A new appeals court ruling illustrates that an employer that pays a salary to an employee who is classified as exempt under the Fair Labor Standards Act (FLSA) should also ensure that the employee agrees the salary covers fluctuating hours. Doing so could help reduce the amount of overtime the employee is owed in the event a court subsequently finds the employee was misclassified as exempt, as shown by Black v. Settlepou, 2013 U.S. App. LEXIS 20715 (5th Cir. 2013).
By way of background, certain employees, such as executives, administrators and professionals, are exempt from the overtime requirements of the FLSA. For employees who are nonexempt, the FLSA provides that in most circumstances they must be paid one and one-half times their regular rate of pay for all overtime hours.
However, in calculating overtime, the FLSA will allow an employer to pay a salaried nonexempt employee whose hours fluctuate from week to week a fixed amount per week as straight time, regardless of the number of hours actually worked. This is known as the fluctuating workweek method. Under this method, payment for overtime hours is just one-half times the regular rate of pay, instead of one and one-half times the rate because the straight time rate is understood to compensate employees for all hours actually worked.
In applying a fluctuating workweek method to determine overtime pay, the regular rate of pay is calculated by dividing the number of hours actually worked into the amount of the straight time salary for the workweek, rather than dividing the salary by 40 hours. For example, an employee who receives a weekly salary of $1,000 and who works 50 hours in a certain week would be paid $100 in overtime that week under the fluctuating workweek method. First, divide the weekly salary ($1,000) by the total number of hours worked (50), which results in a regular rate of $20 per hour. Second, multiply that amount by one-half, resulting in an additional $10 per hour for each hour of overtime. Third, multiply the half-time rate ($10 per hour) by the number of hours worked over 40 in the workweek (10 hours). An employer properly using this method can in effect reduce the amount of overtime an employee is owed.
Several federal circuit courts have allowed employers to use the fluctuating workweek retroactively to reimburse employees for back overtime damages in misclassification cases. However, for it to be properly applied, the employer and the employee must clearly and mutually understand that the straight salary covers whatever hours the employee is actually required to work. Indeed, in Black v. Settlepou, the 5th Circuit Court of Appeals reversed the lower court's ruling that the fluctuating workweek could be used to calculate damages because the court found that the employee had never agreed to its use.
In Black, the employer had argued that the employee's conduct in accepting her fixed weekly pay, without any additional compensation for hours worked above the standard workweek showed that she understood and agreed that her fixed weekly salary would cover all of her hours worked. However, based on findings that the employee had lodged complaints with her supervisor and her employer's human resources directors about the fact that her pay did not compensate her for extra work, the Fifth Circuit instead determined that the employee had never agreed to it. Accordingly, the Fifth Circuit held that the lower court should not have retroactively applied the fluctuating workweek method to calculate damages and sent the case back to the lower court to recalculate damages accordingly.
A Pseudo-Split in the Circuits
There was a subtle but potentially significant twist in the 5th Circuit's ruling that could have ramifications in future misclassification cases.
Two circuits have held that the fluctuating workweek could be applied retroactively as long as all the requirements of a US Department of Labor regulation, 29 C.F.R. § 778.114, are met. See Valerio v. Putnam Assocs., Inc., 173 F.3d 35 (1st Cir. 1999); Clements v. Serco, Inc., 530 F.3d 1224 (10th Cir. 2008). That regulation requires that there be "a clear mutual understanding of the parties that the fixed salary is compensation (apart from overtime premiums) for the hours worked each workweek, whatever their number, rather than for working 40 hours or some other fixed weekly work period."
However, the 5th Circuit followed the 7th Circuit and the 11th Circuit in rejecting the application of 29 C.F.R. § 778.114 because it: (a) "is forward looking, and therefore is not a remedial measure" and (b) "requires the contemporaneous payment of overtime premiums at one-half the employee's regular rate of pay, a requirement that by definition has not been met in an employee's suit for unpaid overtime premiums." See Urnikis-Negro v. Am. Family Prop. Servs., 616 F.3d 665 (7th Cir. 2010), cert denied 131 S. Ct. 1484 (U.S. 2011) and Lamonica v. Safe Hurricane Shutters, Inc., 711 F.3d 1299 (11th Cir. 2013).
Instead of relying on 29 C.F.R. § 778.114, the 5th, 7th and 11th circuits turned to the U.S. Supreme Court's ruling in Overnight Motor Transp. Co. v. Missel, 316 U.S. 572 (1942) for the authority to calculate the overtime premium using the fluctuating workweek half-time multiplier.
The end result is essentially the same for all the circuits - overtime damages can be calculated at one-half times the employee's regular rate of pay instead of one and one-half times the regular rate of pay. However, as one plaintiffs' attorney has argued, relying on Missel instead of 29 C.F.R. § 778.114 means that "any payments that constitute non-fixed pay," such as deductions for vacation, personal days or sick days, could preclude the application of the fluctuating workweek method.