. And state wage laws, many of them stricter than the federal floor, provide their own routes to recovery regardless of what the FLSA does or doesn’t cover.
A favorable ruling like this is a good moment to take a fresh look at your own pay practices — not a reason to ease up. The same review that protects you from gap-time claims also covers the larger risks this case actually turned on, so it’s worth doing well.
Start with timekeeping and pay-by-schedule practices. The core failure here was paying people for scheduled hours rather than hours actually worked. If your system assumes the schedule equals reality, that gap is exactly where claims live.
Fix automatic meal-break deductions next. This is the single most common exposure Garland flags. If your system auto-deducts 30 minutes for lunch but a worker gets pulled back mid-break — think of the lone retail clerk who hears the door chime five minutes into a break and goes to help a customer — that deduction can become a violation. You need to be able to show employees were genuinely relieved of duty.
“The FLSA is one of the few areas of the law where the employer is sort of guilty until proven innocent.”
Burt Garland, Employment Attorney, Ogletree Deakins
Check your regular-rate math. Overtime is owed at time-and-a-half the regular rate, and the regular rate has to include shift differentials, nondiscretionary bonuses, and similar pay. Leaving them out is precisely what the district court penalized in this case.
Revisit exemption classifications. The new “fair reading” standard helps employers — but only when the underlying classifications are defensible to begin with.
And run these audits under privilege. Garland’s strongest procedural point: conduct pay-practice audits under attorney-client privilege, so the findings can’t be turned around and used against you if they surface a problem. In practice that usually means engaging counsel, who can then bring in a partner like AAIM to handle the operational review.
Gap time is unpaid straight-time work that doesn’t push an employee below minimum wage and isn’t overtime. “Overtime gap time” is the version that happens in a week the employee also works more than 40 hours. The Third Circuit just held the FLSA provides no remedy for it.
Directly, it binds employers in the Third Circuit — Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands. Elsewhere, courts are split, and the Supreme Court hasn’t resolved the question, so the outcome can still depend on where you operate.
Often, yes — just not through the FLSA in the Third Circuit. Those claims are pushed into state wage laws and contract theories, many of which offer broader remedies than the federal statute.
They can, if employees work through breaks the system deducts anyway. The safeguard is being able to show employees were fully relieved of duty during the deducted time — which is why automatic deductions remain one of the most common sources of wage-and-hour liability.
A favorable decision is a good moment to get ahead of the practices that create wage-and-hour risk in the first place — while things are calm and you can review them on your own terms. Most of what tripped up the employer in this case was ordinary, fixable, and hiding in plain sight: timekeeping systems, meal-break rules, regular-rate math.
If you’d like help getting ahead of it, AAIM can support the review. Our HR consulting team can audit your timekeeping, meal-break, overtime, and classification practices — ideally under the direction of your employment counsel, so the work stays privileged. For pay-structure and regular-rate questions specifically, our compensation strategies team can help. Members can also tap Aaime Hart for quick questions anytime. Not yet a member? Learn more about AAIM membership.
Getting this right isn’t about reacting to the latest ruling — it’s about running a workplace where the records already tell the true story.
Want to Hear the Full Conversation?
You can watch or listen to the full conversation between Burt Garland and Phil Brandt on This Week at Work — including the part we didn’t get into here: their opening-segment look at the DOJ’s challenge to the disparate-impact theory and the EEOC’s new National Enforcement Plan, both of which they’ll dig into next time. Watch or listen to the full episode of This Week at Work.
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