Misclassification Alone Doesn’t Create Overtime Liability, Court Says

A federal court found a worker had been misclassified and identified more than 800 hours of potential overtime. But the Fifth Circuit still upheld a jury verdict denying overtime pay.

The case draws a clear line between compliance risk and overtime liability: Overtime becomes a payable cost only when the employer knew, or should have known, the work was being performed.

That distinction determines whether potential exposure becomes a payable wage liability – one that can be claimed, defended or recorded.

Misclassification Created Potential Overtime Liability

Jerry Merritt worked as an agency manager overseeing a team of insurance agents at Texas Farm Bureau.

Like other agency managers, he was classified as an independent contractor. He set his own schedule, chose how many hours to work each day, and was not required to track or report his time.

He was paid on commission rather than hourly wages, earning between $552,000 and $627,000 annually from 2016 to 2018.

Despite that structure, Merritt filed a claim seeking unpaid overtime under the Fair Labor Standards Act. A federal court ruled he should’ve been classified as an employee and was owed at least 816 hours of overtime.

At typical overtime rates, that level of hours represents substantial back pay exposure, which can be doubled under FLSA liquidated damages.

That ruling represents the starting point for potential overtime liability: Once a worker is deemed nonexempt, all hours worked become relevant for overtime calculations and potential back pay liability.

Why the Overtime Claim Failed

At trial, the central issue wasn’t whether Merritt worked long hours, but whether Texas Farm Bureau had actual or constructive knowledge of those hours.

The jury found the company didn’t have that knowledge and denied overtime pay. The Fifth Circuit affirmed that outcome.

That finding eliminated any obligation to pay the identified overtime hours, despite the underlying misclassification.

Even though Merritt was misclassified, the deciding factor was whether the company knew, or should’ve known, that overtime work was being performed. Without that showing, the identified hours did not translate into a recoverable wage claim.

This distinction is critical. Liability depends not only on hours worked, but on whether those hours are visible, recorded or reasonably knowable within the organization’s systems and processes – and therefore provable as a wage obligation. 

Employee Argued Overtime Was Permitted

Merritt argued the company should be liable because it allowed him to work without limiting his hours. He relied on the FLSA’s definition of “employ,” which includes work that an employer permits.

He also claimed the company’s knowledge of his overtime hours shouldn’t matter.

The court rejected that argument, reiterating that employees seeking overtime must show the employer had actual or constructive knowledge of the work.

No Constructive Knowledge Without Visibility

Merritt also argued the company had constructive knowledge because it did not track his hours.

Constructive knowledge exists when an employer has an opportunity, through reasonable diligence, to learn that overtime work is being performed.

But the court rejected this argument. It emphasized that the burden remained on Merritt to show the company knew he worked overtime. It also said the absence of a timekeeping system alone did not establish constructive knowledge.

The company’s structure also mattered. Agency managers worked autonomously, were not paid hourly and were not required to report their time. Under such conditions, the court found the company had no reason to view Merritt’s work in terms of overtime hours, limiting any basis to treat the time as measurable or payable overtime. 

Controlling Overtime Liability and Exposure

This case shows how payroll visibility and controls shape overtime liability under the FLSA.

Even when misclassification creates potential exposure, liability still depends on whether overtime work is known or reasonably knowable.

Key considerations for payroll and finance teams:

• Align timekeeping practices with risk tolerance. More detailed tracking improves defensibility but increases visibility into potentially payable hours.
• Use workforce data to identify emerging exposure. Workforce management technology can detect patterns such as extended hours, irregular schedules, or gaps in reporting that may indicate overtime liability risk before claims arise. 
• Treat managers as control points for wage risk. Failure to detect off-the-clock or unscheduled work can allow overtime liability to accumulate.
• Don’t assume autonomy or commission-based pay eliminates exposure. These structures can either limit or obscure liability depending on whether hours are observable and attributable. 
• Evaluate classification alongside visibility. Misclassification creates exposure, but systems and oversight determine whether that exposure turns into payable overtime liability.

This case shows that overtime compliance errors do not automatically result in financial liability – payment depends on evidence that the employer knew or should have known the overtime work was performed.

Merritt v. Texas Farm Bureau, No. 24-50127 (5th Cir. 2/6/26).